UniFirst Corp (UNF) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the UniFirst Corporation second-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 four on your telephone. I would now like to turn the conference over to Mr. John Bartlett, Senior Vice President, UniFirst Corporation. Please go ahead, sir.

Thank you, and welcome to UniFirst's conference call to review our second-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'd like to give a brief disclaimer.

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 "anticipate" and "should," and other expressions that indicate future events and trends, identify forward-looking statements. Actual [inaudible] 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; and the outcome of pending and future litigation and environmental matters.

Now that that's behind us, I'd like to turn the call over to Ron Croatti for his comments.

Thank you, John. Welcome to all of you who are joining us for the review of our second fiscal quarter and the first half of our fiscal year. I am pleased to say that both reflect excellent performance by the Company. I'd like to take this opportunity to thank all our team partners who contributed to this success. John will cover the numbers in detail in a few minutes, so I'd like to just touch on the highlights.

Net income for the second quarter was $10.1 million, or $0.52 per diluted common share, a 52.7% increase over last year's 6.6 million, or $0.34 cents per diluted common share. For the first half, net income was 23.4 million, or $1.21 per diluted common share, a 45.3% increase from last year's 16.1 million, or $0.84 per diluted common share. The biggest reason for the variable -- very favorable increase in net income in the second quarter and the first half were reductions in overall operating costs. As a percent of revenue, operating costs for the second quarter decreased 1.3% from the same period in fiscal 2004, and for the first half, operating costs decreased 1.6% from the comparable period in 2004. These decreases were due primarily to lower merchandise amortization from acquired Textilease locations, cost savings realized from the Company's Mexican manufacturing operations, and lower production payroll costs as a percent of revenues. These were slightly offset, due to higher energy costs in the laundries and increased fuel costs associated with operating our fleet of vehicles.

Revenues for the second quarter were 190.7 million, a 7.5% increase from the 177.4 million in the same period a year ago. Revenues for the first half were 379.1 million, a 5.8% increase from the 358.3 million for the comparable period in fiscal 2004. Most of the advances in both quarters and the half is the result of internal growth at laundries, though our UniTech and first aid business did make solid contributions as well. Comparing this year's second quarter to last year's, revenues for our Canadian operations were up 15%, for our first aid division, up over 11%, and for our UniTech Services Group, up over 9%. Price increases had a minimal effect. Within our core rental business, new uniform service sales continued to trend up, as did protective garment sales and facility service sales. Our national comp business also continued to show positive results, with increases both in rental sales and direct sales performance.

The economic numbers we are seeing tend to support predictions of a more favorable business environment during the second half of the year. [Inaudible] sales continue to trend up, service sector revenues are on the rise, wholesale numbers appear solid, and overall business sales are up slightly. The Institute for Supply Management index continues to run in the middle 50s, indicating that both the manufacturing economy and the overall economy remains on a growth track. And though recent government numbers show overall employment fell slightly in February, the ISM employment index continues to track positively for the 16th consecutive month. All this suggests a great, favorable prognosis for our ability to sell new business and retain that which we already have during the balance of the year. As we previously indicated, the more favorable business conditions also have an impact on the decision we make about capital spending. This year, with the economy that appears to be on more solid footing, we will be a bit less restrictive in making new infrastructure investments. We continue to plan on capital expenditures in the order of 50 to 55 million, with some of this going to new construction, some to major expansions, and some to equipment replacement and upgrades.

Now I'd like to reintroduce Chief Financial Officer John Bartlett to give you the expanded financial details.

Thank you, Ron. As Ron explained, we've been very pleased with results of operations thus far this year. Revenues for the 13 weeks ended February 26, 2005 were a record $190.7 million, a 7.5% increase over the prior year. This increase was substantially all from internal growth and price increases. The laundry business reporting unit represented 6.5% of this increase, with the balance coming from the UniTech and first aid businesses. Revenues for the first 26 weeks of fiscal 2005 were a record $379.1 million, a 5.8% increase over the prior year. This increase was also substantially from internal growth and price increases. The laundry business reporting unit represented 5.3% of this increase, with the balance coming from the UniTech and first aid businesses.

Operating costs increased from $230.8 million to a hundred -- $238 million, or 3.1% over the comparable 26 weeks last year. As a percent of revenues, these -- costs decreased from 64.4% of revenues to 62.8% of revenues. For the 13 weeks ended in February, the operating costs declined as a percent of revenues from 65.2% to 63.9%. The primary driver of these decreases was lower merchandise cost. The Company continues to benefit from its transition to manufacturing garments in Mexico, as well as better merchandise control at our laundries, including the new locations acquired as part of the Textilease acquisition. These decreases were offset by significantly higher energy costs. Selling and administrative costs increased 6.4%, from $73.9 million to $78.6 million for the 26 weeks ended in February 2005, and from $37 million to $40 million, or 8% for the 13 weeks ended in February of 2005. As a percent of revenues, these costs were 20.7% in the 26 weeks ended in February 2005 versus 20.6% in the prior year, and 21.0% for the 13 weeks ended in February of 2005 versus 20.9% in the prior comparable 13-week period.

Depreciation and amortization decreased $1 million for the 26-week period, from $22.7 million to $21.7 million, and $600,000, from $11.7 million to $11.1 million, for the second quarter. As a percent of revenues, depreciation and amortization declined in both periods. For the 26-week period, depreciation and amortization declined from 6.3% to 5.7% of revenues, and for the 13-week period, from 6.6 % to 5.8% of revenues. The decreases were due to certain fixed assets becoming fully depreciated in fiscal 2004. Amortization of intangible assets also decreased slightly in both periods.

The net result of the above factors were that income from operations increased 32.1%, or $9.9 million, from $30.9 million to $40.8 million for the 26-week period, and 36.5%, or $4.7 million, from $13 million to $17.7 million for the 13-week period. As a percent of revenues, income from operations increased from 8.6% to 10.8% for the 26-week period, and from 7.3% to 9.3% for the 13-week period. Net interest expense for the first 26 weeks decreased from $4.7 million to $3.1 million, and for the second quarter from $2.2 million to $1.5 million. These decreases are primarily due to lower debt outstanding in the current year. The provision for income taxes in both periods of 2005 was 38% of income before taxes, or slightly less than the 38.5% in both periods of fiscal 2004. This decrease was due primarily to lower rates and foreign taxes. Finally, net income for the first 26 weeks of fiscal 2005 increased $7.3 million, or 45.3% from $16.1 million, or $0.84 per diluted common share, to $23.4 million, or $1.21 per diluted common share. For the second quarter, net income increased $3.5 million, or 52.7% from $6.6 million, or $0.34 per diluted common share, to $10.1 million, or $0.52 per diluted common share.

Overall, we are very pleased with results for the first half of fiscal 2005, and continue to be optimistic for the balance of the year. However, we do not anticipate the same significant year-over-year increases in our operating income the second half of fiscal 2005. Our balance sheet is very strong and continued to improve from our August year end. Accounts receivable at February 26, 2005 were $79.1 million, or 13.9% more than the $69.5 million at August of 2004. These receivables represent 37.8 days of sales in fiscal 2000 versus 37.4 days at the same time in fiscal 2004. New inventory has declined from $31.1 million at August of 2004 to $26.6 million at February of 2005. A portion of this reduction relates to the utilization of inventory acquired as part of the Textilease acquisition. Merchandise in service has increased from $60.5 million at August of 2004 to $65.8 million at February of 2005, but is only 3.4% higher than the $63.6 million as of February of last year. On an overall basis, merchandise in service continues to be at a relatively low level in relationship to the revenues of the Company.

Net property and equipment has increased from $288.8 million at August of 2004 to $299.8 million at February of 2005. During the first 26 weeks of fiscal 2005, the Company funded $29 million of capital expenditures. In our January conference call, we estimated fiscal 2005 capital expenditures of between $45 and $50 million. We now anticipate capital expenditures for fiscal 2005 will be between $50 and $55 million. We also expended about $10 million in several acquisitions in both the uniform rental and first aid businesses. None of these acquisitions were individually significant in size.

On the liability side of the balance sheet, current liabilities increased to $118.2 million at February of 2005, from $113.2 million at August of 2004. Total debt has increased slightly, from $178.8 million at August of 2004 to $180.6 million at February of 2005. Finally, total shareholders' equity increased from $367.7 million at August 2004 to $392.1 million at February of 2005.

In our January conference call we provided guidance that we expected fiscal year 2005 revenues would be between $745 and $750 million, and diluted net income per common share would be at least $2.15. We now believe revenues will be between $755 million and $760 million, and diluted net income per common share will be between $2.15 and $2.25 for the full year.

Now, I'll turn the call over to Dennis Assad, Senior Vice President of Sales and Marketing, for his comments.

Thanks, John. From a new sales standpoint, our professional sales organization makes the biggest impact on results, and in the second quarter they are producing at a rate about 7% ahead of the same quarter last year, and up from this year's first quarter. We accomplished this despite rolling at only about 80% of budgeted rep workweeks, a shortfall that is largely the consequence of rough turnover. As we noted last time, we're putting a lot of effort into increased sales management training, and are giving local sales leadership more tools to help them excel at recruiting, training, coaching and directing our frontline sellers. One tool that is having an increasingly positive effect is our sales force automation system, which is now installed in three of our regions and which is scheduled to be rolled out to two more by the end of the fiscal year. The combination of hardware and software is giving the reps both a powerful territory management aid and a highly refined personal sales productivity tool. It's also giving local sales managers a means of maintaining a realtime monitoring over activity sets, leading to vastly more effective performance coaching.

At the very end of the quarter we introduced a new sales compensation plan, which is specifically designed to deliver improved earning opportunities for sales reps who deliver results. It simplifies the payment system, provides for more realistic market-specific base rates, and offers more incentive for higher levels of achievement. We think it will help us in recruiting the kind of people we want, while at the same time delivering the upside dollars that will allow us to retain top sales performers.

Uniform program sales continues to be our number one priority. However, facility service products are an increasingly important part of our offer and are incorporated in most programs. But for a portion of our professional sales organization, our dedicated facility service reps, these products are the total focus of their daily efforts. They deal exclusive -- exclusively with floor care and hygiene products, and though their average sale is smaller, the shorter selling cycle and more rapid merchandise payback makes it a highly profitable business for the Company. For that reason, we're planning to add reps, expand the product offer and put additional focus on selling pre-packaged [inaudible] services that deliver extra customer value.

Our national accounts team continues to make big contributions Both direct sales and rental sales are up over last year. An area of particular focus is the organization and the execution of our preferred vendor program. Many national accounts are simplified programs with a single controlling contract that covers all customer facilities and service installations and are executed on a pre-arranged, pre-scheduled basis. Others, however, take the form of a preferred vendor deal, whereby the central authority typically endorses us as an official service supplier, but requires that we directly contact and sell their individual locations. This calls for considerable logistical coordination between our corporate national accounts group and our individual service locations, and is an area where we are currently putting a lot of effort.

The product management concept we are employing in certain of our specialty market areas is delivering both sales success and accelerated market development. In the protective garments area, for example, the specialized management resources, knowledge and skills we've brought to bear have improved the training of sales reps throughout our organization while, at the same time, generating increased interest on the part of large prospects in considering UniFirst as primary supplier for their major protective garment program. Likewise, by applying special product [inaudible] expertise to the [inaudible] area, something we've been working on for over two years now, we've been able to devise special programs for the food processing industry that are [inaudible] to deal more effectively with the governor -- government-mandated requirements for cleaner in-plant processing and government programs that help to control cross-contamination. And specialized product management in the facility service area is helping us to drive ahead with new product development in the floor care and hygiene areas that we expect will deliver additional sales for the future. In all three cases, we're getting concentration of effort and sales focus we wouldn't have had without dedicated resources.

Finally, to keep things rolling through the rest of the year, we're making sure reps are working their databases and keeping their individual sales pipelines stocked. Experience tells us it's the best way to sustain momentum and keep the new business wins coming. Given what we see, we're optimistic about the balance of the year, and look forward to reporting to you on our results in the quarters ahead. John?

Thank you, Dennis. Now we'll turn it back -- turn it over to the Q&A period.

Thank you. Ladies and gentlemen, if you would like to register for a question, please press the one, followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw it, please press the one, followed by the three. If you are using a speakerphone, please lift your handset before entering your request. One moment, please, for the first question. And our first question comes from the line of Michael Schneider from Robert W. Baird. Please proceed with your question.

Good afternoon, guys.

How are you doing, Michael?

I'm doing very well, and nice quarter. I'm just curious about the second half now. It looks like from the guidance, while you've had big spikes in operating margin in the first half, you're not looking for the same type of momentum in the second half. I'm just wondering what is different about the model as you progress through the year?

Well, I -- I think the -- the one thing that we're very cautious of, Michael, I think the -- from an operating margins standpoint on the laundry side, we -- we hope to be consistent as we continue through the year, but we're very concerned about the -- the UniTech business. They've had a -- I think we've mentioned in the past, they've had a -- a very significant account that -- that's winding down, and we don't expect the same performance from them in the second half as the first half. So what we -- we've had some -- I guess, some year-over-year benefits compared to prior year. I think some -- we talked about the significant benefit in the merchandise cost in Textilease and also from our -- our manufacturing, but I -- I think what we're looking forward is we -- we're looking for the next two quarters, it'll -- the year-over-year profit performance will be closer in line with the -- the revenue growth. That's what we see at this point.

Okay. And then on the topic of revenue, you beat, I think, most people's expectations handily on the top line this quarter. You did -- it sounds like you did a few small acquisitions. Yet, again, it looks like you didn't raise your revenue guidance all that much. Is there something about the market that makes you more cautious in the second half, just from an organic standpoint?

I think I'll answer the acquisition part. The -- there was actually one acquisition in there, and it really didn't hit until February.

Okay.

It's very small.

I think really any acquisitions we've had this year are sort of offset by the linen business we sold last year. So, we -- we -- we -- we sold some of the linen business we acquired from Textilease so, again, on a pure acquisition/divestiture standpoint, I think it's pretty neutral at this point.

Okay, and I apologize if I missed this, but just on the drivers of organic growth, could you give us some -- some color on add/stops? And, again, I apologize if you covered this already, I hopped on a few minutes late.

I didn't cover it, Mike, I was waiting for you. The new business was about 15.2. The loss business was 7%. The add/stop was negative 1.8. The price increase was 1%, and the acquisition was 0.1%.

Okay, and are these year-to-date numbers now, Ron, or just Q2?

That -- that's the run rate.

Okay. Okay. And your -- your thoughts on add/stops through the quarter? I know it's a seasonally weak period with November, January, February, but any -- any thought just how it looks today versus a year ago, to adjust for that seasonality?

We are doing better year to year by about 0.7 on the wearers.

Okay.

On the -- for the quarter, we only had three positive weeks.

But that -- but that is seasonally, I guess?

That is correct.

Not terribly surprising?

No.

Okay. In fact, I guess, does your gut tell you that that's a good performance in this weak period, or -- or not?

I -- I -- I think it's actually doing pretty well, we're 0.7 ahead of last year.

Okay. All right, I'll get back in line. Thank you.

Ladies and gentlemen, to register for a question please press the one, followed by the four on your telephone. And our next question comes from the line of George [ph] Vanderheyden from Fidelity Investments. Please proceed with your question.

Hi, John and Ron. Congratulations on beating our expectations again.

Thanks, George.

Thank you, George.

I just would like to get to this -- kind of go over this second half again, because I was looking back over the last five years, and never in the last five years has the first-half earnings been more than 50% of the year's earnings. In fact, it's -- it's averaged 47% of the full-year's earnings, from a range of about 45% up to 48% of the year. And I guess that's because there's more holidays in the first half, is that right?

I think that has something to do with it. It's -- I don't have a good answer for you, I mean, I think we -- we -- we certainly don't expect that we'll replicate the second half this year. I mean, we're obviously going to try as hard as we can and do as well as we can.

You don't -- you don't think you'll replicate the first half, you mean?

Right. I think the first quarter was a -- a very strong quarter, and I -- I think we will -- we anticipate we'll probably be in the high 50s to $0.60 in the next quarter and the -- the high 40s. We're looking -- hopefully maybe 10% each quarter over last year is about where we -- we see it. I hope we're wrong, but --

Okay. Well, I hope you're wrong too, but --

I hope we're wrong on the low side.

You -- you've been good at keeping our expectations low for the last two quarters, so that's --

I -- I think, George, we're looking to the high end of those numbers.

Yes. Could you talk a little bit about shrinkage versus a year ago and -- and -- and what's happening with attrition trends at the Textilease locations in renewals?

Okay, the -- the -- the loss business at Textilease is falling more in line with the run rate of UniFirst, so it -- it's definitely slowed down. The add/stop wearer matrix that we measure weekly, as I said earlier, is -- on a year-to-year basis is 70 basis points ahead of where it was last year, so shortening up. So we're pleased with that. I think most of the things we see is -- is the economy is moving along. Our sales have picked up a little bit. So I think we're seeing -- all in all, we're very positive about even the revenue number we're throwing out there. Our concern is not the laundries [inaudible]. John mentioned it. Our concern is the UniTech division had a large account, [inaudible] account that's winding down right now and it has a heavy impact. And the other part of it is that it was third quarter last year when we sold the majority of the linen business, so we're having to skate up that hill.

Yes. Is -- do you see any chance in being able to replace that business that you're losing sometime in the -- in the near to -- near future?

George, we're out shopping. That's all I can tell you.

Okay.

We're trying.

And just -- George, to give you a little more color on the -- the cost side, I -- I -- maybe just give you some numbers about the merchandise and the impact of Textilease. When we bought Textilease, we had to put some money into the merchandise and service and amortize it, and I -- I think the number was about $12 million that we put in, and we amortized that on a declining basis, and so for the first half of last year we amortized $8.1 million of that acquisition merchandise. In the first -- in the first quarter of this year we amortized $373,000, and in the second quarter, nothing. So there's -- there's an eight -- a $7.8 million swing from that amortization, and that was offset by some additional merchandise we had to put in to replace those garments, but that was less than -- than $5 million for the whole company, including Textilease. So the net result of that is the -- the merchandise amortization percentage declined for the six months, 1.7%. I mean, that's a huge number that is not going to continue in that favorable rate in the next two quarters, because we've -- we've amortized over two-thirds of what we've put in already.

Okay.

So that's -- that's one big factor that really kind of helped the first quarter year-over-year.

Your -- your return on capital is nudging close to 9% this year, I would say, in the 8.5 to 9 % area. And it was double digits back in the mid to late 90s. Do you think there's a chance that you could get back to that level?

That's a good question.

Well, we're working on it.

We're working hard, George. We've put a lot into -- we basically tried to tell you in the last phone call that last year was basically the -- the end of the 10-year plan, and -- and we expected the profits to rise, which they did. You know, we built the distribution center, we put the three manufacturing plants online, we're getting that flow-through on our earnings. I think our basic thing now is we're putting in some laundries in markets that we have large branches that we think we can continue to expand in. It -- it --it -- it's just amazing how much money goes for vehicles and IS equipment is -- to get you sick if you see what goes on in -- in those two areas. They just eat it up.

Oh, yes. It looks like -- it looks like you're using your -- your capital more efficiently. In the -- in the last four years, your return on capital has gone from 6 to 9%, while Cintas' return on capital has gone from 16 to 12%.

Well, we're -- We're trying to get it up there.

You're getting closer to them.

We're working on it, and I think we mentioned it in the last call, but I think really two things have been really helping the Company, is the transition to Mexico and just maybe put it in perspective in the -- we've been manufacturing our own clothes since 1966, I think, but until about 2000, the late 90s and 2000, we were generating about a $4 or $5 million operating profit from that, or really a transfer price, the difference between our cost to manufacture the garments and what we would -- could buy them from a third party for, which is what we sort of internally sell them to ourselves at, and that $4 or $5 million figure between 2000 and this year is -- has gone up to about $20 million. So, that's -- that's really not much different in how the laundries are operating. I mean, they're getting the same -- same clothes, we're just making them less expensively and -- and really generating significantly more profit for the Company. So that -- that $15 million is loaded into the -- the P&L over the last four or five years. And the other thing is our distribution center in Kentucky, the actual costs of operating that facility are less now than they were five years ago in the -- the '99, 2000 period, when we were closing distribution centers and opening it. In other words, the costs have really not escalated much, because a lot of the costs down there are depreciation and capital costs. It's very -- very highly automated, and our -- our -- the revenues that's supporting have gone up about 50%. So we have a situation where really Textilease was taken on by that distribution center, and it -- it wasn't even a blip. I mean, they -- they just handled it and it was no issues, and did it with a very minimal increment in their cost structure.

The economies of leverage, huh?

Right, so that's [inaudible]. I mean, those are two things. It's taken us ten years to get to this point from the time we planned that and did it.

Just one last question, and that's on dividends. Your dividend payout ratio is kind of low. It's only around -- I -- I assume around 7%, and your dividend hasn't been raised in five years. It's the same as it was 2000, when you were earning half of -- of today's level of earnings. Any chance that we may see some catch-up there?

I -- I -- I guess I have to refer to the board. They brought it up at our last meeting. I would suspect that something may happen in the near future.

Okay. All right. Thank you, gentlemen!

Very good, George. Take care.

Okay.

Thank you. Ladies and gentlemen, as a reminder, to register for a question please press the one, followed by the four on your telephone. Gentlemen, at this time there are no further questions. Please continue with your presentation or closing remarks.

I want to thank all of you for joining us this afternoon. I can be quite confident and assure you all that this is UniFirst's banner year, and we are continuing to work hard and keep our growth going and keep the profit line improving, and we want to 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.