UniFirst Corp (UNF) 2004 Q4 法說會逐字稿

Thank you for standing by and welcome to the UniFirst Corporation fourth 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 1 followed by the 4 on your telephone.

I would now like to turn the conference over to Mr. John Bartlett.

Please go ahead, sir.

Thank you and welcome to UniFirst's conference call to review our operating results for fiscal year 2004 and to discuss our expectations, going forward.

My name is John Bartlett, and I am the chief financial officer.

Joining me is Ronald Croatti, UniFirst president and CEO.

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

Before I begin I would like to give a brief disclaimer.

This conference call may contain forward-looking statements that reflect the company's current view 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, strikes and unemployment levels, demand and price for the company's products and services, improvement and under-performing rental operations, and the outcome of pending and future litigation and environmental matters.

Now that I've completed the disclaimer, I'd like to turn it over to Ron Croatti for his comments.

Good afternoon and thank you, John, and welcome to all of you who are joining us for the review of our fiscal 2004 performance.

Our annual numbers were released earlier today, and I am very pleased to report they showed a 20.5-percent increase in revenues, and a 14.7-percent increase in income before cumulative effect of accounting changes.

Net income was up 24.3 percent over last year.

Revenues were $719.4 million, and net income was $33.6 million, both the best in the company's 68-year history.

Under our historic reporting method, basic earnings per share increased to $1.75 from $1.53 in 2003.

This is consistent with the guidance we have previously provided, however, we are now required to report earnings of our two classes of stock separately, and I'm going to let John explain the effect when he covers the detailed financials in a couple of minutes.

A big part of the increase, we realize, were the results of the Textilease acquisition, which was completed at the start of 2004 year.

Overall, acquisitions accounted for 14.7 percent of total annual revenue growth with organic internal growth making up most of the balance.

Price increases had a 1-percent impact.

Integration of Textilease operations was a major task throughout the year.

Our intent was to have all the facilities converted to UniFirst billing and ordering system by the end of the fiscal year.

We were pretty much on target with this.

We are working on a few last details now, and we expect the integration process to be fully completed by the end of the first quarter of this year.

There were a couple of things, which hurt acquisitions revenue.

First, we sold about $7 million in Textilease linen business, which simply didn't fit with our operations, direction, and growth interest.

Second, we suffered fairly high loss to comps at the acquired locations, primarily as a result of very aggressive competitive pricing attacks directed at customers during the ownership transition period.

While most of this occurred in the first few months, attrition continued throughout the year and was the main reason we finished with over 10 percent annual (ph) company-wide.

Without that impact of these two factors, our revenue would even be higher today.

Though issues-related Textilease integration absorbed a lot of our time and effort, it wasn't the only thing we worked on during the year.

Our subsidiary units, particularly UniTech and Green Guard made independent progress.

UniTech introduced new products and services for U.S. customers; worked to increase its penetration in the common market countries with its Euro Nuclear service unit.

Green Guard, in addition to absorbing the medical service part of Textilease businesses added professional selling staff and expanded geographic coverage.

We also made progress with our core uniform service business.

We introduced our new Amerex line of self-manufactured flame-retardant garments, products that will give us an advantage of big account competitive pricing situations, and we made plans to reopen our previously closed shirt manufacturing plant in Cave City, Arkansas, as a floor-care products manufacturing facility.

This move will enable us to make the mats and mops, which are a big part of our facilities services business.

It will give us both product design control and obvious cost advantage in the marketplace.

During the year we made progress in new account selling and continue to see some benefit from our note programmer (ph) focus as well as for our decisions to maintain a more solid pricing floor.

Still, weekly sales reps are not yet where we would like them, and our average rep day's work remain under our targeted level to a turnover running higher than we want.

We recently made some changes to sales leadership in an effort to remedy this and will continue to give this issue close attention throughout the new year.

As a means of bolstering sales, we continue to invest in sales force expansion with approximately 8-percent personnel growth planned for this fiscal year, and we will continue to roll out new sales force automation system, which will have the effect of making reps more efficient and more productive.

At the same time, we are continuing to build our success of our national account team and are adding additional resources in account support and service management.

This group had an excellent year, and we are looking forward to them continuing the momentum into fiscal 2005.

Finally, we continue to increase our focus on protective garments and are being rewarded with an expanded pool of larger prospects who are now seeing us as a serious contender for their business.

During the year we continue to exercise careful cost control, avoid initiating major capital projects where we could.

Still there were some expenses that continued to go up despite our best efforts at controlling them.

In particular we were impacted by higher energy costs and increased healthcare-related expenses.

This certain isn't unique to UniFirst.

And energy and fuel expenses is particularly problematic when you are running a large processing operation and are operating an extensive fleet of delivery vehicles.

And with a big workforce subject to all the normal health risks faced by the population at large, rising medical expenses and higher health insurance premiums are an ever-present concern.

As we head into our new fiscal year, we are faced with even higher projected energy costs, little in the way of healthcare expense relief, and an economy that has not yet rebounded enough to make for the job losses and wear reductions that have impacted us over the past couple of years.

We expect our core business to grow at a slower pace than in 2004.

We have anticipated that our nuclear division will be off somewhat from fiscal 2004 due to a slowdown in the government cleanup of de-commissioned nuclear facilities and hazardous waste sites.

We expect to see continued growth from our first-aid service operations.

We don't anticipate a breakout year.

With no additional major acquisitions on the horizon, this year's progress will depend on internal organic growth.

While we hope for superior performance from all our operating units, we believe it is prudent to keep our projections on the conservative side.

Given that, we are expecting no more than modest growth in both revenue and profits.

Our current expectations for fiscal 2005 are that revenues will be between $745 million and $750 million and a basic income per common share will be in the $2.05 to $2.15 range.

And the income per share of Class B common stock will be between $1.64 and $1.72.

Naturally, we will be closely monitoring internal and external conditions as we move through the year and will advise of any changes either up or down, which we believe are warranted.

In the meantime, we are moving ahead with optimism and confidence.

Now let me turn it back over to John for a more detailed review of the financial numbers.

Thank you, Ron.

As Ron explained, we are pleased with results of operations for fiscal 2004, which were better than we anticipated as we entered the year.

On an overall basis, several things contributed to these results.

The first was the Textilease acquisition slightly exceeded our expectations.

It not only covered the increased interest expense and amortization costs from the acquisition but had a slight favorable impact on our earnings.

Also, our basic laundry business had a very strong year.

We did an excellent job of controlling our labor and merchandise costs, which make up the most significant portion of our operating expenses.

We continue to benefit from our Mexico manufacturing operations.

Revenues for the 2004 fiscal year were a record $719.4 million, a 20.5-percent increase over the prior year.

Of this increase, 14.7 percent arose from acquisitions, the balance of 5.8 percent from internal growth and price increases.

The acquisition of Textilease accounted for substantially all of the growth from acquisitions.

For the quarter ended August 28, 2004, revenues were $178.1 million, a 20.6-increase over the prior year.

Of this increase, 14.5 percent was due to acquisitions, the balance of 6.1 percent from internal growth and price increases.

Again, the Textilease acquisition accounted for substantially all the acquisition growth.

The pricing environment continues to be difficult, and the revenues from price increases were less than 1 percent in both periods.

During the year we successfully completed the sale of certain linen business acquired as part of the Textilease acquisition.

This will decrease future revenues by approximately $7 million per year on an annual basis.

No gain or loss was recognized as a result of this disposition.

The first aid business nearly tripled in all periods due to the acquisition of Textilease.

This segment is performing well, and we are optimistic it will continue to make a positive contribution to our operations.

Finally, our UniTech business provided another strong year.

It actually lost money in the final quarter due to the cyclical nature of this business and some one-time charges.

Operating costs increased from $381.6 million to $462.6 million, or 21.2 percent over the prior year.

As a percent of revenues, these costs were 64.3 percent of revenues in fiscal 2004 and 63.9 percent in fiscal 2003.

For the 13 weeks ended in August, the operating costs as a percent of revenues increased slightly from 64.4 percent to 64.9 percent.

The primary drivers of these differences were lower merchandise costs, which was offset by significantly higher energy costs, and the fact that the Textilease laundries have higher production costs than the existing UniFirst facilities.

During the year, the company made a decision to close its Richmond plant and transfer the processing to the Richmond plant acquired as part of the Textilease acquisition.

As a result of this decision, the company has written off the value of machinery and equipment at this facility, which is not expected to have continuing value.

Pretax and auto are approximately $600,000 as recorded as a cost of operations in the third quarter of fiscal 2004.

The transfer of the operations was completed in the fourth quarter, and the old UniFirst plant has been closed.

Any closing costs as a result of this closure were absorbed in the operations during the year.

One of our long-term goals is to reduce our overall plant operating costs as we assimilate the former Textilease operations over the next couple of years.

As previously noted, we expect to see the benefit of combining the operations as we move forward in fiscal 2005 and 2006.

Selling and administrative costs increased 16.1 percent from $127.3 million to $147.9 million for the year and from $32 million to $37.2 million, or 16.4 percent for the 13 weeks ended in August of 2004.

As a percent of revenues, these costs declined from 21.3 percent to 20.6 percent for the year and from 21.7 percent to 20.9 percent for the comparable 13-week period.

Depreciation and amortization increased 14.6 percent from $39.2 million to $44.9 million for the year, and 13.3 percent from $9.3 million to $10.5 million in the fourth quarter.

The primary driver of these decreases was the impact of the Textilease acquisition, however, as a percent of revenues, depreciation and amortization declined in both periods.

For the year, depreciation and amortization declined from 6.6 percent to 6.2 percent of revenues.

For the 13-week period, they declined from 6.3 percent to 5.9 percent of revenues.

The net result of the above factors was that income from operations increased 31.1 percent, or $15.2m -- $48.8 million to $64 million for the year and 30.8 percent, or $3.4 million from $11.3 million and $14.7 million for the 13-week period.

As a percent of revenues, income from operations increased from 8.2 percent to 8.9 percent for the year.

Net interest expense for the year increased from $1.3 million to $9.4 million and to the fourth quarter from a positive $500,000 to $2.5 million of expense.

These increases are substantially due to the additional debt arising from the Textilease acquisition.

On June 14, 2004, the company completed major restructuring of its debt.

The company entered into new private placement with a group of insurance companies to borrow $75 million over a seven-year period at a fixed rate of 5.27 percent and $90 million for a 10-year period of floating-rate debt.

The proceeds of these borrowings were used to repay and reduce its bank line of credit.

The interest rate on the new floating rate debt is significantly lower than the prior bank rate and should moderate the impact of possible interest-rate increases.

As a result of this restructuring, the company incurred a charge in the fourth quarter of approximately $1 million to write down a portion of the deferred financing costs.

This amount was included in the interest expense reported in the fourth quarter.

The provision for income taxes remains constant in all periods at 38.5 percent.

Finally, I would like to report on our income per share.

This has gotten considerably more complicated due to a new requirement of the FASB.

As many of you know, we have two classes of common stock.

The shares are identical except for the fact that the Class B common shareholders are held by insiders and have 10 votes per share.

The common shares, which are publicly traded, have one vote per share and receive a 25-percent premium on any dividends declared.

The new pronouncement, which is ITFO3-06 requires companies to calculate earnings per share for each class of stock using the assumption that all earnings are distributed as dividends.

In the UniFirst case, this means that the basic income per share of common stock would be 25-percent higher than the income-per-share for the Class B common stock.

Based on this method, our income-per-share are as follows -- the income for basic common share before cumulative effect of the accounting change was $1.95 in fiscal 2004, a 14-percent increase over the income per basic common share of $1.71 in fiscal 2003.

The income for basic class E common share of $1.56 also increased 14 percent from $1.37 in the prior year.

For the fourth quarter, the net income per basic common share was 44 cents in fiscal 2004, a 5-percent increase over the net income per common share of 42 cents in the fourth quarter of 2003.

For the fourth quarter, the income per basic class D (ph) common share increased to 35 cents from 34 cents in the prior year.

I would also like to make a comment that there was a small error in the press release we released earlier today.

We have re-released it, but the press release showed that the income per basic common share increased 9.5 percent, and it should have been 5 percent.

A new press release has been sent out to correct that.

Total debt for the company at August 30, 2003, was $69.9 million, or 17.3 percent of total capital.

As a result of the acquisition of Textilease, and company's debt increased dramatically from the $69.9 million to approximately $250 million as of the acquisition date of September 2, 2003.

The cash flow of the company remains very strong, and we've reduced total debt to $178.8 million at August 20, 2004, or $71.2 million since the acquisition.

We expect to continue to reduce the debt level significantly over the next couple of years.

Looking forward, UniFirst is aggressively pursuing additional acquisitions and anticipates its capital spending will increase substantially in fiscal 2005.

On a preliminary basis, we anticipate capital spending in fiscal 2005 will be between $45 million and $50 million.

The company is in the process of building new facilities in Nashville, Chicago, and Edmonton.

Also, it expects to spend significant amounts as part of the assimilation of the Textilease business.

Finally, as Ron said earlier, we would like to provide preliminary guidance as to our expectations for fiscal 2005.

Our expectations are that revenues for fiscal 2005 will be between $745 million and $750 million and that basic income per common share will be between $2.05 and $2.15, and that the basic income for the Class D (ph) common stock will be between $1.64 and $1.72.

That completes our prepared comments, and now we'd be pleased to answer any questions you may have.

(OPERATOR INSTRUCTIONS)

Our first question comes from the line of Michael Schneider from Robert W. Baird.

Please proceed with your question.

Good afternoon, guys.

I apologize for the background noise, I'm at an airport here.

First, I guess, just the cautious tone of your comments, Ron -- I sense, I guess, a newfound level of caution not only in your voice, your comments, but also the guidance.

Give us some more color.

Well, if I give you the matrix, you'll kind of understand where we're coming from, and that will help you here, Mike.

On the new business growth side, for the year, including the new business from the routes, that was 17.3 percent.

The last business, Mike, was 10.2.

The adds versus reductions -- all products -- was 3.1, and the pricing was 1.0.

So it's a net of 5.0.

Our caution is we have to make up the $7 million in linen that we sold.

We figured that we lost about an extra 2 percent, 2.5 percent in lost business that we've got to make up.

So that's another $3 million or $4 million.

And then we also don't see the adds versus reductions coming even.

If it will improve the same 1 percent year-to-year, so we're basically saying it's a 2-percent negative.

So that's why we're a little cautious on the growth side.

So add stops got no better during the quarter?

We did not see them get any better for the quarter at our company.

If you want it for the year, I broke up by quarter.

Yes, that would be helpful.

The first quarter of '04 -- this is total volume, and this is men only -- garment wearers only, okay?

That was 0.17 percent negative; the second quarter was 1.3 percent negative; the third quarter was 0.66 percent negative; and the fourth quarter was 1.26 percent, or a total of 339 of garment revenue shrinkage.

Okay, and I guess any color during the quarter as to what might explain why they actually sequentially deteriorated for you?

All we can figure is that some of that -- whether the hurricanes were involved, August, you know, we can't think back that far.

We really don't have a good answer, Mike.

That's the bottom line.

Geographically, is it concentrated down in the Southeast?

It's higher in the Southeast than anywhere else, that's what we see.

And the lost business rates being up for you -- is it more competitive, is it more financial losses?

It was more competitive.

I think I was saying all along that I was giving your UniFirst numbers without Textilease, and we went back and pulled everything together.

As I stated, we have all of Textilease except two small locations on our system now, and we've pulled all the numbers together.

We had very difficult losses in Textilease.

Now, whether it was all price or what, our people tell us we were hit very hard with price competition.

What do you believe the revenue run rate of that business is now?

That's pretty hard, now that we're intermingling it.

It's harder and harder to recall.

Okay, that's fair.

You mentioned -- it sounds like you have some frustration on the new business side, Ron, as well, and the management change there.

Yes, I think our turnover for three years has remained relatively -- you know, gone down maybe three or four points, nothing significantly.

And I think we basic – Dennis said at early part of the year, our productivity slipped a little bit.

We were able to get almost back to neutral, and I think it just – wasn’t getting the leadership that it should get, and, you know, Dennis and I came to the conclusion that it was time to make some changes, and we're making a -- you know -- his right-hand man who runs the sales force is no longer with the company, and Dennis has taken over that role very actively.

We'll see if we can get where we should be.

Okay, let me get back in line and think about this.

Thanks, guys.

Thank you, our next question comes from the line of Mike Werner from Kennedy Cap.

Please proceed with your question.

Hi, thank you, can you hear me okay?

Yes.

Okay.

I just wanted to clarify one thing -- the guidance $745 million to $750 million revenues, and the earnings per share basic 205 to 215 -- can you give me what it would be on a diluted basis before the cumulative effect of the accounting change?

Well, I think we're looking 5 percent to 10 percent in growth in the earnings per share and the -- I think that's the rough --

(multiple speakers)

-- on top of the $1.74 that you produce this year.

Right, yes.

Okay, 5 to 10 percent on that.

We’re stuggling to figure out how to report earnings per share.

Yes, there are several.

And I just wanted to clarify two other things -- you said you had a $600,000 pretax charge that was for an inventory issue, and then a $1 million charge in the -- also pretax -- that was in interest expense for a deferred financing charge.

Is that correct?

Mostly correct -- the $600,000 charge was not inventory.

That was a write-off of equipment that we did not feel was usable, and that was in the third quarter of 2004 for closing our Richmond facility.

We also had some additional -- what do you call them -- closure costs -- in the fourth quarter we didn't break out as we merged the two facilities together, but we haven't really identified how much that was, and that was just absorbed in the operations.

The $1 million charge related to when we originally purchased Textilease, we got a $285 million loan from the bank, and there was a significant deferred financing charge, and when we redid that deal we ended up with $125 million bank loan and private placement money for $165 million, and there's a complicated FASB ruling of how you have to write off that deferred financing charge, and that resulted in almost a $1 million charge in this quarter, and that was included in interest expense.

Okay, I just wanted to clarify those things.

Thanks -- I'll get back in line.

(OPERATOR INSTRUCTIONS)

There are no further questions at this time.

I will now turn the call back to you.

Please continue with your presentation or closing remarks.

Well thank you for listening in.

We appreciate the interest and look forward to talking to you in the future.

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.