UniFirst Corp (UNF) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the first-quarter earnings conference call. (OPERATOR INSTRUCTIONS).

I would now like to turn the conference over to Mr. John Bartlett, Senior Vice President.

Please go ahead, sir.

Thank you and welcome to UniFirst's conference call to review our first-quarter operating results for fiscal 2006 and to discuss our expectations going forward.

My name is John Bartlett, and I am the Chief Financial Officer.

Joining me are Ron Croatti, UniFirst's President and CEO, and Dennis Assad, Senior Vice President of Sales and Marketing.

This call will be in 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 and 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, and the outcome of pending and future litigation and environmental matters.

Now I will turn the call over to Ron for his initial comments.

Thank you, John.

I would like to welcome all of you who are joining us for this review of our first fiscal quarter, a period that produced record revenues for our Company.

John will cover the details in a few minutes, but let me start with a brief recap.

Revenues for the first quarter of fiscal 2006 were a record 199.3 million, a 5.8% increase over the 188.4 million in the same period a year ago.

A major upside influence came from growth in our rental uniform business with total laundry operating showing an increase of 8.6%.

This was offset by a revenue decrease in the Specialty Garments segment revenues with our UniTech business unit showing a 21% decline on a quarter to quarter comparison basis, this year to last.

This was due almost entirely to the conclusion of our service contract at the government's Rocky Flats nuclear facility and the loss of those associated revenues for fiscal year 2006.

A general reduction in reactor outages for refuelings during this period UniTech services was primarily utilized had also a slight impact.

Our Green Guard First Aid safety business was up 4.7%, but only had a (inaudible) of an impact on the corporate total revenue increase.

Acquisition-related revenues accounted for 1.9% of the previous noted laundry increase.

Net income was 11.4 million, a 14.7 reduction from the 13.4 million reported in the first quarter of last year.

Earnings per diluted common share were $0.59 as compared to last year's first-quarter earnings per diluted common share of $0.69.

The main reason for the 2 million decrease in net income was the revenue and profit drop-off of the Company's nuclear business.

UniTech's net income from operations decreased approximately 3.1 million for the first quarter of fiscal year 2005.

Again, the results of the conclusion of the Rocky Flats contract.

Also, our Green Guard business had no profit contribution during the quarter due primarily to costs associated with the startup of the new pill packaging operation in Florida.

Excluding the Company's nuclear and First Aid segments, the income before income tax generated by core laundry operations increased about 4%.

As a percent of revenue, operating costs increased 1.8% from 61.3% the first quarter of fiscal 2005 to 63.1% for the first quarter of fiscal 2006.

This increase was due largely to higher fuel and utility costs associated with running both our vehicle fleet and our laundry plants and to the unfavorable cost revenue relationship associated with the nuclear business drop-off.

Merchandises amortization expenses also began to creep up as we saw the combined value of circulating and supply inventory increase by over 14% on a quarter to quarter basis.

Solid costs increased slightly due primarily to expansion of the salesforce size on a quarter to quarter basis.

Also, despite the best efforts to control them, we continue to see health care costs edging up.

Within our core uniform business, new uniform service sales for the quarter -- that means duly contracted rental dollars -- were up over the same period a year ago, and revenues for income associated with stock losses and reductions were down slightly.

Both of these metrics are influenced by business conditions.

And despite the negative impact from the recent severe hurricane season, we believe that we are benefiting from a generally positive economic climate.

The economy grew at an annual rate of 4.1% in the third quarter of 2005.

Labor productivity increased 4.7% from July to September.

The unemployment rate remains essentially unchanged at 5% The Institute for supply management report on business shows the manufacturing sector grew in November for the 30th consecutive month and non-manufacturing sector grew for the 32nd consecutive month.

Both indexes are running well above the 50% range.

That serves as a marker of business expansion institutes maintains its call for continued slow growth in the overall economy.

All this adds to good news for our business.

Last year we loosened up a bit on our capital spending, and we continue to exercise pretty tight control over the initiative of major new projects.

This year we plan to maintain the same cautious approach.

We anticipate capital expenditures will again run about 50 million with the new laundry expansion equipment replacement heading the list of items we will be moving then.

Now to give you additional financial details you are looking for, I would like to reintroduce John Bartlett.

Thank you, Ron.

As Ron explained, the first quarter of fiscal 2006 was a solid quarter from a financial standpoint and reflected the anticipated decrease in revenues and contribution from our Specialty Garments segment, which includes our nuclear and cleanroom operations.

It should also be kept in mind that this quarter is being compared to the first quarter of fiscal 2005, which was by far the best quarter in UniFirst's history.

Consolidated revenues for the 13 weeks ended November 26, 2005 increased 5.8% to $199.3 million as compared to $188.4 million for the 13 weeks ended November 27, 2004.

Excluding the Company's Specialty Garments and First Aid segments, revenue growth in the core uniform rental business grew 8.6% from $164.6 million to $178.8 million.

However, revenues during the comparable quarters for the Specialty Garments segment declined 21% from $17 million in fiscal 2005 to $13.4 million in fiscal 2006.

This decrease in revenues for the Specialty Garments segment was anticipated and is primarily due to the completion of a large government contract in fiscal 2005.

Nevertheless, we are pleased with the core growth -- the growth in our core uniform rental business.

Of the 8.6% increase, approximately 1.9% was from acquisitions and the balance of 6.7% was from internal growth and modest price increases.

Operating cost increased to $125.7 million in the first quarter of fiscal 2006 from $115.5 million in the prior year and increased as a percent of revenues from 61.3% to 63.1%.

This increase in cost as a percentage of revenues is primarily attributable to higher energy costs associated with operating our industrial laundries and our fleet of delivery vehicles.

In addition, the operating cost of our Specialty Garments segment increased as a percent of revenues due to the significant decrease in revenues.

Selling and administrative expenses increased to $42.1 million or 21.1% of revenues in the first quarter of fiscal 2006 from $39.2 million or 20.8% of revenues in the prior year.

This increase in selling and administrative expenses as a percentage of revenues is due to the increase in the salesforce for the U.S. and Canadian rental business.

Depreciation and amortization increased from $10.7 million to $10.9 million in the comparable quarters, but decreased slightly as a percent of revenues from 5.7% in fiscal 2005, 5.5% in fiscal 2006.

The increase in depreciation and amortization is due to normal capital expenditures and acquisitions activity.

The overall effect of these and other variations was that income from operations decreased from $23.1 million to $20.6 million.

As a percent of revenues, income from operations decreased from 12.3% to 10.3%.

However, from an operating segment standpoint, the operating income from the core uniform rental business, excluding the Specialty Garments and First Aid segments, increased 6.2% from $18.4 million to $19.6 million.

This increase was offset by the decrease in the operating income of $3.7 million from our Specialty Garments and First Aid segments, which decreased from $4.7 million in the first quarter of 2005 to $1 million in the current year.

As previously noted, the decrease in the Specialty Garments segment was anticipated and is primarily due to the completion of a large contract in fiscal 2005.

The decrease in the First Aid segment was due to increased selling expenses, as well as costs related to its new pill packaging facilities.

Interest expense was $2.1 million in fiscal 2006 versus $1.6 million in the prior year.

This is due primarily to the increase in interest rates in fiscal 2006 and the portion of the Company's debt which is tied to variable interest rates.

The average debt outstanding in the first quarter of fiscal 2006 was $174 million, which is slightly less than the $175.7 million in the first quarter of fiscal 2005.

Finally, the provision for income taxes in the first quarter of 2006 was 38.5% or slightly higher than the 38% in the prior year.

The overall result was that net income for the first quarter of fiscal 2006 decreased 14.7% from $13.4 million in fiscal 2005 to $11.4 million in the current year.

The diluted income per share for common stock also decreased 14.5% from $0.69 per share in fiscal 2005 to $0.59 per share in fiscal 2006.

Although we are disappointed in the decrease, it was largely anticipated, and we are pleased with the strong performance of our core laundry business.

Our balance sheet is very strong and continued to improve from our August year-end.

Accounts Receivable at November 26, 2005 were $85.4 million or 5% more than the $81.4 million at November 27, 2004.

These receivables represent 39.0 days of sales, which is consistent with the 39.3 days a year ago.

New inventory was $30.7 million at November 26, 2005 and is down slightly from the $31 million at our August 2005 year-end.

Merchandise and services increased from $69.8 million at August 27, 2005 to $73.4 million as of November 2005.

We are carefully monitoring this increase in merchandise and service and are optimistic the increase will moderate in the next few quarters.

On an overall basis, merchandise and service continues to be a relatively low level in relation to the revenues of the Company.

Net property and equipment has increased from $305 million at our August year-end to $306.6 million November of 2005.

During the quarter, the Company funded $11.2 million of capital expenditures, which is consistent with the guidance given at our year-end conference call of capital expenditures estimated to be between 45 and $50 million in fiscal 2006.

Total current liabilities increased to $126.9 million at November 26, 2005 from 117.9 million at our August year-end.

The increase is primarily due to the increase in accrued income taxes.

Total debt declined slightly from $176.7 million at our August year-end to $171.4 million at November 26, 2005.

Finally, total shareholders equity has increased from 412.3 million at August 2005 to $424.4 million at November of 2005.

Total debt as a percent of capital has declined from 30% at August 2005 to 28.8% at November of 2005.

Looking ahead, we believe that the balance of fiscal 2006 will be a solid year.

In our year-end conference call, we provided guidance that we expect revenues for fiscal 2006 to be between 800 and $805 million and that basic diluted income for our common shares would be between $2.20 and $2.25.

We continue to believe that these are realistic and achievable expectations for fiscal 2006.

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

Thanks, John.

For the first quarter of fiscal 2006, combined professional and service sales ran well ahead of last year's two quota performance in the same quarter.

New rental sales were up 14.9% over last year's comparable period with the mid-Atlantic, Southeast and Canadian regions leading the way.

Sales rep headcount was up over 10%, and total sales cost followed proportionately.

The sales payroll expense as a percent of new sales was down by over 1 full percentage point, an indicator of the gradual productivity improvement we have been experiencing, and rep turnover for the first quarter of fiscal 2006 as compared to the first quarter of 2005 was down 21%.

These are all positive signs, and we believe that if general market conditions remain relatively stable, the trends it reflects can be maintained throughout the balance of the year.

Our national account group, which now accounts for about 8% of new sales, had another good quarter, exceeding their targets for both rental and direct sales dollars.

We continue to expand both the sales and service sides of the organization with new field territory managers and new staff program managers scheduled for addition this year.

We are also in the process of relocating some inside program sales positions from Owensboro, Kentucky to our Wilmington headquarters.

This will help to streamline operations and should aid customer contact efficiency through improved internal communications and faster reaction times.

Additionally, we are implementing a new year-round program of scheduled and coordinated promotional contacts with our preferred vendor accounts in an effort to take better advantage of the strong relationships we have been able to build with our internal customer, Champions.

In terms of product mix, uniforms and garments continue to dominate our new sales results.

But complementary items, particularly our facility service product group, are coming on strong.

Restroom service products are among the fastest-growing items in our entire offer, and mats and mops, the key components of our floor care service programs, are realizing good increases, especially considering they are being measured against a much larger installed base.

As you know, we began to self manufacture mats and mops during the past fiscal year, and our new proprietary products with quality features that help to differentiate them from the competition are getting very positive reviews from both customers and prospects.

This is helping to generate fresh interest in these services, and as a result, we expect to see continued strong growth in this category.

Our protective products area featuring our own self-manufactured flame resistant and high visibility garments continues to show steady growth with more large account bid business being won against so-called name brand products and previously entrenched competitors.

We anticipate seeing continued strong results in this area as UniFirst's branded products gain wider exposure that benefit from the market buzz that comes from their selection as "Garment of Choice" by big-name users.

Finally, as I mentioned in our last call, we are making a special effort this year to improve the capability and effectiveness of field sales management through more advanced level training.

As we have said many times, these sales leaders are the key link between our classroom training programs and our on the street implementation.

We want to be sure that they have all the tools they need to make themselves and the reps they manage successful.

We are also giving them a new corporate developed system for recruiting quality sales representatives that relies more on network referrals and less on traditional advertising and the use of outside recruiters.

This product approach that has been proven successful in hundreds of high performing selling organizations, and we believe it will benefit us as well.

We see some good things starting to happen in sales, and we look forward to what we will be able to report to you throughout the balance of the year.

I will turn it back over to John.

Thank you, Dennis, and now we will turn it back to the operator for calls -- questions you may have.

(OPERATOR INSTRUCTIONS).

Michael Schneider, Robert W. Baird.

Happy New Year and I guess first on the UniTech side, certainly it appears as though the Rocky Flats contract was very profitable, but it looks like give us about 100% margin.

Is there anything else going on on the expense side?

No, no, no, (multiple speakers)

No, it's not --

In the first quarter last year, we told you we were losing Rocky Flats, and during that timeframe, there was a less (inaudible) with their loss respirator bill and all that put in that period, and that inflated the margin during that quarter.

Now, as you go forward over the next three quarters, the nuclear division will run fairly close to what it ran last year.

In margin or in operating (multiple speakers)?

Okay, in margin.

John, do you want to add to that?

Well, if you now disclose it, I think we filed the 10-Q, so it is public information.

In the first quarter of 2005, the Specialty Garments nuclear business had operating income of $4.2 million.

I think that was 4.2 out of the -- I don't have the year in front of me.

I think it was 6.9 or something like that.

So I mean they got 75% of the income they earned in the first quarter last year.

Now I think, and we don't know, but I think for the next three quarters I believe that segment is going to do better than they did last year.

That is what we are hopeful.

But (multiple speakers) pardon?

Are there any accrued expenses coming to reduce facilities or reduce staff as a result of Rocky Flats rolling off?

Well, I think the answer to that is that business has -- certainly the direct labor component is higher than let go if need be, but the facilities, you know the management, so forth, I mean there is a relatively high level of fixed costs.

And when we are busy in that division, we make tremendous profits, and when things are slow, we have had many quarters where we have lost money, and I think it's going to continue in that vein.

Traditionally the first quarter in that business has been strong.

I mean this is the first year that I can remember where that business had a weak first quarter.

Michael, we look for that business to run relatively consistent to what it did last year or in the next three quarters.

Okay.

And then just switching to the First Aid side, could you just give us some more color as to what expenses were hitting the P&L this quarter, and then what we should expect in the coming three quarters because there is -- the operating loss I guess is a little surprising, but it sounds like there is some unusual expenses.

Well, 150,000 of it was casualty loss.

They had a flood at the --

The flood at the St. Louis facility.

The other 300,000 was really a heavy startup cost that we incur as we are opening up this bill packaging operation.

So should we expect similar costs aside from -- (multiple speakers)

I think you're going to have about one more quarter of heavy startup.

Okay? (multiple speakers)

To the tune of a couple hundred thousand bucks.

I don't anticipate really a significant negative comparison for First Aid for the balance of the year.

I think again I think the profits for the year, they were only -- what was it, $1 million?

$1 million.

So I mean over half of their profit came in the first quarter, too.

So the balance of the year I don't anticipate for those segments we are going to have this significant negative impact. (multiple speakers)

I think you have got to focus on the good job that the laundries are doing, Mike.

That is my closing question, yes.

In fact, I'm surprised your tone has definitely changed and more optimistic now, Ron.

Well, I think we are seeing -- we were a little nervous about the quarter when we started out.

We knew we had a major account coming out.

You know, we were losing up in Canada.

We knew that we had this major account coming out on the nuclear side, so we were a little nervous.

I think in Dennis' group we are seeing good sales growth.

You know, the lost accounts are running relatively consistent in the 8% range.

So I think we are a lot more positive than we were at the -- you know, I'm comfortable, very comfortable with the forecast that we are putting out.

And I think my associate Mr. Bartlett -- I won't speak for him -- but I think he is very comfortable.

I think what we have said at the year-end and what we continue to believe that that is where we will be.

And I think we are a little bit more positive maybe now than we were then, but even in spite of the weak quarter and the UniTech and the First Aid.

Well, along the (inaudible) line, if you were able to look at it regionally so we could exclude the impact of Katrina and the hurricanes, would (inaudible) actually be in positive territory now, or have they improved sequentially in areas other than the Gulf Coast?

Well, the men-wear for the quarter, the men, actual number of men were black.

Now, the pattern is really very similar for the first four months to last year, Mike.

We are generally positive, but then as we get the January period, the first weeks are looking not so good again.

So I don't think there is -- we're not really looking at it regionally, but overall I don't think there has been a significant change in that.

And Ron, that was flat sequentially or year-over-year?

I would say that is sequentially.

(OPERATOR INSTRUCTIONS). [David Lynn], William Blair.

Just a couple of quick questions.

Last quarter you guys mentioned that the Hurricane Rita had quite a bit of impact on your Texas operations.

Can you guys quantify what that was this quarter and maybe Katrina also?

Well, we were hit with three hurricanes, the sneaky one in Florida, what was that Wilma?

What was the one in Florida?

Affected us a couple of weeks in Florida where operations were shutdown in Southern Florida for basically two weeks.

So, on a revenue basis, it has cost us probably about 1% of our sales.

Okay.

So the organic growth rate would have been even stronger?

Let me keep going.

The problem is that in the New Orleans area and in the Louisiana, Lake Charles, Mobile area is the volume from a number of customers has not come back.

And that is going to be gone for another year, two years, who knows?

You said that was from Katrina in New Orleans?

There was New Orleans and Lake Charles and Mobile.

And then what about in Texas?

Well, we call that Texas because they ran out of a Texas operation.

Okay.

Got you.

Okay.

And them my only other question is, in terms of energy can you quantify what percent of sales that is for you guys?

Sure.

John, do you want to give it to them?

We just did it.

Well, we just captured all the utility costs.

I think they have increased from approximately -- this includes water and sewer -- from about 3.1 to about 3.9%.

3.1 to 3.9.

And then do you guys -- can you provide the breakout between gas and natural gas and electricity?

I think we would rather not.

I mean there is no question the biggest increase is in natural gas in the plant area, and in the fleet area, you know fuel flow vehicles is also up substantially year-over-year, and the biggest increase is gas cost.

Okay.

And then just (multiple speakers)

And that increase year-over-year is actually I think about 8/10% the year-over-year increase. (multiple speakers) on a quarter -- this quarter versus November of a year ago.

I think the good news is now gas prices have come down a little bit to moderate a little bit.

Yes.

Okay.

Thanks, guys.

(OPERATOR INSTRUCTIONS).

Alex Paris, Barrington Research.

Just a quick questions.

With regard to your guidance which was reiterated, what is the guidance on the bottom line, 220 to 225, and how did you phrase that for basic earnings per share?

Diluted.

Oh, that was --

Basic diluted.

Yes, we have this thing with the two classes of stock where the primary earnings per share are kind of funny numbers, so we base focusing on the diluted earnings per share.

Okay.

So for a comparable basis, we are comparing against 2005's 224 diluted earnings per share?

That is correct.

Okay, great.

And just incidentally, do you happen to have cash flow from operations for the quarter?

Yes, in the 10-Q in front of me, which it is up on the Internet now, so you can get that number.

But, yes, from the fund statement, you're talking about?

Yes.

Yes, cash provided from operating activities is 19,888,000.

Very good.

Thanks, John.

I will grab the 10-Q.

[Jeff Warck], Robert W. Baird.

Following up on the energy question, the utility costs, can you tell us what you are assuming looking ahead to get to that 220 to 225 guidance given that natural gas has pulled back quite a bit over the last month?

Is that reflecting your guidance at all, or can we look at that as possible upside?

I think everything we -- there is a lot of things that will be variable going forward, and we have not pulled out anything like that to say I mean there might be some pluses and some minuses as we go through the year.

So I don't think we anticipate that is going to be a significant factor in the year-end numbers.

Okay.

And then you noted the impact of acquisitions on revenue growth a little bit more than we had forecast.

Can you talk about what acquisition that was?

It was not any one acquisition.

I think we have made -- it is really and those numbers are really the acquisitions we have made over the last 12 months that were in the revenues in the first quarter of fiscal 2006 and not in the first quarter fiscal of 2004.

Okay.

And -- (multiple speakers)

There is one in Detroit.

There is, you know, we toward the end of the quarter we bought the business in New Orleans from Tulane.

There is nothing big, but I think there is 10 to 12 fairly small acquisitions we have done.

Should the run-rate in the next couple of quarters be similar to what it was this quarter?

From acquisitions?

Yes.

Yes, I think it will.

And when we are talking of several companies, it might even increase.

Okay.

And then finally on the UniTech business, it sounds like you're looking for margins to be relatively stable compared to last year.

On the topline, have you signed up any new lookouts to try and replace Rocky Flats, or how is that process going?

We are working hard primarily on the Europeans side.

We finally got a small contract out of France, nothing to the size of what we lost to the government.

But all I can tell you is we are working on it.

Nothing substantial at this point.

[Tom Hoseck], [Geneva Investments].

That would be (inaudible) incidentally.

If we were to stand back and sort of look at this thing, not this thing the business of putting aside the effect of the hurricane and some of the shorter term things, do you think the business -- the core business I'm talking about -- do you think the core business will ever return to double-digit percentage growth rates?

You are talking about internal growth or --?

Total growth.

Well, I think with the relatively modest inflation and absent acquisitions I think it is going to be difficult.

I think the high single digits are excluding acquisitions, probably obtainable, but in --

In that kind of environment, do you anticipate or foresee any changes in the competitive situation?

It has always been a very competitive business, but is it going to get even more tough?

You know, I think -- this is Ron, John -- I think it is really the four majors and maybe two or three regional guys right now driving it out there, and price is an issue and it varies by market.

It is still very competitive, and we are seeing it on the national accounts side even more.

So, you know, you have got to keep producing your operating costs.

We have got to become the low-cost producer.

Jeff Warck.

Ron, you talked a little qualitatively about ad stops and pricing.

Can you give us a sense of quantitatively what the different breakdowns of organic growth were in the quarter at (multiple speakers) and new accounts lost?

Okay.

Well, we have talked about this in the past, and it is very difficult to really get back to the year-over-year growth from the metrics.

But we made our best guess in the past, and let me give you comparable to what we have given in the past.

New business from new business sales about 16.2% plus, lost business 8.5% negative, ad reductions about 2.1% negative, and price increases about 1.1%.

So that gets back to the year-over-year growth of about 6.7%, and then as we put in the press release about 1.9% from acquisitions, so an overall quarter-over-quarter growth of about 8.6%.

Okay.

Terrific.

Thank you.

That was our final questions.

There are no further questions.

I would now like to turn the conference back to you.

Please continue with your presentation or closing remarks.

This is Ron.

I want to thank all of you for spending your afternoon with us.

We know it is winter and everybody likes to get out when you can, particularly if it is snowing like it is around here.

But we feel much more confident in our direction and where we are going for the year, and we are very comfortable with our annual forecast here moving forward.

And we want to thank you for your time.

Thank you.

Ladies and gentlemen, this concludes today's conference call.

We thank you for your participation and ask that you please disconnect your lines.