UniFirst Corp (UNF) 2005 Q4 法說會逐字稿

Thank you for standing by. Welcome to the UniFirst Corporation fourth quarter and year end earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Mr. John Bartlett, Senior Vice President and Chief Financial Officer. Please go ahead sir.

Thank you and welcome to UniFirst’s conference call to review our operating results for fiscal year 2005 and to discuss our expectations going forward. My name is John Bartlett and I’m the Chief Financial Officer. Joining me are Ronald Croatti, UniFirst’s President and CEO, and Dennis Assad, our 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, 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, fluctuations in the cost of materials, fuel and labor, economic and other developments associated with the ongoing war on terrorism, the impact of the recent hurricanes in the southeast and the company’s operations, the outcome of pending and future litigation and environmental matters.

Now with the disclaimer completed, I’ll turn the call over to Ron Croatti for his initial comments.

Thank you John, and welcome to all those who are joining us for this review of our fourth quarter and full fiscal year 2005. our annual numbers were released earlier today and I am happy to report that they showed another excellent year for our company.

For the full year revenues were a record $763.8 million, a 6.2% increase over last years $719.4 million. Net income was $43.3 million, or $2.24 per diluted common share, a 29.1% increase from the $33.6 million or $1.74 per basic diluted common share reported in fiscal year 2004. These results combined for the best year in our company’s history, one that all our team partners can be justly proud of. We made improvements in all areas of our operation, expanded our market reach, added new products to our service offer, and strengthened our organization through both training and the addition of new people.

Our core uniform service business continued to trend positively, with new rental sales contracts meeting expectations. Our national account group continued its positive performance with over quota results in both rentals sales and direct sales. Both our UniTech and Green Guard revenues were up for the year, as were those for our Canadian operations. Almost all of our revenue improvement was a result of internal growth and price increases, with only two tenths of one percent related to acquisition.

For the fourth quarter revenues were $188.8 million, a 6% increase from $178.1 million in the same period a year ago. This was achieved despite a quarter-to-quarter fallout in our nuclear business, due primarily to the conclusion of our servicing contract at the government’s Rocky Flats facility.

Net income for the quarter was $8.1 million or $0.42 per basic diluted common share, an 8.1% increase from last year’s $7.5 million or $0.39 per basic diluted common share. Again, income performance was affected somewhat by the loss of our profitable Rocky Flats business.

Overall the pace of our business throughout the year remained steady. New sales held up well, normal increases in the current customer base were maintained, we experienced only a slight negative revenue effect at the end of August caused by the impact of hurricane Katrina on the Gulf Coast states of Louisiana, Mississippi and Alabama. We lost both sales and service days at our facilities in New Orleans, Lake Charles, Shreveport and Mobile, but none of these facilities suffered the kind of direct damage that will have long term impact on those service capabilities. In fact we were back up and running within days after the storm. For that we thank our many dedicated team partners in the region, who made extraordinary customer service efforts under very tough conditions.

The second Gulf storm, Rita, which hit the Texas/Western Louisiana coast at the end of September, caused some disruption to the operations in Houston and Lake Charles. No direct damage. The big impact from these hurricanes will be felt during the current fiscal year. We anticipate some ongoing revenue loss due to customers being down for long periods, or in some cases not being able to reestablish their business at all.

During the year we did a good job of cost and expense control, and that benefited our profitability. A reduction in production labor expense was pretty much offset by increase in service and sales labor expense. We were able to keep merchandise expense under the prior year’s rate and total operating expenses ended up 1.2% under the previous years as a percentage of revenue.

Sales expenses were up slightly, due primarily to an expansion in the size of the field force, and the resulting increase in total rep days worked. Due to more new account installations, combined with increased normal clothing replacements for an expanded customer base, the value of total merchandise and service jumped considerably during the latter part of the year. That will have an impact on merchandise amortization expenses going forward.

As we head into the new fiscal year, we are faced with both revenue and cost challenges. With a slow growth economy holding down employment expansion we don’t expect any significant incremental uniform adds from our current customer base. That means more dollars will have to come from the sale of additional product services to our customers, without using all that we have to offer. That also means that new account sales will be very important. We’ll expect street selling will remain intensely competitive and continue to challenge the skills and resources of our professional sales team.

Cost controls will test us as well. We’re doing well on the manufacturing side by making a higher percentage of the goods we put into service than ever before, and saving money in the process. But actual item usage is increasing at an accelerated rate that will cause total merchandise expense to reach new heights. On top of that higher energy costs are expected to continue through the year, and that will have an impact on both plant operating costs and fleet operations expenses. We expect to get some recovery from price adjustments, but not enough to make up for the extra dollars we will be paying out.

All this means we are taking a realistic and conservative view in setting our financial expectations for fiscal year 2006. Currently we’re estimating a full year’s revenue of between $800 million and $805 million, with earnings per basic diluted common share of between $2.20 and $2.25. As always, we will be closely watching both internal and external conditions as we move further into the year, and we’ll advise you of any changes either up and down, which we believe are warranted.

In the meantime we’re looking forward to the challenges ahead, fully expect to be able to report good results to you in the quarters ahead. Now let me turn it back over to John for his more detailed review of the numbers.

Thank you Ron. As Ron explained, we were very pleased with the results of operations for the fiscal 2005 year. The overall results were by far the best results in the company’s history, and in many ways represented the benefits of decisions the company made many years ago.

On an overall basis the primary reason for the significant year-over-year increase in net income was significantly lower merchandise costs. On a consolidated basis merchandise expense was approximately 1% lower as a percent of revenues in fiscal 2005 than in fiscal 2004. This decrease in merchandise expense is the primary reason our income from operations increased from 8.9% of revenues in 2004 to 10% in fiscal 2005. the decrease in merchandise expense resulted from both the increased benefit of our manufacturing operations in Mexico and lower amortization relocations acquired as part of the Textilease acquisition.

Obviously there were many other factors that impacted our results; on the positive side was an overall decrease in our production labor costs as a percent of revenues. On the negative side were the increase in selling expenses, as we have increased the size of our sales force, and the increase in energy costs, particularly fuel for our vehicle fleet. Revenues for the fiscal 2005 year were a record $763.8 million, a 6.2% increase over the prior year. Of this increase 6% arose from internal growth and price increases, and the balance of two-tenths of a percent was from acquisitions. For the quarter ended August 27, 2005, revenues were $188.8 million, a 6% increase over the prior year. Of this increase, 5% was from internal growth and price increases, and the balance of 1% was from acquisitions.

Operating costs increased from $461.1 million to $480.7 million or 4.3% over the prior year. As a percent of revenue, these costs decreased from 64.1% of revenues in fiscal 2004 to 62.9% in 2005. For the 13 weeks ended in August, the operating cost as a percent of revenues decreased slightly as a percent of revenues from 64.1% to 64.0%. The primary reason for the decrease for the full year was the benefit of lower merchandise expense, which I previously noted. The primary reason for the lower benefit in the fourth quarter was the loss incurred by our specialty garment business in the fourth quarter, which I will discuss later.

Selling and administrative costs increased 9.3% from $149.4 million to $163.2 million for the year and 10.1% from $38.7 million to $42.7 million for the 13 weeks ended in August 2005. As a percent of revenues these costs increased from 20.8% to 21.4% for the year, and from 21.8% to 22.6% for the comparable 13 week period. Again, the primary driver for the increase in the amount in the fourth quarter was the impact of our specialty garment business. For the full year the increase was primarily due to the expansion of our professional sales force.

Depreciation and amortization decreased slightly from $44.9 million to $43.9 million for the year, and increased slightly from $10.5 million to $11.1 million in the fourth quarter. As a percent of revenues, depreciation and amortization declined from 6.2% to 5.8% of revenues for the full year, and was 5.9% of revenues for both 13 week periods.

The net result from the above factors was that income from operations increased 18.8% or $12 million, from $64 million to $76 million for the year, and decreased slightly from $14.7 million to $14.3 million in the fourth quarter. As a percent of revenues income from operations increased from 8.9% to 10.0% for the year.

Net interest expense for the year decreased $2.6 million from $9.4 million to $6.8 million, and for the fourth quarter decreased six-tenths of a million dollars from $2.5 million to $1.9 million. These decreases are primarily due to a lower amount of debt outstanding during fiscal 2005 as compared to fiscal 2004.

The provision for income tax has decreased from 38.5% in fiscal 2004 to 37.3% in fiscal 2005. This decrease primarily resulted from a $500,000 credit in income taxes recorded in the fourth quarter, related to the reduction of tax related reserves that were no longer needed.

Finally the income to diluted common stock increased 28.7% from $1.74 in fiscal 2004 to $2.24 in fiscal 2005. The income per diluted common share of stock for the fourth quarter increased 7.7% from $0.39 per share to $0.42 per share.

I would now like to provide some additional information by our operating segments. After extended communications with the SEC, the company has provided additional operating results by operating segment. This segment disclosure was provided in the 10-Q the company filed for the third quarter, which ended in May, and in amended 10-K for fiscal 2004, which was filed in July of 2005.

The company believes the most significant information in this segment disclosure is the results of operations for our specialty garment business, a business segment that provides services to nuclear and clean room customers. For the fiscal year ended 2005 the revenues for this segment increased 5.3% from $58.6 million to $61.7 million. However, the income from operations year-over-year decreased slightly from $7.1 million to $6.9 million. In the fourth quarter revenues for this segment decreased 13% from $12.7 million in fiscal 2004 to $11.0 million in fiscal 2005, and had a loss from operations in both fourth quarter periods.

The losses from operations in the fourth quarters of fiscal 2004 and 2005, were $1.5 million and $3.2 million respectively. This increase in the loss from operations of $1.7 million in the fourth quarter was the primary reason the consolidated net income from operations for the company declined from $14.7 million in fiscal 2004 to $14.3 million in fiscal 2005. In our previous conference calls we noted the concern that we expected our specialty garment business to be weak in the fourth quarter. This business fluctuates greatly and is usually strongest in the first and third quarters. Many times, it incurs losses in the summer period, which corresponds to our fourth quarter.

In addition, we noted in a previous call that this segment had completed work on a major cleanup site. Thus the fact that this segment lost money in the fourth quarter was not a surprise, but the loss was a little higher than we expected.

Revenues for our first aid segment increased slightly from $26.7 million to $27.7 million, a 4.1%. Income from operations for this segment declined from $1.7 million in fiscal 2004, to $900,000 in fiscal 2005. The primary reason for this is startup costs related to a new field packaging facility in Florida.

Looking forward, UniFirst is aggressively pursuing additional acquisitions and expects to complete some small acquisitions in the near future. On a preliminary basis, we anticipate capital spending in fiscal 2006 will be approximately $50 million.

Finally, as Ron stated, our preliminary guidance for fiscal 2006 is that revenues will between $800 million and $805 million and that basic income per diluted common share, will between $2.20 and $2.25. This income per share guidance is based on our lower expectations for our specialty garment business, as well as a concern for the significant year-over-year increases in energy costs, including natural gas, fuel for our vehicles and electricity. We’ve also been impacted by the recent hurricanes and flooding in the southeast. It is premature for us to forecast a long-term effect of these natural disasters, but we know we’ll not be proud of it.

In spite of our flat guidance for fiscal 2006, we anticipate the company will have another excellent year. And flat guidance after a year with a 28.7% year-over-year increase in net income for the diluted share is still very positive. Now, I’ll turn the call over to Dennis Assad for his comments.

Thanks John. As Ron mentioned, new sales held up well throughout our year. Our professional sales team was able to secure us new rental contracts at a pace that was consistent with our expectations, and our national accounts group beat their quote in both rental and direct sales.

Our professional sales representatives finished the year up 9% in sales over fiscal year 2004 and our national accounts team showed a 20% improvement in year-to-year comparison. The two selling groups combined ran over 12% ahead in total new sales, as compared to a year ago. Aiding this was the fact that sales representative turnover was down by 8%, and total rep up weeks [ph] were up by over 8%. Rep weekly sales averages up as well.

During the year, we also [inaudible] overall professional sales headcount, consistent with our objectives for geographic expansion and increased penetration in selected markets. Professional reps dedicated to selling facility service products increased by 8%, which was pretty much on target with our expansion plans for the year. I think you know we’re constantly looking for ways to boost sales performance. One of the things we did in fiscal year 2005 was to undertake a comprehensive review of our sales organization and selling process, with the aim of highlighting areas for our improvement. This project was handled by an independent outside consulting organization that specializes in helping companies advance revenue results through a better sales system.

We were pleased to get a very positive report, based on what we were already doing, but also glad to have a few things highlighted as areas for potential improvement. As a result, we’re currently taking a closer look at elements of our hiring process, at career path opportunities, and recognition systems. We have processes for [field coaching] to see where some minor adjustments may pay off in measurable sales increases. They’ll be working in all these areas throughout fiscal year 2006.

As for 2005, I think a couple of things, both of which we’ve discussed in past calls, were particularly helpful in supporting our professional sales results. First was the ongoing implementation of our sales force automation system, which, through customized software and compact handheld devices, is giving our sales reps a powerful new territory management tool, which makes them more efficient and more productive than ever before. We have only two regions remaining to be rolled out and anticipate having that task completed by the end of the first half of [physical] year 2006.

Second was the introduction of a new sales compensation plan, which provided variable, location-specific base wage rates and offered increased levels of incentive for higher levels of performance. As a result, it’s providing increased motivation to excel. It has also helped in attracting better people and appears to be positively influencing our retention.

Back to the point of areas we’ll be working out of in 2006, I think it’s worth highlighting one in particular, and that’s the field sales management team. We’ve also given a very high priority to training and it’s something we continue to focus considerable resources on. Basic sales training, advanced sales training and sales manager training remain at the forefront of our education agenda.

So now, we are putting more efforts then ever into the continuing development of the frontline field sales managers, who drive weekly selling results. They are the real key to lasting sales productivity improvement, because they are the critical reinforcing link between classroom instructions and on-the-street implementation. Their advocacy of our selling system is critical and we’re making sure we provide everything they need to execute that mission. It will be a constant area of attention in fiscal year 2006.

Wd don’t expect that this year will be an easy one, but given the base we’ve built and the organizational resources we can bring to bear, we’re optimistic that we can get the job done. I’m looking forward to reporting our results to you as we go through the year. And now, I’ll turn it back to John Bartlett.

That completes our prepared remarks and we’ll turn it back to Elizabeth to respond to your questions. Thank you.

[OPERATOR INSTRUCTIONS] Michael Schneider, with Robert W. Baird.

Good afternoon, guys. I wonder, first, if you could just address the tone of business. You guys sound maybe even more incrementally cautious this quarter. Ron, you made the comment you wouldn’t expect the economy to really add any jobs to your existing accounts. Can you give us a sense of what you saw through the quarter, and maybe just give us some more color on your thoughts about the momentum?

I think, Mike that comes a lot from this hurricane situation. We kind of think things slowing down in the Texas area, the oil dropping down to $61.00 recently. And, with the hurricane situation, we’ve lost a number of customers. Hopefully they’ll come back. But then this last one in Florida fouled us up for about a week in core operations down in Florida.

So, we’re a little cautious. Are we seeing good adds, vs. reductions, in the west coast? The answer is yes; Midwest, yes, but we have not seen it as robust in Texas and the southeast as we have in the past. We’re a little cautious.

OK, and what’s your sense about, in particular in the northeast and the southeast, as to what the explanation is? When you talk to your field guys, are they particular areas because--well the job numbers haven’t been great out at the census bureau. They’ve been running 150,000 to 200,000 a month. Is there some area you’re not participating in, just by virtue of your customer concentration or markets, or whatever it is?

Not really.

Sales in the southeast and northeast, actually continue to go well. So, from the sales side, I think we’re doing fine. On the add vs. reductions, I haven’t noticed any noticeable difference. Have you Ron?

No.

So, I think we’re still OK there.

OK. And then, for the textile lease integration, I guess, just do a kind of a post mortem on what you’ve accomplished today and then maybe what’s left in your eyes?

OK, what we’ve basically done, we’re pretty much on plan, Michael. The right routes are now running out of the right buildings. As I think we stated before, we closed three or branches, two plants. And, we’re putting together the last two plants, so we’ve got one more plant to go. But the routes are now running out of the one building.

So, this year will be a year where we try to consolidate the routes, so that we don’t have as many routes in the area, number one. And, they’re not criss-crossing the way they are currently. That’s our focus for this year in that area.

The good news is, we’re building a sales team down there finally. And, by building that sales team, we’re getting, I guess, they have put it bluntly, your best defense is a good offense. Hopefully, the lost business will not be as great in that area as it’s been the last two years.

Right. And then, just your outlook for, or imbedded I your guidance, revenue of $800 million to $808 million, or I’m sorry, $805 million, and then, that’s vs. $763 million this year. Have you built acquisitions into that? And, is really energy the chief leakage on the margins?

We have not built acquisitions into that. And the leakage in the margins, I think, is really related to the amortization of the merchandise. We’re selling more new accounts, right now, the last six months, probably than we ever had. And we’re actually seeing the merchandise cost climbing over the last six months. John, do you want add to this?

I think that’s right. I think the merchandise cost seems to cycle. I think last year probably hit an all-time low, and my guess is it’s going to start moving back up a little bit, as a percent of revenue.

So, we’re concerned about the merchandise costs. We’re obviously concerned about the eyar-o9ver-year increase in energy costs. I mean, they were relatively high last year, but I thin some things like electricity maybe lags the increases in the others a little bit. And even though fuels for the vehicles has come down a little bit in the last few weeks, it’s still significantly over what it was a year ago.

And then, the third concern is the UniTech. I mean, we had two really terrific years, and we lost this very profitable account, and they’re working to replace it. But, we suspect that our UniTech business is going to be off a little bit.

Well John, on that point, what are you expecting for UniTech’s growth in the coming year?

Well, I think we basically budgeted them backwards. In income, $3 million in revenues, and probably $500,000 to $1 million in profits. But quite honestly, that’s much less predictable than our base uniform business. It really is very, I don’t know, cyclical. I mean it’s both cyclical and it comes in--you know, when things are going well, they’re really going well. And when they’re not going well, it’s pretty disappointing. It’s been a very lumpy business, very different than our basic uniform business.

And John, [inaudible-several people talking]…I’m sorry, the model you built in fiscal ’06 for expenses, it assumes energy is at today’s prices?

That’s what we budgeted, yes.

OK, I’ll get back in line. Thanks guys.

David Lind [ph], with William Blair.

Good afternoon, guys. Can you just give us the components of organic growth for the quarter and on an annual basis?

Sure. On the annual basis, they were 16.2% in new business, 8-1/2% in lost business, 3.1% in what we call adds vs. reductions, that’s mainly [inaudible technical difficulty] goods; about 1-1/2% in price increase and 2/10% in acquisition. That’s .3% net.

OK, and on a fourth quarter basis, year-over-year?

Fourth quarter basis, it was about 3.7% in new accounts, 2.8% in lost accounts, .9% in adds vs. reductions, .3% in price increase, with a net of .3%. It seems like our boys take more accounts the last quarter as they clear up their books for the new fiscal year.

OK and that was year-over-year fourth quarter, right?

No that’s the actual fourth quarter, not year-over-year. That’s what we actually ran for the quarter.

OK, and then just to take a step back, I think you guys gave guidance last quarter, and I was wondering if the one time gain of the $500,000 for the tax was included in your guidance last quarter of the $2.25 to $2.30.

No, that’s something that really came about at the year end with our audit and really reviewing the reserves we needed for taxes.

So John, the way we should be looking at that then, if that’s a $0.03 gain it should be about $2.21 then versus the $2.25 low end of the guidance, right?

That’s correct. I think the other side of that is we really did not expect that we’d have the loss that we had in the specialty garment nuclear business of $3.2 million.

Understood. Then what about option expensing for your new guidance for ’06, how was that factored in?

Well we will obviously have to adopt that. It’s going to be a relatively insignificant piece. We don’t really have a lot of options out there, but that’s in the number that we’re looking at.

I’m sorry, it is?

It is, yes. It’s only a penny a share or something, so it’s not going to have any kind of material affect on our results.

OK.

We’re reporting a diluted income per share anyway, so it’s really been in the numbers because we have this dual plat situation.

OK. Last question is, if you guys can dig a little bit deeper on the SG&A and maybe additionally the D&A, where do you think margins can go, if it was 10% in fiscal ’05 are we in the seventh or eighth inning of this? Do you guys think we can push it to 11%?

Inherent in our guidance with a little higher revenues and the same profits we’re kind of unfortunately looking at we’re going to go backward a little bit this year.

OK so we’re thinking like, from SG&A as a percent of revenues back up into the 21%, are we going to climb over 6% as a percent of deprecation and amortization as a percent of revenues?

I think depreciation and amortization will probably be about where they are, but I think the operating costs are going to climb a little bit.

OK, thank you very much.

Rick Dotay [ph] with Columbia Management.

Just back to UniTech, the contract, well it was the Rocky Mountain contract, is that fully gone?

Rocky Flats; it’s cleaned up, it’s done.

OK. Last I recall there was a big Department of Energy piece of business behind that. What’s the status of that?

Well there’s some other pieces I think that at this point we really are not–-I think Hanford has still got a lot of clean up work to do in the future, but it’s not, as I understand, really active at this point.

So there’s nothing in the queue coming out of the government?

That’s correct. We’ve had some increased business in Canada, and we’re fairly optimistic in Europe that we have quite a bit of additional work in England. But the government is slowing down right now.

OK, maybe it was Canada. What’s the status of that work?

Well Canada’s in our guidance for nuclear comeback.

But is it up significantly there year-over-year, in your guidance?

Our boys are telling us there’s going to be an increase of about half of what Rocky Flats was.

OK. Anything new on Unite and the union front?

We’re basically; knock on wood, been very quiet on our side, nothing new on our side at all.

OK, and to the extent – what’s the pricing environment out there? You said you were trying to pass through some of these costs, but you’re not getting everything through. Is that accurate?

We put through something the first week of September to just about most of our customers, and it seemed to go well with our smaller accounts. It’s the larger, national accounts that usually give you more problems than anybody about taking any price increase. When gas was at $3.09 for regular we immediately took at step to try to move some pricing, to try to offset that.

And the competitors weren’t pushing their national accounts at all?

Dennis, do you want to handle national accounts?

Everybody pushes national accounts. We tried very hard to implement some price increases there, but as you probably are aware, competitive pressures really are causing a problem for us. So I would say that we had little success at putting through price increases at that level, and increasing fuel charges.

OK, thanks guys.

[OPERATOR INSTRUCTIONS]

Mr. Bartlett, there seem to be no more questions at this time, I’ll turn the presentation back over to you.

In closing I just want to thank everyone for joining us. Just let me say that we believe that fiscal year 2006 will be another very good year for UniFirst. We will be challenged by some cost factors that we expect will constrain income growth, that’s why we’re making a conservative call on our EPS. However, as John said earlier, coming off a very high performing year for earnings, we’re not happy calling for matching numbers for this year. With that I’d like to say thank you.

Thank you. 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.