UniFirst Corp (UNF) 2005 Q1 法說會逐字稿

Welcome to the first-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. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to Mr. John Bartlett, Senior Vice President.

Thank you, and welcome to UniFirst's conference call to review our first-quarter operating results for fiscal 2005 and to discuss our expectations going forward. My name is John Bartlett, and I am the Chief Financial Officer. Joining me are Ronald Croatti, UniFirst's 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. 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 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; strikes and unemployment levels; demand and price for the Company's products and services; improvement in underperforming rental operations; the outcome of pending and future litigation and environmental matters.

Now, I would like to turn the call over to Ron for his comments.

Thanks, John. I would like to welcome all of you who are joining us for the review of our first quarter, a period that produced record revenues and earnings for our company. John will cover the details in a few minutes but let me start with a brief recap.

I am pleased to report that revenues for the first quarter of 2005 were 188.4 million, a 4.2 percent increase over the same period a year ago. All areas of the business contributed, with the major upside influence coming from growth in our rental uniform area. Absent the sale of certain linen volume that came with the Textilease acquisition, the revenue increase would have been approximately 4.7 percent.

Unlike last year, when acquisitions accounted for a major portion of our posted revenue expansion, this year the Textilease locations were fully integrated into the UniFirst structure and counted as contributors to internal organic growth. There were no acquisitions of consequence and price increase had only a slightly more than a 1 percent impact.

In addition to our laundry doing well, our Unitek business was up slightly. Our Canadian rental volume increased quarter-to-quarter, and the Green Card first-aid and safety division held essentially flat net income. Net income was 13.4 million, a 40.2 percent increase from last year's first quarter of 9.5 million. Net income per diluted common share was 69 cents compared with last year's reported net income per diluted common share of 49 cents. The primary reason for this very favorable improvement came from lower merchandise costs at laundry operations. John will go into further detail in his comments.

Within our core uniform business, new uniform service sales for the quarter -- that means newly-contracted rental dollars -- were up slightly from the same period a year ago, though through our professional sales reps were up over last year. Total shrinkage for the quarter was about 30 percent less than last year for the same period. This metric is of course sensitive to general business conditions, and the fact that we're seeing improvements suggests that our customers are doing better in a strengthening economy; they're more optimistic about the future prospects.

We agree there are some positive signs out there. Housing starts are up. Retailers are beginning to see more consumer spending. There's been a pickup on the broad service sector. Overall, predictions are for a strong economic growth in 2005. The Institute of Supply Management calls for modest spending and employment growth in the manufacturing sector and more robust growth in the non-manufacturing sector. If these predictors are correct, we should be able to look forward to a more favorable sales and retention environment in fiscal year 2005 than we experienced in fiscal 2004.

Except for some minor system details, the Textilease business we purchased at the beginning of fiscal '04 is now fully integrated into UniFirst. There remains some realignment, primarily combination of certain geographical proximity locations. This will carry over into this year and slightly into next, but mostly -- most of the heavy lifting has been done.

We are pleased with how the smooth whole process has been managed to the credit to local teams and corporate leaders who facilitated this effort. We've been acquiring businesses for over 60 years, and in terms of integration planning and execution, this one has to rank number one. As you know, for the past couple of years, we've been extra careful about our capital spending, trying to keep a tight rein on major projects and only undertaking those which were absolutely essential to the maintenance of smooth operations.

This year, with a little more comfort in the basic economic direction we're seeing, we plan to loosen the grip just a bit. We anticipate capital expenditures will run in the 45 to $50 million range with some new laundry constructions, some major expansions and some significant equipment replacements on the table.

So now, to give you additional financial details you've been waiting for, I would like to reintroduce John Bartlett.

Thank you, Ron. As Ron noted, the first quarter of fiscal 2005 was an outstanding quarter from a financial standpoint. Although we expected to have a good quarter, the results far exceeded our expectations and resulted in the best quarter in the history of UniFirst. I will briefly comment on the specific factors which helped us achieve these results.

Revenues for the 13 weeks ended November 27, 2004 increased 4.2 percent, to $188.4 million as compared to $180.9 million for the 13 weeks ended November 29, 2003. The increase is primarily due to revenue growth in our laundry operations as a result of internal growth, fees charges for damaged garments and price increases.

Revenues for the nuclear and first-aid segments accounted for 7/10 of a percent of the increase. These increases were offset somewhat by the sale of certain linen business in fiscal 2004 which reduced revenues by approximately 7/10 of a percent.

Operating costs increased to $116 million in the first quarter of fiscal 2005 versus $115.1 million in the prior year. As a percent of revenues, these costs decreased by 2 percent, from 63.6 percent to 61.6 percent. Of this 2 percent decrease, 1.4 percent was from lower merchandise amortization for locations acquired as part of the Textilease acquisition.

The Company also benefited from cost savings realized from the Company's manufacturing operations in Mexico and lower production labor costs as a percent of revenues. These cost savings were offset somewhat by higher energy costs.

Selling and administrative costs remained relatively constant as a percent of revenues, increasing slightly from 20.4 percent in fiscal 2004 to 20.5 percent in fiscal 2005. Depreciation and amortization decreased from $11 million, or 6.1 percent of revenues, to $10.7 million, or 5.7 percent of revenues. The decrease was due to certain computer equipment becoming fully depreciated in fiscal 2004, as well as lower depreciation expense arising from the Textilease acquisition. Amortization of intangible assets also decreased quarter-over-quarter.

The overall effect of these and other variations was that income from operations increased from $18 million in fiscal 2004 to $23.1 million in fiscal 2005, or almost 29 percent. As a percent of revenues, income from operations increased from 9.9 percent to 12.3 percent.

Interest expense was $1.6 million in fiscal 2005 versus $2.5 million in the prior year. This was due primarily to the fact that the average debt outstanding during the first quarter of fiscal 2005 decreased to $175.7 million as compared to approximately $245 million in the prior year. The provision for income taxes in the first quarter of fiscal 2005 was 38 percent as compared to 38.5 percent in the prior year. The reason for this decrease is primarily due to a reduction in the provision required for foreign taxes. The overall result was that net income increased over 40 percent, from $9.5 million in fiscal 2004 to $13.4 million in the first quarter of fiscal 2005.

The diluted income per share for common stock also increased over 40 percent, from 49 cents per share in fiscal 2004 to 69 cents per share in fiscal 2005. Overall, we are delighted with the operating results for the first quarter of fiscal 2005.

Our balance sheet is very strong and continued to improve from November of 2003, as well as our August year-end. Accounts receivable at November 27, 2004 were $81.4 million, or 4.9 percent more than the $77.6 million at November 29, 2003. These receivables represent 39.3 days of sales, which is consistent with the 39.1 days a year ago.

New inventory has declined from the $31.6 million at November of 2003 to $27.3 million at November 27, 2004. A significant portion of this reduction relates to the utilization of inventory acquired as part of the Textilease acquisition.

Merchandise and services declined from $68.7 million at November of 2003 to $63.3 million as of November 2004, but is up slightly from the $60.5 million at August 28, 2004. On an overall basis, merchandise and service continues to be at a relatively low level in relation to the revenues of the Company. Net property and equipment has decreased from $295.7 million at November of 2003 to $290.3 million at November of 2004, but is up slightly from the $288.8 million at our August year-end.

During the quarter, the Company funded $10.8 million of capital expenditures, which is consistent with the guidance given in our October conference call of expected capital expenditures of between $45 million and $52 (ph) million for fiscal 2005.

Total current liabilities increased to $123.4 million at November 27, 2004 from $112.8 million at November of 2003 and $113.2 million at August -- at our August year-end, primarily due to an increase in accrued and deferred income taxes. Total debt has declined from $239.6 million at November 29, 2003 to $172.5 million at November 27, 2004, or $67.1 million. Finally, total shareholders equity has increased from $345.6 million at November of 2003 to $383.6 million in November of 2004. Therefore, debt as a percent of capital has declined from 40.9 percent at November 2003 to 31 percent at November of 2004.

Looking ahead, we believe that 2005 will continue to be an excellent year. In our October conference call, we provided guidance that we expected revenues to be between $745 million and $750 million for fiscal 2005, and that basic net income for our common shares would be between $2.05 and $2.15, and that basic net income per share for the Class B. common stock would be between $1.64 and $1.72.

As many of you know, we are now required to report income per share for each class of common stock outstanding. In order to provide a meaningful single income per share number, we plan to use as our primary benchmark the diluted net income per share for common stock. Diluted net income per share assumes that the Class B. shares are converted into common shares and it also includes the dilution from the assumed exercise of outstanding stock options. Using this as a Benchmark, our November conference call would have given a range of expected diluted net income per common share of between $1.85 and $1.94 for fiscal 2005, as compared to the $1.74 reported in fiscal 2004.

We continue to believe that the revenues for fiscal 2005 will be between $745 million and $750 million, but are considerably more optimistic regarding that income. We now believe that the diluted net income per share will be in excess of $2.15 per share in fiscal 2005. We expect to be in a better position to update this estimate at the completion of the second quarter.

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

Thanks, John. I appreciate this opportunity to talk with you about UniFirst's sales outlook.

The biggest single new sales sources for our mixed product professional sales team is starting to show signs of renewed vigor. Though turnover remains higher than we'd like, we are seeing sales totals that are up about 5 percent from the same quarter of last year. The fact that we're experiencing a slightly better selling environment certainly plays a part in it, but we believe that steps we have taken to upgrade the organization and its resources have had an effect, too.

For example, we continue to put a lot of time and effort into increased levels of sales manager training aimed at giving our field sales leaders more practical management knowledge and better coaching skills. Also, as our sales force automation system continues to roll out to more regions, we're seeing a positive impact on the database utilization and prospecting efficiency.

On-the-street pricing seems to have stabilized a bit over what we were seeing last year and that makes things a little easier in new account acquisition situations. We're also seeing a reduction in the net turnover rate (indiscernible) better selling conditions. To keep this heading in the right direction, we are modifying our compensation plan to allow for enhanced selling opportunities for all reps (indiscernible) greater ease in attracting and retaining good sales performers.

Our specialized FS salespeople, those professional reps who focus (indiscernible) entirely on selling facility service products are making progress as well. These people concentrate on finding new customers for floor care, hygiene and restroom services, and operate it with dedicated sales management and their own special sales tools and selling aids. We solidified this organization by adding capable and experienced divisional leadership and are starting to see better performance at all current locations. Our plan calls for continued expansion through the establishment of additional locations in several major markets, with some of that slated for later this year.

A real bright spot continues to be our national account team which keeps bringing in new contracts and which has shown particular skill in retaining and signing business and their expanding revenues in the installed base through the addition of new product services. Volume in the quarter exceeded that of the same period a year ago and the number of qualified prospects under active development continues to expand, a positive indicator for future sales.

During the quarter, we added fresh management strength to this organization, bringing on board a new manager of national accounts customer service, and in recognition of the importance our national account effort continues to play by adding a new vice president of national accounts to lead our expanding team and help us plan for accelerated growth.

We've also devoted time and effort to additional sales training for all of our program managers as a way to better equip them for ongoing business development efforts with the current accounts they manage. We believe the emphasis we are placing here is important and can have a significant payoff for the Company down the road.

In other selling areas, our catalog direct sales team continues to build volume by targeting offers to purchase our (indiscernible) base and by creating new purchase-only customers in geographic areas where we have not yet reached out with our rental service offer. Additionally, they support our custom national account programs and produce materials that aid our service sales effort.

Finally, in the marketing world (ph), we continue to focus on selling aids and prospect development tools that aid salespeople to make more productive prospect contacts and in generating additional selling opportunities. We have created targeted programs for facility service applications, for food processing applications, and for protective garment applications, and have seen positive results in each of these areas.

Additionally, we have been working to create new matt and mop product lines which we will be producing for both our professional sales team and for our route sales team. These are the latest in our lineup of UniFirst self-manufactured products designed for superior performance and a level of competitive differentiation.

The first of these new floor care products was released during the quarter and one will hit the streets by the end of the second quarter. They are already starting to generate excitement with our sales reps, and we believe the enthusiasm will translate to more product demos, more sampling, and more sales.

All in all, we're optimistic about the year and are looking for good results from all of our seller resources in months ahead.

Thank you, Dennis, and now we'll turn it back to the operator. We'd be pleased to answer your questions.

(Operator Instructions). Michael Schneider, Robert W. Baird.

I guess first, obviously, earnings were fantastic this quarter. Congratulations on that. Maybe you can give us more color. It looks like it's all gross margin driven, and you mentioned cost of goods sold was 1.4 of the 2 points. I guess, why is that a surprise to you, you guys? What changed in the Textilease accounting that was such a positive surprise, and why does it continue for the balance of the year?

Well, I think we were optimistic. I think what we were surprised at -- actually the dollar impact of it. And what we did, Mike, is when we did the purchase accounting for Textilease a year ago, we had to load in as part of the purchase an amount for the merchandise and service that we acquired as part of the acquisition. And we loaded a relatively significant amount in, and we depreciated that on sort of an accelerated basis. So the biggest chunk came in early in the year, and it will decline through the year as we go forward. But that was expected to be offset by merchandise that we would have to replace as the garments that they provided wore out. I think we really had very favorable results. I mean, the garments and service at Textilease apparently were in good shape and we didn't have to replace a significant level of garments. So the year-over-year difference is dramatic, and it's really more than we would have expected, I think. The best part of it -- I think the other -- another significant part is we continue to get the benefit of the flow-through from our manufacturing operation in Mexico. That cuts across the whole company. That wasn't as significant as the Textilease.

So the Textilease amortization -- it's more a function of just better experience in the wearer of the existing garments?

Yes. I mean, last year in the first quarter, from the acquisition garments in the first quarter, we had a charge of $4.5 million. That is just about gone. That was from the initial load that we put in. And the new garments we have put in this year, the total amortization is about $2 million, for the garments that have been put in since the acquisition and the amortization of those. So it's almost a $2.5 million swing.

Okay. And then are you confident that that experience continues in the remaining three quarters?

Well, I don't think we're going to have the dramatic difference between last year and this year, but I think we're confident that the level of expenditures or the percentage of garment amortization as a percent of revenue should remain relatively constant. We're not going to get the same benefit year-over-year, but I see no reason that the percent of revenues that we're experiencing shouldn't continue.

I guess just switching gears, on the organic growth -- Ron, in the past, you have broken it up for us. If you could do it again I would appreciate it, just add stops and retention.

Michael, the new business for the quarter was about 4.2 percent. You can annualize that out, the run rate. The lost business for the quarter was down at 1.6. You can annualize that out. The adds versus reductions were even, which is a great help to us. And then I know you like it by month, Michael. September was a negative month. October was a positive month. November was a positive month, and December was slightly negative. But we are positive for the four months.

And is that seasonally normal for December to be negative? Presumably nobody is hiring, but most people are trimming the payroll at year-end.

It was a fairly modest difference. It was only $1400, I think, negative.

Okay. So you don't read a deterioration into the December trend?

No.

And organic growth for the quarter then was all of the 4.2, or was there some slight acquisition contribution in there?

(multiple speakers) like 2/10 of a percent or something, and part of that was in the first-aid business.

It's really in the first-aid business. (indiscernible) business. And price increase was 1 percent.

And just add stops -- focusing on that for a minute. The trend is positive. We've heard this from other companies and many of the private companies we talk to as well. What is your sense, Ron and Dennis I guess, just as to what you're hearing from the field? What sectors are better? What geographic regions are better? Any color you can give us would be helpful.

We had two regions that were down on the negative side, even though the Company is even, the Northeast region and the West (indiscernible) area. All our other regions were positive.

And your sense of manufacturing versus service?

I think that is the big difference. I think those two regions are more manufacturing, particularly the West (indiscernible) -- the Pennsylvania, Ohio and Illinois, Indiana area.

And then switching to new business -- 4.2 percent. Give us a sense if that's an acceleration by your numbers from last quarter or a deceleration.

I think that the run rate -- that's going to be that same 17 percent roughly that we ran last year.

Of new sales (multiple speakers)

The way we calculate it. We don't have the ability to calculate it individually by customer rolling average; we just do it from the start volume.

And, Ron, you've talked in past quarters of your concerns about decelerating sales -- new sales growth as the sales force appears to be understaffed.

We are still struggling to get the staff, Mike. We still have open positions. We did add more positions. We did fund -- budget more positions, and we're still struggling to get to the desired level we want.

Mike, sales are up a little over 5 percent from first quarter of last year. But Ron is absolutely right, we're having some difficulty finding the right people for these positions. We have changed our modeling a little bit and I think we're adjusting a little bit to that change. So I think there is some difficulty there. But we are struggling and we're trying to get the right people on board, and we're being very selective. So henceforth, we're not just putting anybody who knocks on the door.

Dennis, I'm sorry; what number is up 5 percent?

The sales is up 5 percent from first quarter last year. (multiple speakers) revenue. New sales.

What is the headcount within the sales force these days? Is it up or down year-over-year?

It's up slightly.

And is your target still to get that up 8 percent this year, as you mentioned last quarter?

Yes, it is.

I will get back in line. Thanks, guys. Congratulations again.

(Operator Instructions). Rick Dote (ph), Columbia (ph) Management.

Just something that you guys brought up, I think, a couple of times last year -- the Textilease pain that was incurred as the sharks circled the waters and picked off some of the accounts. Has that now stabilized and you feel comfortable that we -- we're in more of a positive mode at this point?

I think, as I made in my comments, Rick, that the boys did a good job assimilating the acquisition. And part of that assimilation was a heavy effort to get renewal contracts and contracts on the volume. And that effort is starting to pay off. The sharks are slowed down and it's been reflected in this quarter that the losses are less.

So we're still looking at negative, but it's lower negative?

That is correct.

Is it better than you anticipated? Because you were -- the sense I got on the November call was that issue came up again and was one of the reasons why I think the guidance was somewhat tempered. Are you experiencing better than you had budgeted or are you kind of tracking where you were budgeted?

We're tracking the average debt customer loss on a weekly basis, and we see the Textilease locations coming more in line with the UniFirst locations. This quarter they actually -- there were actually a couple that did better than some of the UniFirst locations. But it's following pretty close to in line.

And the good thing, I think, is it's all on our system now. So we can track it the way we're comfortable tracking it using our numbers and our approach, because it's all on our billing system now. in our approach because it would fall on our billing system now.

Now just remind me, I can't remember -- were there unions involved there?

None.

(multiple speakers) unions that (indiscernible) when it was thought that Cintas might be successful, but I think it's pretty much back to (indiscernible) now. So there's no unions in Textilease.

And whatever you were going to divest from that on the linens side is done?

There's a little bit more that we might consider selling. It's not material.

Okay. That's all I have.

Michael Schneider, Robert W. Baird.

Just some follow-up guys. First, just on Textilease. Ron, you mentioned that the heavy lifting is done. Yet correct me if I'm wrong -- there's at least two or three consolidations that need to occur yet. Is that right?

That is correct.

And I guess I'm surprised to hear you describe that, at least I guess by inverse, that those aren't heavy lifting. Give me your confidence level in not disrupting the operations, because rerouting is known as being difficult.

Rerouting is probably going to start at the end of this year into next year, but the consolidation of our plant, their plant -- we've really got one more to go, and that's the Charlotte area. And once we do that one we'll have all the right business in the right buildings, and then we'll take a hard look at routing, consolidating, getting the route volumes up to where they should be.

Okay. But that doesn't occur until '06. So it's just the one consolidation this year.

That's correct.

We finished the one in Richmond, and that's, I think, gone pretty well. And the next, really, plant closure will be the one -- one of the Charlotte plants. But we're as we talk -- and we're continuing to move branches from plant to plant, which causes some disruption. And that's going, I guess, relatively smoothly. But that is happening month-by-month as it makes sense. We're moving some branches out of Charlotte to make room so we combine them, and so forth.

And then switching to Unitek, the expectations I guess we've been given today at least were for a flat to down year, yet it was up this quarter. Have you guys revised your (multiple speakers)

It wasn't up. I mean, it was flat this quarter, or very slightly up. But we are -- we do expect it is going to be down as the year progresses. There's one big contract that is basically completed that's going to significantly impair their profit probably in the third quarter.

So in the second half. What type of magnitude are we talking in revenue dollars?

It's significant.

It's substantial. It's a seven-digit number.

Annually or quarterly?

Both.

Acquisitions --

We keep hoping, Mike, -- we keep hoping the government is going to take the money to spending it as one site and rechanneling it to one of the other sites to do a cleanup. At this point we haven't heard that, so the one site is coming down actually this month. And we don't know what the government is going to do with the money.

I think the good news is it was a pretty successful cleanup.

And acquisitions. Ron, last quarter you mentioned that there was nothing sizable that would be imminent. Can you give us an update on what the activity is like these days and what your pipeline looks like?

We have a few in the pipeline but nothing of any significance. We would certainly entertain something significant if we could find it.

How about stepping outside the core uniform business?

If we find some first-aid that fits in, we would certainly pick it up. We're looking at a couple of businesses that are allied to the nuclear business that could fit right into those type of customers at this point (multiple speakers) that business going. But we're not going outside of our core basic three.

Just a final question. John, on the guidance, by raising it from a midpoint of $1.90 to 2.15, it implies about 7 to 8 million more in operating income, that is pre-tax. Can you break that down for us? What gives you that type of optimism? You mentioned about 2.5 million this quarter alone from the Textilease amortization issue. Where does the balance of, say, the 5 million come from?

I think the margins that were -- we achieved in the first quarter, we're hopeful we can sustain those maybe not quite as high in the second quarter, but we expect we'll substantially improve the margins year-over-year. So it's really a margin improvement that we're expecting.

And it's the same issues flowing through in the remaining three quarters, the amortization issue and the better garment sourcing out of Mexico?

Merchandise is a big piece. We also commented that we did a good job. Our production labor as a percent of revenues is actually down year-over-year. We've done a nice job controlling our costs. Our distribution center, really -- the costs have not escalated as we increased the volume that goes through there. And we're continuing to get a tremendous benefit from our manufacturing. We're moving from where we were seven or eight years ago, where the manufacturing was flowing through let's say 4 or $5 million of profit. This year it's going to be over $20 million, so it's a substantial benefit that -- I think really what we're seeing is the culmination of 10 years of work that's really now being realized.

I guess that is all. Thanks again.

We have no further questions. I will turn the call back over to you.

I would certainly like to wind this up and say thank you for coming to our conference, and we certainly feel a lot better about the year than we did in November. We think our revenues might even be a little stronger than the 750. We're pretty confident about the profits and our prediction that we're going to be there, and we certainly appreciate your support. And this will be UniFirst's banner year. I can assure you of that. Thank you very much.

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