UniFirst Corp (UNF) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. 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. (OPERATOR INSTRUCTIONS).

It's now my pleasure to turn the conference over to Mr. John Bartlett, Chief Financial Officer. Please go ahead, sir.

Thank you and welcome to UniFirst's conference call to review our second-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 Ronald Croatti, UniFirst 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 we 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, believe, 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, costs of materials, fuel and labor, economic and other developments associated with the ongoing war on terrorism, the outcome of pending and future litigation, and environmental matters.

With that completed, I will turn the call over to Ron Croatti for his initial comments.

Thanks, John. I'd like to welcome all of you who are joining us for a review of our second fiscal quarter, another period of record revenues for our company.

John will be covering the financial details in a few minutes, but let me start with a brief recap. Revenues for the second quarter of fiscal 2006 were a record 202.2 million, a 6% increase over the 190.7 million in the same period a year ago. Major upside influence came from the growth in the rental uniform area with total laundry operations showing an increase of 8.5%. Also contributing positively was our First Aid division, which delivered 8.7% revenue increase for the quarter.

Offsetting these increases was a revenue decrease in our Specialty Garments segment, with our UniTech business unit showing a 24% decline on a quarter-to-quarter comparison basis this year to last. As we noted last time, the falloff in UniTech's revenue was due to the conclusion of our major service contract for the government's Rocky Flats nuclear site. This occurred in fiscal 2005 and has resulted in a loss of some fairly substantial revenues for this year.

Year-to-date, through two quarters, Company revenues were up 401.5 million, a 5.9% increase over the 379.1 million from the same period in fiscal 2005. For the first two quarters in year 2006, laundry revenues were up 8.6% over the same period in 2005. First Aid revenues was up 6.7, while UniTech is down 22.4. Acquisitions account for about 1.7% of the increase in the core laundry revenue with a combination of organic growth and price increases accounting for the balance.

Net income for the second quarter of fiscal year 2006 was 6.3 million, a 37.1% reduction from the 10.1 million recorded in the same quarter in fiscal 2005. Earnings per diluted common share were $0.33 as compared to last year's second-quarter earnings per diluted common share of $0.52. For two quarters, net income was 17.7 million, a 24.3% reduction from the 23.4 million reported in fiscal year 2005. Earnings per diluted common share were $0.92 as compared to $1.21 for the first two quarters of fiscal 2005. The main reason for the decrease in net income was the revenue and profit off at UniTech, due primarily to the contract termination that I mentioned earlier. Our Green Guard division, which showed essentially no profit last quarter due to the absorption of startup expenses for its new pill packaging facility, bounced back with a solid profit contribution in the second quarter.

Total operating costs for the second quarter and first half were up slightly with certain production and service costs, particularly natural gas and fuel running higher than the comparable period a year ago. Selling expenses also increased, both in dollar amounts as a percent of revenues.

Healthcare and other payroll-related cost increases as well. Once again, merchandise costs were up a bit with increased clothing usage required to support the installation of new accounts and to handle the replacement of garments in existing accounts.

Sales force performance continued to improve during the quarter. Total shrinkage associated with account losses and reductions in adds ran behind the same period a year ago. This gives support to our belief that the general business climate continues to improve. The economy, as reflected by real GDP, continues to expand. In the second quarter unemployment rate trends slightly downward from this first quarter, settling in at 4.8% from February. The Institute for Supply Management's report on business shows that the manufacturing sector grew in February for the 33rd consecutive month with the overall economy showing its 52nd consecutive month of growth. Business activity in the nonmanufacturing sector increased for the 35th consecutive month in February with 10 of the 17 sectors showing improvement. Both indexes continue to run well above the 50% rate and marks economic expansion.

Our capital spending remains on track with planned projects (indiscernible) predicted spending levels and with no one anticipated infrastructure requirements calling for budgetary realignment. We expect full-year spending will come in at or slightly below predicted level. There are no major acquisitions on the immediate horizon, though we continue to investigate opportunities in our primary businesses and will be active in pursuing good-quality, complementary businesses.

Now, to give you some additional financial details, I'd like to introduce Chief Financial Officer, John Bartlett.

Thank you, Ron.

As Ron explained, the first 26 weeks of fiscal 2006 were solid from a growth standpoint but reflected the anticipated decrease in revenues and contribution from our Specialty Garments segment, which includes our nuclear and clean room operations. It also reflects the impact of increased energy and merchandise costs, as well as the impact of our expanded sales force. It should be kept in mind that this period is being compared to the first 26 weeks of fiscal 2005, which is by far the best results in the Company's history.

Revenues for the 13 weeks ended February 25, 2006 were a record $202.2 million, a 6% increase over the prior year. Excluding the Company's Specialty Garment and First Aid segments, the revenues from the core uniform rental business grew 8.5% from $169.3 million to $183.7 million. However, revenues during the quarter for the Specialty Garments segment declined 24% from $14.6 million to $11.1 million. This decrease in revenues was anticipated and is primarily due to completion of a large government contract in fiscal 2005. Nevertheless, we're pleased with the growth in our core uniform rental business. Of the 8.5% increase, approximately 1.8% was from acquisitions and the balance of 6.7% was from internal growth and price increases.

Revenues for the first 26 weeks of fiscal 2006 were a record $401.5 million, a 5.9% increase over the prior year. Again, excluding the Company's Specialty Garment and First Aid segments, the core uniform rental business grew 8.5% from $334.0 million to $362.5 million. However, revenues during the first 26 weeks for the Specialty Garments segment declined 22.4% from $31.6 million to $24.5 million. Of the 8.5% increase in the core uniform rental business, approximately 1.8% was from acquisitions and the balance of 6.7% was from internal growth and modest price increases.

Looking at our results of operations by segment for the first 26 weeks of fiscal 2006, the income from operations for our core laundry operations decreased from $34.7 million to $33.3 million, or as a percent of revenues from 10.4% to 9.2%. This decrease in operating margin can be attributed to several factors. The first and most significant factor is the increase in energy costs. These costs have increased as a percent of revenues by approximately 0.8% during the two comparable periods.

The second factor is the impact of merchandise costs. On a year-to-date basis, merchandise costs are approximately the same as a percent of revenues as the prior year. However, as a percent of revenues, they were approximately 0.5% higher in the second quarter but approximately 0.5% lower in the first quarter as compared to the prior comparable periods. This change accounts for a significant portion of the decrease in the margin for the first quarter to the second quarter of fiscal 2006.

Another significant factor in comparing fiscal 2006 to fiscal 2005 is the increase in expenditures for our sales effort. As a percent of revenues, total selling expenses have increased approximately 0.6% over the prior-year amounts in both periods.

We also experienced slightly higher payroll costs, payroll-related costs this fiscal year and the second quarter of fiscal 2006 was impacted by higher-than-expected health insurance claims. Nevertheless, the Company is optimistic about the core uniform rental business and anticipates its results for the second half of fiscal 2006 will equal or exceed last year's second-half results.

Results for our Specialty Garments segment continued to be disappointing but not unexpected. On a year-to-date basis, the loss from operations for this segment was $0.3 million versus a profit of $5.6 million in the prior year. However, the income from operations for this segment for the 26 weeks of fiscal 2005 was only $1.3 million, and the Company is optimistic the income from operations in the second half of fiscal 2006 will approximate these results.

Finally, our First Aid segment had significantly improved results in the second quarter of fiscal 2006. Revenues for this segment increased 8.7% over the prior comparable quarter. Income from operations increased from breakeven in fiscal 2005 to a contribution of $700,000 in the second quarter of fiscal 2006. On a year-to-date basis, revenues increased 6.7% over the prior year. Income from operations was $600,000 in both periods.

Depreciation and amortization increased $500,000 for the 26-week periods from $27.1 million in fiscal 2005 to $22.2 million in fiscal 2006 and $200,000 from $11.1 million to $11.3 million for the second-quarter periods. As a percent of revenues, depreciation and amortization declined in both periods.

The net result of the above factors was an income from operations decrease 17.8%, or $7.3 million, from $40.8 million to $33.6 million for the 26-week period and 26.7% or $4.7 million from $17.7 million to $13 million for the 13-week periods. As a percent of revenues, income from operations decreased from 10.8% to 8.4% for the 26-week periods and from 9.3% to 6.4% for the 13-week periods.

Net interest expense for the first 26 weeks increased from $3.1 million to $4.3 million and for the second quarter from $1.5 million to $2.2 million. These increases are primarily due to higher interest rates in the Company's variable interest rate debt, as well as slightly higher debt outstanding during the fiscal 2006 period.

The provision for income taxes was 39.5% for the first 26 weeks of fiscal 2006, as compared to 38% in the same period in fiscal 2005. For the 13 weeks ended in February of 2006, the income tax provision was 41.3% as compared to 38% in fiscal 2005. The income tax provision for the second quarter of fiscal 2006 was increased by $300,000 to provide for tax exposure assessed by the Company. Excluding this additional $300,000, figure, the provision would have been 38.5% in both fiscal 2006 periods.

Finally, net income for the first 26 weeks of fiscal 2006 decreased $5.7 million or 24.2% from $23.4 million or $1.21 per diluted common share to $17.7 million or $0.92 per diluted common share. For the second quarter, net income decreased $3.7 million, or 37.1%, from $10 million -- $10.1 million or $0.52 per diluted common share to $6.3 million or $0.33 per diluted common share.

Overall, we're disappointed with results of operations for the first half of fiscal 2006, but remain optimistic for the balance of the year. We are optimistic that the results for the second half of fiscal 2006 will equal or exceed the results in the prior year's comparable periods.

Our balance sheet continues to be very strong. Accounts Receivable at February 25, 2006 were $86.4 million or 9.2% more than the $79.1 million at February 26 of 2005. These receivables represent 38.9 days of sales in fiscal 2006, a slight increase from the 37.8 days of sales in February of 2005.

New inventory declined slightly from $31 million in August of 2005 to $30.7 million in February of 2006. Merchandise and services increased 10% from $69.8 million at August of 2005 to $76.8 million in February of 2006. Debt, property and equipment has increased 1.5% from $305 million at August of 2005 to $309.6 million at February of 2006.

During the first 26 weeks of fiscal 2006, the Company funded $23.4 million of capital expenditures. In our January conference call, we estimated fiscal 2006 capital expenditures of approximately $50 million. We continue to believe that this is a reasonable estimate for the full year.

We expended about $15.5 million in several acquisitions. None of these acquisitions were individually significant in size.

Current liabilities, excluding accrued taxes, decreased slightly to $113.4 million at February of 2006 to $113.9 million at August of 2005.

Total debt has increased from $176.7 million in August of 2005to $193.3 million in February of 2006.

Finally, total shareholders equity increased from $412.3 million at August of 2005 to $431.1 million in February of 2006. Total debt as a percent of capital was 31.0% as of February 2006, as compared to 30% as of August of 2005.

Looking ahead, we are optimistic that the results of operations for the second half of the year will equal or exceed the prior-period comparable periods.

At our January 2006 conference call, we provided guidance that our full-year revenues would be between 800 and $805 million. We now believe that revenues for the full year will be between 805 and $810 million. Unfortunately, we now anticipate the full-year diluted earnings per common share will be lower than in fiscal 2005. Our current estimate is that diluted income per common share for the 2000 fiscal year will be between $1.95 and $2 per share.

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

Thank you, John.

For the second quarter of fiscal 2006, combined professional and service sales were ahead of last year's (indiscernible) performance in the same quarter. Year-to-date, new business growth was up 8% from the year's starting volume with professional rough weekly averages showing good improvement in most regions. Through two quarters, annualized rep turnover numbers are down as compared to fiscal 2005. The number of active reps has increased by about 10%, and rep work weeks are up proportionately.

Overall, sales expense was up, consistent with personnel increases but average rep performance was also up, indicating an increase in productivity. Though competition continued to be strong in most markets, our pricing on new account sales held steady as compared to a year ago. All three of our primary selling resources have performed well year-to-date. Professional rep sales showed a healthy increase through the first two quarters as compared to a year ago and both national account sales and service sales were up as well.

Our national account sales team is showing growth too in sales, in the scope of their service management, and in the scale of the organization. Year-to-date combined rental and program sales are running ahead of budget. The number of national customers under central service management has increased, and department staffing has expanded to handle the added workload. Our retention has been excellent with no customer losses reported through the first two quarters.

Our professional sales team continues to do a good job concentrating on better-quality opportunities. Specialized protective applications, including flame resistant, high visibility and sanitary controls for the (indiscernible) food processing market, are resulting in higher average sized sales at better price points. Continued concentration on larger prospects is putting us in front of decision-makers who control the uniform needs of bigger employee groups. But while the sales cycle for these classes of business tends to be longer, the-pay off in weekly revenue is better and more often than not account stability is better as well.

Our facilities service product category, which primarily includes floorcare and restaurant services, continues to grow in importance. Presently, about 20% of new sales are coming from these products, and we look forward to continued expansion as we define new applications and service opportunities. Our dedicated facilities service divisions are showing progress as well with staffing levels up and rep averages running about 10% above where they were for the same period a year ago.

From a sales-support standpoint, we are developing and delivering more sales aids that are directly compatible with the targeted selling tactics I just mentioned. We're conducting direct-mail and phone contact programs aimed at identifying and qualifying prospects who are ready for follow-up action. Additionally, we're working with our field sales management group to help them to be more efficient and productive in managing territory reps and in identifying activity patterns that require either modification or reinforcement. With our sales force automation system now installed in all regions, we are introducing some new sales management techniques and processes that tie directly to a more detailed activity reporting that managers now have at their fingertips. We believe these new approaches will further aid productivity.

Finally, I continue to be involved in field sales through the in-depth regional sales reviews I personally conduct on an ongoing basis. These sessions, done in conjunction with our regional vice presidents and regional sales managers, give me the opportunity to meet directly with individual location managers and sales managers, review their year-to-date sales results, evaluate their grow plans, and help them with strategies for success. Most of all, these meetings allow us, as an executive group, to impress on location managers the performance of continuous and committed involvement in the sales process. We are emphasizing to them the Company's cultured commitment to sales and our belief that, from the top down, it's everyone's job to sell.

Overall, I think market conditions are more stable than they've been for some time. I believe our sales opportunities will remain solid for the balance of the year and expect to see further expansion of sales, staffing and support of our business growth objectives. I look forward to when I will be able to report to you in the quarters ahead. Ron?

Thank you, Dennis. Now we will turn it over to the operator, Elizabeth, to answer any questions you may have.

Thank you. (OPERATOR INSTRUCTIONS). Jeff Bork, Robert W. Baird. Please go ahead.

A good afternoon, Jeff.

Mr. Bork, your line is open.

Hello?

I'm here. Sorry about that. Are you guys there?

We are here.

Okay, great. John, if we could look at the quarter in a little bit more detail on the uniform business itself, I'm trying to get a grasp for what changed from the last quarter. It sounds like there was this 100 basis point swing in the merchandise costs. Was there anything else? Because it looks like energy costs were roughly similar; the sales force is roughly the same size. Is there anything else sequentially that changed other than those merchandise costs?

I think the merchandise cost is by far the biggest swing. The other thing that really happened in the second quarter, as opposed to the first quarter -- and it's not huge -- but on the margin effect (indiscernible) as we mentioned, some health and welfare insurance costs, and some employee-related -- we actually had a couple of termination settlements that we -- it was a few hundred thousand dollars that hit in the quarter.

Okay. The merchandise cost issue, can you explain why the big swing from quarter to quarter? If you had any insight into that, that happening and what it looks like for the balance of the year?

Well, I think, from my perspective, what it looks like for the balance of year is that it's going to continue to be higher than last year. I think from looking, if you just look our balance sheet in the merchandise and service, you can see that that's trended up a little bit. So those are garments that are in service that we need to amortize. I think, for the balance of the year, that is going to continue to trend up a little bit.

Okay. Then on the UniTech business, I just want to make sure I understand the comparison now. If I'm right, Rocky Flats ended I think in January of '05, so we should have lapped that at this point, correct?

As I understand it, that's essentially correct, although in talking to our guys there were a few small billings after that. But yes, I mean, it was essentially done a year ago and so we should not be having negative comparisons going forward as a result of that.

I think nothing that might help you understand, is that they Rocky Flats (indiscernible) we were anticipating the startup (indiscernible) all year long in our numbers. The Canadian government, up until last January, or this January, I think in November they decided well, they may, they may not restart these two reactors. In January, they basically put the nail in the coffin on restarting those two reactors.

So that's primarily the reason for the shortfall, besides Rocky Flats. We anticipated Pickering coming online. It is not. We have since been successful in signing Bruce Power, and we expect Bruce Power -- they are telling us they're going to start their outages and restart process the middle of April. This gives us the optimism for the next six months for the nuclear division.

Okay. How does the margin profile look on that new business?

We're looking to be at least equal to what we did last quarter, or the last six months, I guess, the last six months of '05.

I think we feel we have bottomed out and we're going to (indiscernible) back but we're not going to come back (indiscernible). In talking about that is I think this year is going to start getting better and next year will be a little bit better, but it's really two years out before they really see a real -- (multiple speakers).

The full amortization of merchandise they're putting in there.

Okay. Then last question, just a housekeeping item -- it sounded like you're indicating that 38.5% for the tax rate is kind of a normalized rate. Is that what we should be assuming going forward?

I think you can use that. I mean, what is going on is we have several states that are always in doing audits, and really the way the accounting rules require to do the tax provision (indiscernible), Jeff, and you probably know this as well as I do, they basically do it from a liability standpoint. So each quarter, you really have to look at your exposures and they kind of blip in and out. The way we are required to do it and with the auditors reviewing it, we can't kind of just normal us the expense the way I think companies used to do. You really have to adjust the liability in there and it create these blips in the provision.

If you look back, I think in the fourth quarter of 2005, we had a relatively low tax provision, so we couldn't really justify what we used to call a cushion and we had to bring the provision down. So it really is kind of a quarter-by-quarter thing. But I would say, yes, normalized, 38.5% is a reasonable number to use.

(OPERATOR INSTRUCTIONS). Mr. Bartlett, there are no further questions at this time. I will now turn the call back over to you. Please continue with your presentation or closing remarks.

Well, this is Ron Croatti. We are confident in the remainder of the year that we can form what we were telling. I think that the sales led by Mr. Assad have been coming right up. Our growth has been there and we are confident that we can get this merchandise thing under control. The nuclear division is fairly comfortable with their forecast on Bruce Power -- that they can get that revenue and those profits in this remainder of '06.

I appreciate your time and interest in the Company, and we look forward to next quarter's report.

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.