UniFirst Corp (UNF) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the UniFirst Corporation third-quarter 2005 earnings 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 John Bartlett, Senior Vice President for UniFirst Corporation. Please go ahead, sir.

Thank you, and welcome to UniFirst's conference call to review our third-quarter operating results for fiscal 2005 and to discuss our expectations going forward. My name is John Bartlett and I'm the Chief Financial Officer. Joining me today 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 in 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 with that completed, I'll turn the call over to Ron for his initial comments.

Thank you, John, and welcome to all of you who are joining us for this review of our third fiscal quarter. I am very pleased to report that our results continue in a very positive direction and that we are tracking toward record numbers for the year.

Net income for the third quarter was 11.8 million or $0.61 per diluted common share, an 18.7% increase over last year's 9.9 million or $0.52 per diluted common share. For three quarters, net income was 35.2 million or $1.82 per diluted common share, a 35.2% increase over last year's 26.1 million or $1.35 per diluted common share.

A major reason for the increase in net income in the quarter versus 2004 was continual favorable comparison in operating costs year to year. As a percent of revenue, operating costs for the third quarter were 1.2% lower than the same period in fiscal 2004 and through the first three quarters were running at 1.5% under the comparable period last year.

Also, very important was a significant profit contribution from our UniTech division. Revenues for this business segment were up 12% for the quarter and their profits from operation were approximately 1 million over the third quarter of last fiscal year. Operating costs decreased primarily to lower merchandise costs, lower manufacturing costs, and lower production payroll costs. However, the lower merchandise cost was less of a benefit in the third quarter than in the first half. I'd like to point out that this is something we expect to see reversing in the months ahead as we move more new garments at the higher number of new accounts we anticipate our sales efforts will generate. We also benefited from a reduction in depreciation expense and from decreased interest expense. The combined favorable comparisons were somewhat offset by higher energy expenses at the laundries, increased fuel costs for vehicles, and increased payroll expenses associated with a slightly larger sales force.

Revenue for the third quarter was 196 million, a 7.1% increase over the 183 million for the same period a year ago. Revenues through three quarters were 575.1 million, a 6.2% increase from the 541 (ph) million in comparable period in fiscal 2004. Most of the increase opened the quarter into the first three quarters as a result of internal organic growth to laundries. In our first-aid division, particularly UniTech made solid contributions as well.

Comparing this year's third quarter to last year's shows revenue throughout the non-operating area. With the core rental business we continue to see a positive trend in uniform service sales, particularly in the basic small to midsize street business that is (technical difficulty). Our national account (ph) team also maintained this positive performance trend with over-quota increases in both rental sales and direct sales. We continue to closely watch the economy in the economic numbers as a predictor of what we could expect to see for the balance of the year. Generally speaking, we think the broad economy looks pretty secure. That (technical difficulty) in our business. However, the Institute for Supply Management report on manufacturing indicate the sector is losing momentum, with new factory orders declining and the employment index showing its third downturn in 18 months. Likewise, in the non manufacturing sector, the series index dropped in May, indicating a slower rate of growth. Employment in this sector increased for the 20 consecutive months, but only slightly. Overall, the combined business index shows a growing trend, a slowing economy with generally stagnant employment.

So while we continue to anticipate favorable conditions for our business through the end of the current quarter, we are more cautious about the long-term outlook. Our capital spending plan remains essentially on track with the numbers we have supplied previously. We continue to claim (ph) our fiscal year expenditures in the order of around 55 million with some of this from new facility construction, some to major expansions, and the balance to equipment replacement and upgrades.

Now I'd like to reintroduce John Bartlett, Chief Financial Officer to give you an expanded financial detail.

Thank you, Ron. As Ron explained, we are very pleased with the results of operations for the third quarter of fiscal 2005. Revenues for the first 39 weeks of fiscal 2005 were a record $575.1 million, a 6.2% increase over the prior year's first 39 weeks. This growth was from internal growth and price increases of 5.3% in our laundry operation, 0.9% in our UniTech business, and 0.1% in our first-aid business, and offset by a 0.1% decrease from the sale of a certain linens business sold in fiscal 2004.

For the quarter ended May 28, 2005, revenues were $196 million, a 7.1% increase over the prior year. This growth was from internal growth and price increases of 5.4% in our laundry operations, 1.1% in our UniTech business, and 0.2 of a percent in our first-aid business plus 0.4 of a percent from acquisitions.

Operating costs increased from $347 million to $359.9 million or 3.7% over the prior 39 weeks. However, as a percent of revenues, these costs were 62.6% in fiscal 2005 or 1.5% lower than the 64.1% in the prior year. For the 13 weeks ended in May, the operating costs as a percent of revenue decreased 1.2% from 63.5% to 62.3%. The primary drivers of these decreases were the realization of increased contributions from our manufacturing operations in Mexico, lower industrial laundry production payroll costs, and lower amortization expense of rental merchandise in service. However, the benefit from lower amortization of rental merchandise had a smaller impact in the third quarter and we anticipate these expenses may increase as a percent of revenue in future periods as we invest in merchandise for new customers. In addition, in the third quarter, the operating costs for our UniTech business was significantly lower than in the prior year. These decreases were offset by significantly higher energy costs and employee-related costs, including health and casualty insurance.

Selling and administrative costs increased 9% from $110.6 million to $120.5 million for the 39-week period ended in May and from $36.8 million to $41.9 million or 14.1% for the 13-week period ended in May. As a percent of revenues, these costs increased from 20.4% to 21% for the 39-week period and from 20.1% to 21.4% for the comparable 13-week periods. The increase was primarily due to the expansion of the provisional (ph) sales effort. We also experienced an increase in employee-related costs, including health and casualty insurance.

Depreciation and amortization decreased 4.4% from $34.4 million to $32.9 million for the 39-week period and 4.5% from $11.7 million to $11.1 million in the third quarter. One factor which impacted these decreases was a charge of $600,000 incurred in the third quarter of fiscal 2004 to reflect additional depreciation for our Richmond plant, which was closed as we transferred the UniFirst business to the plant acquired as part of the Textilease acquisition. The net result of the above factors was that income from operations increased 25.3% or $12.5 million from $49.3 million to $61.7 million for the 39-week period and 13.9% or $2.5 million from 18.4 million to $20.9 million for the 13-week periods.

A significant portion of the increase in income from operations in the third quarter was due to increased profits from our UniTech business. Revenues for this business segment were up approximately 12% for the quarter and the increase in year-over-year income from operations for the quarter was approximately $1 million. This is a significant change from the first six months of the year when income from operations for this business were relatively flat with the prior year.

Net interest expense for the first 39 weeks decreased from $6.9 million to $4.9 million and for the third quarter from $2.2 million to $1.9 million. These decreases are primarily due to the lower average debt outstanding during their respective periods. The provision for income taxes was 38.0% in both periods of fiscal 2005 as compared to 38.5% in both periods of fiscal 2004.

Finally, net income for the first 39 weeks increased $9.1 million or 35.2% from $26.1 million or $1.35 per diluted common share to $35.2 million or $1.82 per diluted common share. For the third quarter, net income increased $1.9 million or 18.7% from $9.9 million or $0.52 per diluted common share to $11.8 million or $0.61 per diluted common share.

In our March conference call, we provided guidance that we expected fiscal year 2005 revenues to be between 755 and $760 million and diluted income per common share to be between $2.15 and $2.25 for fiscal 2005. We now anticipate revenues will exceed the $760 million amount and that diluted income per common share will be between $2.25 and $2.30. Our current estimate is that capital expenditures will be approximately $55 million for the full 2005 fiscal year.

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

Thanks, John. As we've noted in the past, the efforts of our (inaudible) sales team makes the biggest impact on our new sales results. So to the extent they are tracking positively, overall Company results tend to as well. In the quarter, as well as year to date, professional rep performance is up by a comfortable margin over the previous year. Third-quarter new accounts sales were up and through three quarters, they are ahead of a comparable period in fiscal 2004 at 9.3%. This improvement is primarily due to a combination of headcount increases and productivity gains. Overall, weekly rep averages are up and the percent of budgeted rep weeks worked continues to show improvement, another indication we are making progress and reducing turnover.

Things look even better when we add in the results from our national accounts team, which is showing big improvements in both rental sales and direct sales over the previous year. Up a combined 29% year to year. Combining the two selling groups, we are running about 16% ahead in new sales over a year ago. Service sales produced by our route sales team are slightly behind where they were a year ago but this has had only a slight negative impact.

As I mentioned last time, we've introduced a new professional rep sales compensation plan designed to provide improved earning opportunities for sales reps who deliver the best results. It has simplified the payment system, provided more realistic location-specific base rates, and delivered more incentive for higher levels of achievement. It has been well received by our field selling group and we believe it will be an important aid in helping us retain more of our top sales performers. We think it will also help us in recruiting better people and that will be important in improving the overall quality and productivity of our professional sales team.

That's not all it will take though. We know that the effectiveness of our local sales managers is absolutely critical to recruiting, hiring, development and retention of a high-performing sales team. And that's why we're putting more and more emphasis on developing our sales managers and giving them the tools and training they need to deliver the sales results we want. We continue to improve the processes we use for team building, performance measurement, coaching and motivation. Additionally, we have eliminated variability and local recruiting practices and have taken steps to ensure the hiring profiles and interviewing protocols we endorse are being consistently applied.

Our focus is on implementation and execution. I'm convinced that we're doing a lot of the things right, but the harder we work to identify those key few things we can improve upon, the better we'll be in the future and that is certainly our goal. We are committed to using the best training, the best tools, and the best resources we can find to make our sales team the most productive in the industry. We may not be there yet, but we are heading in the right direction. With just one quarter left in the current fiscal year, I am very optimistic that we will finish strong and put ourselves in a good position to begin fiscal year 2006 in full stride. John?

Thank you, Dennis, and now we'll turn it over to you folks for any questions you might have.

(OPERATOR INSTRUCTIONS). Steven Weiss (ph), Mindflow (ph) Capital (ph).

Thank you. Nice job, guys, good quarter. A couple of questions. A lot of companies within the differenties (sic) are looking at new sourcing initiatives to reduce their raw material costs and also their cost of goods sold by establishing a better line of collaboration and communication with their supplier base. I just wonder (ph) if you could provide some color to all of us as to what you guys are doing with your suppliers to establish a better line of communication to reduce your raw material costs in this very highly competitive market and therefore, reduce your cost of goods sold?

This is Ron. I think what we're basically doing on the fabric side was (indiscernible) probably 95% domestic fabric. We are trying to source fabrics overseas, particularly in Asia. That's our primary focus, I would say.

Okay so, kind of I'm just trying to see, are you looking to consolidate your supplier base right now? How are -- one question is are you guys doing any type of cost (indiscernible) so you could justify the right allocation of your fabric purchases to your supplier base? How are you guys handling that?

You probably got the wrong people to ask. Our fabric is really only a few vendors in the U.S. that can provide the type of fabric that we use in our garment manufacturing. And we are, quite frankly, not the ones that are working with those directly. But as Ron said, we are looking very diligently to see if we can get similar fabric in Asia, where it would be a significant cost reduction. Right now, to our knowledge, no one in our industry is sourcing fabric or the piece goods from anywhere but the U.S.

How does that initiative end? Have you decided on what the trade-offs would be if sourcing from Asia instead of (multiple speakers)?

Obviously, there's going to be -- about 66% of the cost of making a garment is the fabric and the findings (ph). And obviously, there's got to be substantial savings in the fabric because of the pipeline, time, capital involved and all of that. So we're just out there now in that process. So we really don't have a good handle. We do import some of our other stuff -- the shop tiles, bar mops, from various countries, but our main thing is the fabric for the garments.

Right. So as you decide to source overseas, you'll be looking at logistics costs and overall (multiple speakers) figure out what is really your lowest cost of goods sold?

That's correct.

But you're really at the initial stages, probably on the next call in three months you'll give us a little more color on some of your plans?

We certainly can.

Okay. And what has been some of your supplier feedback? Have you talked with some of your suppliers about what you plan to do? Or what's been some of their feedback?

I think the feedback that I'll give you is if you look at the mills, most of the mills have already gone overseas other than about half a dozen still left in the United States. We have been pressuring the mills that we want to do stretch fabric with the permanent press features and we tend to go offshore to look for it. Of course they're telling us we're not going to find it, so we don't necessarily believe it.

Right. Okay. Thank you very much, guys. Congratulations on a good quarter.

George Nisan (ph) with Merrill Lynch. Unfortunately, Mr. Nisan has disconnected. We will go to the next question from Shaun Nicholson with Kennedy Capital.

Yes, hi. I just have a couple of quick questions. You mentioned your revenues you're going to exceed the expectations you gave in the second quarter. Can you speak as to, is that part of more price increases or UniTech is continually performing better than expected? Why is that now adjusted again?

Well I think it's really two things. Yes, UniTech has done better than we anticipated in the third quarter and I think we've been a little more successful in the basic laundry business than we anticipated. So it's a combination of two positives factors. And we're not suggesting it's a major change that will be expected.

Okay. And did the UniTech division -- they were, I think you mentioned, losing -- a contract was winding down. Has that happened yet? Or is that still going to happen in the fourth quarter?

Well that account is out. It went out at the end of February and we've been fortunate to basically pick up a couple of accounts to replace it.

(OPERATOR INSTRUCTIONS). Jeff Burke (ph) with Baird.

Hi, guys. I wonder if we can go through the standard question of walking through the organic growth in terms of new accounts, add stops, et cetera.

Okay. Jeff, this is Ron. The new business was 15.6. That's the run rate. The lost business run rate is 7.7. The adds versus reductions is a negative 2.9 and the price increase is 1% -- a little over 1.

Okay. The add stop there, 2.9, looks like it's a little bit more negative than you had mentioned through the second half.

That is correct.

Anything notable?

We have not been as successful in the flat goods side and we seem to see a lot more shrinkage. Now maybe it's because the schools are out right now or what, but we seem to have that hitting us right about now.

On the garment side, I'll give you the garment side; that's what you're interested in, Jeff. All three months were negative. But we are running ahead of last year as far as the -- what do you want to call it –- negativity? Right word, John?

John's got --

Lower negatives.

Lower negatives.

Got you.

It's probably about two-thirds of last year.

It's actually not that much different. I mean it's pretty close (multiple speakers). Yes, that's the year-to-date.

Okay. It looks like the attrition also, a little bit higher than as of last quarter. Anything notable there?

All I can tell you, Jeff, I think we have a strong presence in the Florida market. That region seems to be hit a little harder, particularly in March and April.

Okay. And then you mentioned pricing pretty consistent with the last several quarters.

Pretty consistent.

Are you guys instituting any surcharges for fuel costs?

Well, where we can, we are.

And John, how much are the energy costs impacting you year-over-year? Is there a basis point number you can point us to?

Well, it's substantial. It's probably 25, 30 basis points.

Gas is just --

Yes, that's actually -- it's probably -- that's probably for fuel and probably another 25, 30 for natural gas and electric. So probably 50 basis points; it's a rough number.

Okay. And as you look at the prices at the pumps now, is that pain going to get worse in the next quarter or the coming quarters or pretty consistent with that 50 basis point type run rate?

I would say -- I don't expect a big change from that. Of course, I mean, the (indiscernible) every day.

Right.

So it's always a little bit higher in the summer, so you're comparing probably higher prices with higher prices a year ago for the fuel -- the gas.

Okay. The benefit from the Mexican manufacturing, is that something that we can expect to be sustained for another few quarters or is that more of a onetime?

Well, I expect we will sustain it for next quarter. I think it's probably going to be less in fiscal 2006, although I would add that it would have been a little bit more this year, but I think we've mentioned in the past that we have begun manufacturing mats. And so far this year-to-date, we've absorbed about $750,000 in startup costs, kind of period costs, to get that going. So once that turns around, it's possible that will be a little bit of additional help in that area. But I don't anticipate much impact on that next year. I don't anticipate the negative impact, but that's going to help us as we move forward, we hope.

Okay. One last question before I get back in line. The UniTech improvement in profitability, you mentioned a new contract you had picked up. Are those contracts just more profitable than what you had last year or is there something else in there?

Well I think the UniTech business, and Ron can add to what I say, it's always lumpy. They're really there. They go 100 miles an hour or they're not doing much work. So when they are busy, they make substantial profits and when they slow down, they break even. And so we've got this nice contract actually up in Canada and it's been a big plus for us, more than we anticipated. Ron, do you want to --?

No, I think it's more than the customer at this stage (inaudible). They've had some reactor issues.

Okay. Thanks.

(OPERATOR INSTRUCTIONS). Jeff Burke with Baird.

Sorry. I just thought of one last one. The linen divestiture, was that still a factor this quarter?

Well, there was a little bit. I think what we reported, Jeff, was a 0.4 of a percent plus from acquisitions. And that 0.4 of a percent was net of the divestiture. So I don't have the exact number. It was a fairly small impact in the overall numbers.

Okay, great. Thank you again.

Shaun Nicholson, Kennedy Capital.

I just have a quick question. Debt repayment -- is that still a top priority going forward?

Basically, we borrow or pay down our debt everyday. It really is a function of how much we spend in either acquisitions or capital improvements. We've spent a little bit more in capital this year. I think primarily related to the Textilease operation, we had to make some investments in some facilities to combine the operations. And also Textilease had leased a number of assets which we are buying out as the trucks come up -- their termination. So that's bumped it up a little bit. But definitely going forward, we'll be paying down debt.

Okay. Thank you.

At this time we do not have any further questions.

Well I'd like to thank you all for coming to our third quarter. As I've said since the start, this is our banner year. We will continue with our banner year this year and we will hopefully keep the ball going into '06. So we are very optimistic about our business and we certainly appreciate your following the Company. Thank you very much and have a great evening.

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.