UniFirst Corp (UNF) 2003 Q3 法說會逐字稿

Welcome to the UniFirst Corporation 3rd Quarter Earnings 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 4 on your telephone.

As a reminder, this conference is being recorded Monday, July 7, 2003.

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

Please go ahead, sir.

Thank you and welcome to the UniFirst conference call to review our 3rd 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's President and CEO, and Dennis Assad, Vice President of Sales and Marketing.

This call will be in 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 acquisition; economic and business changes; fluctuations in the cost of materials, fuel and labor; economic and other developments associated with the ongoing war on terrorism; strikes and unemployment levels; demand in price for the company's product and services; improvement and underperforming mill operations; and the outcome of pending and future litigation and environmental matters.

Now that that is completed, I'll turn the call over to Ron for his comments.

Thank you, John.

And welcome to all who are joining us for the review of UniFirst's 3rd quarter and year-to-date financial results.

I'm pleased to report that in a business climate which remains unsettled we were able to generate quarterly revenues of 153.7 million, which is a 6.5% increase over the same period a year ago.

We also generated 9.6 million in net income, or $0.50 per share, a 27.6% increase in the same period a year ago.

Measuring the first 39 weeks of fiscal year 2003 against 40-week period a year ago, revenues of 449.3 million is up 5.1% on a comparable 39-week basis.

An income of 22 million is up 8.5%.

These numbers are stated prior to the accumulating effect of accounting changes adopted at the start of the fiscal year.

John will discuss the impact later in his detailed financial review.

All in all, I am satisfied that we are making progress, not only adjusting to the tougher business environment, but also in controlling some of the key costs associated with operations.

Following the 2nd quarter we put in place stringent cost controls and our improvement, our efforts in collecting ancillary charges.

At the same time we're seeing better sales productivity from our professional sales team.

After a sales [INAUDIBLE] rampup toward the end of fiscal year 2002, we are pretty much on budget and head count throughout the 3rd quarter of fiscal year 2003.

So sales improvement generally affect better selling as opposed to simply more feet on the street.

Our UniTech division had another banner quarter, chipping in with almost a third of our reported revenue growth.

Our core laundry operations were strong as well, showing improvement from quarter to quarter in year to year.

Our business units performed about as expected, with Canadian operations running slightly better than the previous quarter.

As you know, we are still looking at an uncertain market.

Total unemployment ticked up another 0.1 of a percent to 6.1% in May, with manufacturing, retailing, and service industry employment all feeling the impact.

Though the production index appears to be climbing in durable goods, orders have inched up slightly, the Feds recent interest rate drop indicates there is still more concern over sustainable recovery.

That means we continue to be cautious as well.

Historically, our 4th quarter is not our strongest, as been our 3rd.

So even though we appear to have some momentum building, we are not about to predict a big final 13 weeks.

We will, though, be doing everything we can to achieve exactly that.

Now I'll turn it over to John Bartlett, our CFO, who will give a more detailed analysis of our numbers.

As Ron explained, the 3rd quarter of fiscal 2003 was very encouraging from a financial standpoint.

The spring quarter is usually strong for UniFirst, and this year it proved to be much better than we anticipated.

I would like to note that the year-to-date period ended May 31, 2003 was 39 weeks, versus the 40-week period which ended in fiscal 2002.

Thus far, revenues increased 2.5 from 438.4 million in the nine months of fiscal 2002, to $449.3 million in fiscal 2003.

The increased on a comparable 39-week period would have been 5.1%.

For the 13 weeks ended May 31, 2003 revenues increased 6.5% from 144.3 million to $153.7 million.

The revenue increase was achieved in spite of continuing net reductions in our existing customer base.

The revenue increases have come from our basic rental business, from substantial direct sales, and continued growth of our Unitech business.

The significant improvement in the 3rd quarter operating results came as a result of several factors.

The 6.5% revenue increase was very positive.

Actually, 2% of this increase came from the UniTech segment, with the balance from the basic uniform rental business.

A portion of this increase was due to improved results in the collection of ancillary charges, such as loss and damage.

These increases, together with stringent cost controls, resulted in substantial profit improvement.

Our cost-cutting effort resulted in a head count reduction, which reduced our labor costs.

Our total labor costs in the uniform laundry segment decreased approximately $1 million from the 2nd quarter to the 3rd quarter of fiscal 2003.

Our UniTech/Nuclear business had another strong quarter, and on a year-to-date basis is about 15% ahead of last year.

We continued to benefit from our transition to manufacturing in Mexico, which resulted in lower overall merchandise cost.

The overall effect of these and other items was that income from operations increased around $13.7 million in the 3rd quarter of fiscal 2002 to $16.3 million in the 3rd quarter of fiscal 2003, or 19.1%.

However, this income from operations for the 39 weeks ended May 2003 was $37.6 million, or 5.2% less than the $39.6 million for the 40 weeks ended in May of 2002.

We're hopeful that the positive trend in operating income we have experienced in the last few months will continue.

Our net interest expense was $719,000 in the 3rd quarter of fiscal 2003, versus $1.6 million in the prior year.

The first nine months net interest expense declined from $6.9 million to $1.7 million, primarily due to a special interest charge for an RAR in the 2nd quarter of fiscal 2002, lower interest rates, lower levels of borrowing, and a benefit from our swap.

The income tax provision was 38.5% for both the 3rd quarter and the first 39 weeks of fiscal 2003, versus the provision of 38% in both periods fiscal 2002.

Finally, income before the cumulative accounting change increased 27.6% from $7.5 million in the 3rd quarter of fiscal 2002 to $9.6 million in the 3rd quarter of fiscal 2003, and basic income per share, before cumulative change in accounting, increased 28% from $0.39 to $0.50.

For the nine-month period, income before the cumulative effect of accounting change, increased from $20.3 million to $22 million, or 8.5%, and basic income per share before the cumulative effect of accounting change increased from $1.06 to $1.15.

Effective with the beginning of fiscal 2003 the company adopted FASB 143, Accounting for Asset Retirement 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 FASB 143 resulted in a cumulative charge, net of tax, of $2.2 million, or $0.12 per share, which was recorded in the 1st quarter of 2003.

Therefore, net income for the first nine months of fiscal 2003 was $19.8 million, or $1.03 per basic share, a 2.6% decrease from last year's $20.3 million, or $1.06 per basic share.

Looking ahead, we believe the balance of fiscal 2003 will continue to be challenging.

We are significantly more optimistic than we were three months ago.

In our April conference call we provided guidance that we expected revenues to be between 585 million and $595 million for fiscal 2003.

That basic income per share, before the cumulative effect of the adoption of FASB 143 would be between $1.32 and $1.40 per share.

We now believe that revenues will be at the top end of that range and may exceed the $595 million upper limit.

Although it continues to be difficult to predict, we believe that the current trends continue, with basic income per share before the cumulative accounting change, will be between $1.50 and $1.55.

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

Thank you.

I'm generally pleased with the sales results we saw in the 3rd quarter, because I think we were able to eke out increases in a market that remains unsettled and is still seeking its footing.

No question there is some [INAUDIBLE] out there.

Many prospects continue to be hesitant about committing to new programs.

Even those who buy are often consciously limiting the scale of their program.

Nevertheless, our professional sales team was able to bring in new contracts at a accelerated rate and show a healthy mix in their new account selling between current competitive users in what we describe as [INAUDIBLE] program.

Looking at this year through 39 weeks, in comparison to 40 weeks for three quarters a year ago, we're showing sales up over 11% and sales rep averages up 6.5%.

The size of the average sale is up about 8%.

That's a measurable improvement in productivity that we ascribe to reduced rep turnover, which we project will be down by at least 8% on a full-year basis, much improved stability in our sales management core, and better training and coaching, which is helping production from our non-tenured reps.

Our other selling resources, including our national account sales team, our [INAUDIBLE] sales organization, and our facility service reps, are also pitching in.

National accounts is having its best year every, our [INAUDIBLE] reps continued to perform well with our power reps, customer promotions, and our facility service reps are starting to show the results we expected from them right along.

One consequence is, that moving forward, we can expect more balance in our overall sales development, and that should benefit our ability to sustain growth.

For the balance of the year, we look forward to a continuation of the sales trends that we've seen develop in the 2nd and 3rd quarters, and we expect to begin reaping additional benefits from the effort we put into both our protective garments program, and our facility services initiative.

These represent good opportunities, both with prospects and with current customers, and we're committing additional manpower and financial resources to each.

We will also continue with the careful evaluation and scales implementation of the sales automation system, which we've been testing, and anticipate some continued improvement in database utilization as a result of that.

All in all, we continue to be satisfied with the direction of our combined sales team, [INAUDIBLE], and are optimistic about the results they've produced in the last quarter.

We believe we're starting to see some signs that business owners and managers are looking past the dark clouds and seeing ahead to the blue sky.

If that is really the case, purse strings may start to loosen, making things easier for us to move into the next fiscal year.

Now I'll give it back to John Bartlett.

Thank you, Dennis.

And now we're prepared to answer some questions.

So we'll turn it back over to April and she'll process your questions.

Thank you.

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

You will hear a 3-tone prompt to acknowledge your request.

If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3.

If you are using a speakerphone, please lift your handset before entering your request.

One moment, please, for the first question.

The first question is from the line of Michael Schneider with Robert W. Baird.

Please proceed with your question.

Good afternoon.

I'm wondering, first, if you could address the ad stop rate?

John, you had discussed in the last call that ad stops were improving minorly.

If you could give us, maybe, what the trend was during the quarter, month by month?

Sure.

Let me just get the schedule so I -- I found it here.

Yeah, the overall for the U.S. laundries, the trend really in January and February was relatively significantly negative, and it got a little bit better in March at about $23,000 and then $11,000 in April, and $16,000 in May.

So -- versus in the low 40s in January and February, right after the first of the year.

All right.

And June?

The early read on that ad stop rate?

We do not have June yet.

Okay.

And then, just breaking down internal growth, you were up 6.5% total growth.

Could you break that down?

Internal growth versus some of the smaller acquisitions.

And then, maybe, by business segment as well, organic growth?

Well, these -- it's actually 2% of the increase was from the UniTech division.

Yes.

The rest was really the laundry division.

A very minimal amount came from acquisitions.

We bought a company about a year ago, about a $5 million a year company in Springfield, Missouri.

So, you know, that might be a little less than a percent.

The price increases have been relatively minimal, and beyond that, you know, we're -- unfortunately, the increase is not great enough to make significant valuations on where it is coming from.

It is definitely from internal growth, the adstop ratio.

Any bias on national accounts?

Dennis, you mentioned they were having their best year ever, was that the bulk of the uniform growth or was it split evenly, as a percent of mix?

No.

Most of the growth really was at the field sales level.

I would say that national accounts probably added maybe 15% of that.

Okay.

And Dennis, just in terms of pricing, what do you hear from the field in the wake of supposedly the new pricing strategies of Syntas (phonetic) and the other players?

I believe it is stabilized.

It not moving up quickly.

But I think it is eking up a bit.

I havn't heard even at the national account division that we're getting a real strong spiral going downward anymore, it has flattened out and I think starting to go up.

Okay.

And could you quantify what type of price increasing you are seeing on a analyzed basis right now?

Again, from what I'm hearing from the field, it is probably going up maybe a couple of percent.

Okay.

I'll get back in line.

Thanks.

The next question will come from the line of Bruce Simpson with William Blair.

Please proceed with your question.

Hi, guys, and congratulations on your quarter.

Thank you.

Thank you.

I would like you to, if you can, try to desegregate the increase in sales sequentially from the February to the May quarters between how much of that is, you guys are doing a better job, you've done a better job of training your salespeople, and how much of it is the overall environment is getting better; it is just easier to sell?

Well, I guess that is really impossible to quantify.

But I believe that it is a little of both.

If I were to say that it is probably in the 50-50 range.

I think that the economy is helping a little bit.

It is still not where we want it to be.

But it certainly has eased up a bit.

We have improved in our training and even our recruiting skills.

We think that that is obviously having its impact, as well.

But it is very difficult for me to quantify.

Okay.

And then just sort of walking down through the elements of the income statement, I'm curious about -- obviously you had a big increase in your gross margin from the prior quarter.

And I'm trying to understand, is that from the marginal sales that you sold another 7 or $8 million worth of uniforms from February to May, or is that independent of the additional sales you are just collecting these fees which you referenced better?

Or anything that you can share about why gross margins ticked up so strongly.

Well, I think it is -- it is a lot of -- there's a few big things and a lot of little things, I think.

Let me talk about the bigger things.

First, the UniTech segment is having a banner year, as we've talked about.

But it really is not even quarter to quarter.

It had a terrific 1st quarter.

It had a negligible 2nd quarter, really just barely above break even, and it had a great 3rd quarter.

And so, when you look at it quarter to quarter, 2nd to 3rd quarter, the UniTech division had a big impact on that margin.

I think the second thing is, we really, we were disappointed in the 2nd quarter, obviously, and we reacted, and we reacted to head count reductions and just kind of stringent cost controls, you know, don't spend money unless you have to.

And I think that it comes across very clearly in the labor that I mentioned.

Quarter over quarter, even though the revenues were up, the actually labor costs of the laundry segment were down $1 million.

And just kind of the other costs in the laundry operations were down quarter over quarter, also.

So, you know, when your costs come down and your revenues goes up, that, obviously, has a positive result.

Beyond that, I think it is just a lot of -- well, yeah, the merchandise is -- the actual merchandise amortization did not change a whole lot.

What -- how we do our internal accounting, we take our loss garment charges and so forth and reflect them against our merchandise costs.

So that, when we report externally, that affects the revenue.

So that was really a kind of a plus on the revenue side, as opposed to how we internally think about it as a reduction of cost, but it was definitely positive on the income.

Okay.

And then, same trends pretty much for SG&A?

I notice it was actually down by about 1.5 million, and that's from the cost controls and head count reductions?

Right.

Can you put some quantity on head count reductions?

What is the total size of the head count of the firm, and what was it prior to the reductions?

I can't really.

I mean, maybe Ron can help.

I mean, we really -- we set targets for each region, each location.

It is not so much individuals.

It is sometimes just hours that you operate your plant.

I think in the sales count, I think the number of salesmen on the payroll has come down a little bit.

And then some of them weren't -- they just wern't replaced as rapidly as we might have in the past.

Ron, can you --

Just on the production department alone we knocked out 63 people.

In the service organization, we took out maybe about 15.

The sales, the actual sales head count is down 8.

To what in sales?

What is the total number of sales?

We never put that one out.

Okay.

Nice try.

I thought it was worth a try.

And then, just on your guidance, I think that you said 150 to 155, and that excludes the accounting change, but that includes the impact of the swap.

Would that be accurate?

Yes.

Okay.

And then lastly, I guess just on pricing, if I can follow up on that, is there -- Syntas mentioned to us, when they were here for the Blair conference in June, that they've been able to make pricing increases stick by about 5% to 6% from February when they announced their change in pricing policy.

I'm curious, is that consistent with what you are seeing out there?

And is there any way to quantify what new business goes out today, relative to what it went out a year ago for example?

In reference to the existing customer base or new accounts?

New accounts.

Okay.

We're not seeing 5 and 6% out there.

Again, it is really tough to measure that at times.

We're seeing more in the vicinity of 2 to 3% and we don't see Syntas going much above that, at this point, and this is, again, what I'm hearing out there in the field.

It is, again, not something that I can really specifically quantify for you.

But Dennis, when you say 2% to 3%, that is from when?

From the last quarter.

Okay.

So it has bounced just a little.

Just a little bit.

It seems to be bouncing up a little bit since the last quarter.

But that sounds like it is still substantially lower than it was, let's say, a year ago for new business?

Yes, it is.

I still think that it is probably down 7 to 8% from a year ago.

Okay.

And last thing, and then I'll get in line, thank you for letting me rattle off several.

The 4th quarter of your fiscal year has always been tough to predict.

I know that historically, before you got the new accounting package, it seemed to be the quarter which showed the most volatility.

Now, can you give us any sort of sense of, obviously, you have guidance, but between the seasonality inherent in August, and the change to your internal accounting system, do you think that the kinds of changes that we saw from May to August in the past have been flattened out a little bit, or do you just not care to make any comment beyond just guidance?

Well, do I not think that the new accounting package is going to have much impact on that.

I think that it is a difficult quarter to forecast, because it is, you know, for whatever reason, we do better in the spring and fall, and the summer and winter are always a little slower.

Partly the UniTech business.

But the -- the basic laundry business has somewhat of the same cycle.

I mean, I think kind of a Back-to-School or a, you know, Easter-type of thing, or something, that, people really get reinvigorated, or whatever.

But I don't know if I've ever been as uncertain about a quarter than this year.

I mean, we were clearly disappointed after the 2nd quarter, and we were, quite frankly, very pleasantly surprised when we pulled the numbers together in the 3rd quarter.

And we've looked really hard to see if some of that should have been in the second quarter.

And nothing has indicated that it should have been.

It looks like things have improved.

And we're crossing our fingers, and hoping that it is going to continue.

I think that the laundries are definitely on a better trend than they have been for some time.

And the UniTech is, I guess, is just going to be weak in the 4th quarter.

Thanks a lot, guys.

Thank you.

The next question will come from the line of Alan Seymour with Columbia Management Group.

Please proceed with your question.

Yeah.

It sounds like your sales productivity is improving a fair amount.

Can you give me some insights into that?

Well, you know, it's in the 6 to 7% range at this point in time.

And, again, I relate it back to, you know, we have really stepped up our training programs, especially at the initial stages when new people are coming in.

We have really redefined our whole training program and buttoned up some of the deficiencies out there in the field.

We think that that has had a lot to do with it.

So I think that training is the key issue.

And the secondary issue, I think, is that we have improved our recruiting efforts.

And we've spent a lot of time trying to teach people how to recruit, how to interview, and so on.

And that's really had some impact on improving our turnover, as well as our productivity.

Those are two key areas that I think that are helping, and, again, we hope to continue with those initiatives, and continue to improve that productivity as we go along.

Great, thanks.

Um-hum.

The next question will come from the line of Michael Schneider with Robert W. Baird.

Please proceed with your follow-up.

John, you made the comment that you were significantly more optimistic after this quarter's results.

You know, I guess I'm somewhat curious, and I apologize for pushing you here, but if we compare where the 4th quarter is guided to, versus even the 1st quarter, and they're generally in the same range, it looks like you are expecting 35 to 40 cents for the 4th quarter, versus the 45 of the 1st quarter.

I guess I'm just curious, are you being overly conservative, in light of your comments that you are significantly more optimistic to predict that the 4th quarter will be, you know, materially below the 1st quarter?

I'm not sure, to be frank.

I think we know that the UniTech is going to be soft in the 4th quarter.

We expect that.

So I think that's a big factor.

It's very strong in the first In fact, stronger in the 1st quarter than the 3rd quarter.

But we know that we're not going to replicate that.

It is really a question of how the laundries do in the 4th quarter, versus the -- you know, the other quarters.

Aside from UniTech, is there anything that you're more cautious about?

No.

And then maybe just, along the lines of why you are significantly more optimistic, is it primarily the progress you've made on the costs side and the rep productivity?

Or are there also external indicators that you are more optimistic about?

No.

I think it is more internal.

I think it is really the combination of we're -- I think we've seen the best quarter over quarter revenue performance we've had in a while, and at the same time, we seem to have done a pretty good job to control the costs.

So that's a pretty powerful combination, and if we can continue that --

I agree.

It's a nice job.

A final two quick questions.

No programmers, do you have a breakdown of what percent of new sales actually came from no program accounts?

Again, we have not really seen it.

We reported this the last few quarters.

We are not really seeing a big change toward no programmers.

We are still at the 45 to 50% level.

And I guess we really haven't given it the emphasis that it is due in the last six to nine months.

We've been working really hard on creating sales at any level.

We're still in the 45 to 50% area.

Okay.

And then, John, cash flow from operations, and cap ex and D&A figures, I'm sorry, cap ex numbers for the quarter?

The capital expenditures, it's a little confusing on the balance sheet because in the fixed assets, we did that FASB 143 which capitalized some assets with just a bookkeeping entry.

Right.

I think that if you pull that out, I believe it was around $26 million for the nine months, and I think we're still in the low 30s we expect for the year.

Okay.

What was the other question?

Cash flow from operations?

You know what?

I don't have the fund statement in front of me.

Hold on, I'll see if I can find one.

I don't have that.

I mean, we'll --

Okay.

I'll follow up with you, John.

I just have the balance sheets and the income statements.

But it -- it was good.

Okay.

I appreciate it.

And nice quarter.

Thank you.

The next question will come from the line of Bruce Simpson with William Blair.

Please proceed with your follow-up.

Hi, guys, also on the balance sheet, what is the disposition towards debt now, you know, generally?

Are you content to chip away with that?

Do you think that you have the funds to chip away with that, or is internally generated cash flow going to go towards building the business if we do start to get an improvement in the overall economic scenario?

And then on a related note, how about the estate situation, share count, share repurchase?

Where do we stand on that?

Thanks.

Well, from a debt standpoint, I mean, we've, to the extent we have excess cash, we will continue to pay down our debt.

But that does not preclude us from using debt to either reinvest in capital additions and/or acquisitions if they make sense.

We're really in a very strong position now to borrow a significant amount of money if, you know, a acquisition comes about that makes sense to us.

It is really a reaction to what is out there, as opposed to, you know, a plan to raise the debt or reduce the debt.

As far as stock repurchases, that is really done by the estate.

I don't even know the numbers as they come through.

I think they are on a regular program to buy a few shares.

Ron, I don't know if you know?

Sell shares.

To sell shares, I was thinking about something else.

And I think that is over a three-year-old period. 15 months, 18 months.

It's a fairly small amount of shares, I believe, in total, a couple hundred thousand shares, or so.

Thanks a lot.

Ladies and gentlemen, to register a question, please press the 1, followed by the 4 on your telephone.

Gentlemen, there are no further questions.

Please continue.

Well, I would like to thank all of those who follow the company for joining us.

We're pleased with the quarter.

We're optimistic for the 4th quarter.

And we're certainly trying to get things in line to head into 2004.

Again, thank you, and we appreciate your support.

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

We thank you for your participation and ask that you please disconnect your lines.