UniFirst Corp (UNF) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the UniFirst first quarter earnings conference call. [OPERATOR INSTRUCTIONS]

I'd now like to turn the conference over to John Bartlett, Senior Vice President.

Please go ahead, sir.

Thank you, and welcome to UniFirst conference call to review our first quarter operating results for fiscal 2007 and to discuss our expectations going forward.

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

Joining me is Ronald Croatti , UniFirst's President and CEO.

This call will be on a listen-only mode until we complete our prepared remarks.

And before we begin, I'd like to give the 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: The 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 with this disclaimer over, I'd like to 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 the review of our first quarter, a fiscal period that produced record revenues and profits 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 2007 were a record $222.4 million, an 11.6% increase over the $199.3 million in the same period a year ago.

Major up-side influence came from growth in our core laundries, with these operations showing an increase of 10.5%.

This was complemented by an outstanding revu -- revenue improvement in our Specialty Garment business; with our [unitec] business unit showing a 28.1% revenue increase on a quarter-to-quarter basis, this year to last.

This reflects a significant recovery from the revenue loss associated with the conclusion of the Rocky Flats decontamination contract, and can be credited to a combination of current account growth, including strong activities with Canadian customers, new account installations, safety supply sales, and the positive effect of our European expansion.

Revenues for our First Aid business were also up, delivering an 8.4% increase over the same quarter of fiscal 2006.

Acquisitions accounted for 2.7% of the total revenue increase.

Net income was a record $13.7 million, a 20.7% increase from the $11.4 million reported in the first quarter last year.

Earnings per diluted common share were $0.71 as compared to last year's first quarter earnings per diluted common share of $0.59.

Profits from our Specialty Garment business improvement substantially from the first quarter of last year, largely due to the strong revenue growth I just mentioned.

In our core laundry business, we continue to focus on sales fundamentals and closer sales management.

Several key measurements we use to track professional sales were consistent with the performance we've seen over past quarters.

Data base monitoring shows we're averaging more calls per day and that we're seeing larger average sized prospects in the several industry groups we spec -- specifically target.

And weekly sales analysis show a higher percentage of preferred larger accounts from being signed.

New account pricing remains essentially flat.

That suggests we're continuing to do a good job at selling value and not falling into the price bid trap.

In our core laundry operations, the ratio of facility service product sales to uniform sales also continues to move up, indicating positive results from increased selling attention we're giving these products.

As a percent of revenue, total operating costs decreased by nine-tenths of a percent, largely due to some modernization -- moderation in fuel and natural gos -- gas costs that primarily impact our core laundry operations, and a decrease in production and delivery costs related to rental service.

These were partially offset by increase in merchandise amortization expenses related to uniform rental operations.

An additional component of the improvement was the favorable operating cost effect of our Specialty Garment revenue increase produced.

Selling costs were up in all areas due primarily to increase in sales force manpower and certain personal-related expenses, particularly health care related insurance costs continue to track higher.

Within our core uniform business, revenues shrinkage associated with stop loss was down a bit.

This metric is directly influenced by overall market conditions, and we believe this slight improvement reflects a general stable business environment.

Despite the recent buildup in wholesale inventories, we see an unemployment rate running at just under 4.5%.

The continued addition of jobs, particularly in the service sector and [inaudible] going labor productivity improvements.

After a hot start to calendar 2006, the economy has experienced slower growth in successive quarters, weighed down primarily by weakness in the housing sector, and we believe it is likely that this trend will carry over into calendar 2007.

But consumer spending is holding up.

Even with some increased worry over the possibility of renewed inflation, the outlook remains fairly positive.

In our core laundry business, we're encouraged by what we've seen so far from our new sales development efforts and for year-to-date reduction results.

We are satisfied that we're making progress in both our Specialty Garment and First Aid business.

If current trends continue in all business units, we expect to maintain our current performance direction and be able to report a solid second quarter, as well.

A final note, as was announced in our press release this morning, Senior Vice President of sales and marketing, Dennis Assad, has left the Company as of December 31, 2006.

His departure was due to a disagreement over the vision for and the future direction of the Company's sales and marketing initiative.

We expect to enter into a severance agreement with Mr. Assad shortly.

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

Thank you, Ron.

As Ron mentioned, our results on a consolidated basis were very solid for the first quarter.

In addition, each of our segments individually performed well.

Consolidated revenues for the 13 weeks ended November 25, 2006 increased 11.6% to $222.4 million, as opposed to $199.3 million for the 13 weeks ended November 26, 2005.

Of the 11.6% increase approximately 2.7% was from acquisitions and the balance of 8.9% was from internal growth and modest price increases.

Operating costs increased to $136.9 million in the first quarter of fiscal 2007, $124.7 million in the prior year, but decreased as a percent of revenues from 62.5% to 61.6%.

The decrease in cost as a percentage of revenues was primarily driven by our strong revenue growth and lower energy costs as a percentage of revenues.

In addition, we had modest decreases in our production costs and delivery payroll as a percentage of revenues.

These decreases were partially offset by higher merchandise costs in our core laundry business as a percentage of revenue, as compared to the first quarter of fiscal 2006.

Selling and administrative costs increased to $48.4 million or 21.8% of revenues in the first quarter of fiscal 2007 from $43.1 million or 21.6% of revenues in the prior year.

This increase in selling and administrative expenses as a percent of revenues is due to an increase in overall selling cost for the Company's core laundry operations.

Depreciation and amortization increased from $10.9 million to $11.6 million, but decreased as a percent of revenues from 5.5% in fiscal 2006 to 5.2% in fiscal 2007.

The overall effect of these and other factors was that income from operations increased from $20.6 million to $25.5 million.

As a percent of revenues, income from operations increased from 10.3% to 11.5%.

Net interest expense was $2.9 million in the first quarter of fiscal 2007 versus $2.1 million in the prior year's first quarter.

This increase is due primarily to the increase in the average debt outstanding during the comparable periods, as well as higher interest rates affecting our variable rate debt.

The average debt outstanding in the first quarter of fiscal 2007 was approximately $208.7 million, which was up from $174 million from the first quarter of fiscal 2006.

The provision for income taxes in the first quarter of fiscal 2007 was 39.25% as compared to 38.5% in the prior year.

This higher rate is due primarily to changes in state tax legislation.

Finally, the income per diluted share of common stock increased 20.3% from $0.59 per share in the first fiscal quarter of 2006 to $0.71 in the first quarter of fiscal 2007.

I would now like to provide some additional information by our operating segments.

Our primary business is our core laundry operations, which includes our U.S. and Canadian rental and cleaning businesses, our garment manufacturing business, and our distribution and corporate operations.

The core laundry operations represented 90% of our consolidated revenues in fiscal 2006.

The revenues for the core laundry operations increased 10.5% in the first quarter of fiscal 2007 over the comparable period last year.

Of the 10.5% increase, approximately 7.4% represented internal growth and modest price increases and the balance of 3.1% was from acquisitions.

The income from operations for the core laundry operations increased 12.7% over the comparable prior period -- prior-year period.

The overall increase in operating margin for the core laundry operations was primarily the result of lower energy production and delivery payroll cost as a percentage of revenues, partially offset by higher merchandise and selling costs as a percentage of revenues.

Our Specialty Garment segment had its second consecutive quarter of positive comparisons with respect to revenues and profitability.

The revenues for this segment increased 28.1% from $13.4 million to $17.2 million.

The revenue increase was principally the results of business from certain Canadian customers has been delayed in fiscal 2006.

Primarily as a result of this revenue growth, the segment's income from operations increased from $1.1 million in the first quarter of fiscal 2006 to $2.9 million for the first quarter of fiscal 2007.

We would like to caution that this segment's strong first quarter is not necessarily indicative of what we expect for the remainder of fiscal 2007, but we are pleased with the rebound in this segment's operating results.

For the first quarter, the revenues from our First Aid segment increased 8.4% from $7.1 million to $7.7 million.

Due to this increase in revenues as well as other cost reductions, income from operations for this segment increased to $600,000 for the first quarter of fiscal 2007 from a small loss in fiscal 2006.

Looking ahead, we believe that fiscal 2000 will be a solid year.

In our year-end conference call, we provided guidance that we expect revenues for fiscal 2007 to be between $875 million and $890 million and that diluted net income for common share would be between $2.25 and $2.30.

We now anticipate our full-year operating results will be at the high-end of these ranges.

This concludes our prepared remarks, and we are now pleased to answer any questions you may have.

Give it back to Shawn for questions.

Thank you very much. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Mike Fox with JP Morgan.

Please proceed with your question.

Good afternoon and congratulations on a great quarter.

Thank you, Mike.

I have a few questions.

It sounds like you guys are seeing a little bit of a slow down, but you guys are doing much better than maybe the overall industry.

Can you just discuss maybe some of the things that's causing that and whether or not you think that's going to persist?

Mike, this is Ron.

I think our continued focus on the selling organization and building the sales organization or adding heads and still trying to get the productivity out of these guys -- gain productivity -- is the key component to our success.

You know, we've been working on that and pushing that.

We will continue to do that.

I think the economy, we think, is going to be basically flat, like I said, just as it currently is, and we think that will help us.

We don't see any downturn coming.

So we're -- we're bullish on our forecast, really.

Okay.

And then with regard to the -- you know, it seems like you are getting the productivity.

Can you give us a little more detail about why Dennis decided to leave maybe on the -- you said -- you mentioned the difference in the vision, so wondering if you could just give us anymore color on that?

I think, Mike, at the present time we'd rather not go into that.

Okay.

And then can you just talk about the acquisition pipeline for maybe the remainder of the year and how that looks and if you guys are continuing to find stuff at reasonable multiples?

[LAUGHTER] There are a lot of acquisitions out there.

We've been looking at quite a few, so the pipeline is there.

The pricing is still very high and we will make the ones that make sense for our Company.

We have not seen any slow down in pricing on the acquisitions at all.

Okay.

Great.

Thanks a lot and congratulations again.

Thank you.

Thanks, Mike.

And our next question comes from the line of Mike Schneider with Baird.

Good afternoon, guys.

Hi, Mike, how are you?

very well, thanks.

And congratulations again.

A very nice quarter.

I guess just focusing in on organic growth within the laundry business, it looks like it did slow down, at least if I got my numbers correct from about 9% last quarter, John, to 7.4% this quarter.

Can you give us some insight as to what is actually slowed?

Is it new account growth pricing, whatever just sequentially?

Well, I don't -- I don't think it's maybe half a point down.

I don't recall it being 9% in the prior quarter.

I think my -- the numbers I have a little less than 8% for all of calendar 2000 -- or fiscal 2006.

Okay.

I don't know.

I guess I don't have the quarter.

I don't think there's been a substantial change in the internal growth.

It's around 7.5% to 8%.

Okay.

Been that way the last few quarters.

And Ron, do you have the growth of the components this quarter that you give us each quarter?

I certainly do.

Again it's the way we keep it.

A little different than our competition, I'm sure.

Yes.

But our new business in the quarter was about 15%, our loss business was 7.8%, our adds versus reductions was a -1.1%, our pricing was about 1.3%, and the acquisitions were at 3.1% or net of 10.5%.

Okay.

And the acquisitions, how do they split between the two segments or are they all in the laundry segment?

That's all laundry.

All laundry.

We're just talking about laundry with those numbers, Mike.

Okay.

They're all laundry.

It sounds like you must have done some this quarter because that number seems a bit higher than I would have guessed.

It's that USA Alliance acquisition that basically we brought in and we really didn't -- we bought it in April, but we really didn't start to get it into the numbers until June.

We do a fairly complex calculation for that, Mike, and really what it is is we might have bought something back in June, and we're getting the revenues in this quarter, but we didn't have them a year ago in the quarter.

So you have to go through and see when the acquisition came in and whether it generated revenues in this quarter versus a year ago.

Okay, so you have in -- in your revenue forecast, John, you haven't necessarily changed the mix to include more acquisitions less organic.

This is playing out as you would have expected?

Yes, our revenue forecast really doesn't anticipate -- I mean, the goal we just set of the $875 million to $890 million, or towards the high end of that, is really without any additional acquisitions.

Right.

Okay.

What we have al -- in the pipe -- you know, what we're already doing.

In the just [rep] productivity, can you give us a sense if the average is up or down, and if you're making progress there still?

We made progress up until the August quarter.

It slowed, have been relatively flat and we're trying to get that moving again.

So it slowed during the November quarter?

That's correct.

Okay.

And headcount, are you still hiring as aggressively as you have been?

We are hiring commiserate with our percentage growth anticipation.

Okay.

And I guess then switching to Specialty, you were quick to caution us that the first quarter isn't an indicative of the year.

I think we have been talking about $3 million to $4 million of operating income expected for that.

You've already done $2.9 million in the first --

Yes, I think I talked to our vice president who runs that division earlier today, and we think we're going to do a little bit better than that.

But the reality of this business is up and down, and it's -- he thinks we're going to break even or make a little bit of money in the second quarter.

I think a year ago we actually lost a fairly significant chunk.

I think we're hopeful we're going to be closer to that $5 million plus for the year, and it could be more.

It really is -- it's unpredictable, quite frankly.

Okay.

And then energy --

-- businesses.

Pardon?

And then energy, John, when you model out now where your hedges are and what your costs are in the door right now for gasoline and natural gas, when does it turn into a headwind again, just given that natural gas is back up and gasoline, although, has come down?

Well, in the first quarter, we had a benefit of roughly 0.05% of revenues for both natural gas and gasoline.

I mean, I think I'm fairly optimistic that it's not going to be a headwind, because it's off, but I don't think it's up as high as it was a year ago.

So I don't think it's going to be a huge benefit, but I don't really believe it's going to be a negative this year.

Okay.

And I'm hopeful it'll continue to be a small benefit.

Okay.

I'll get back in line.

Thanks again.

You can guess as well as I can.

And our next question comes from the line of Bruce Simpson with William Blair.

Hi, Ron and John.

Hi, Bruce, how are you?

Say, at the risk of bringing up the sensitive matter -- and I know earlier you passed on the opportunity to talk about Dennis -- it does strike me that a key part of the investment thesis here has been the acceleration and the performance of your sales force.

So given that the guy shepherdling that, who I think the Street perceives was an important architect of a change there has left, I wonder if it's an opportunity in a public forum here to give us any color at all about whether that -- you know, if it's truly a difference in vision, maybe what you see the Company's vision as moving forward or if it were really just a personal matter then give us that so that we know that there wasn't some sort of disagreement?

No, I think I'll have to go back to the first statement, Bruce, that we're not really prepared at this time to say anything about it until we get everything tucked away.

It's just that we're confident that we can continue on the path that we were on and continue to grow the Company. and get improvements.

Okay.

Can I ask you a little bit about the competitive landscape, as you have -- seem to be taking share away from some of your competitors with a differential in growth rates, I wonder if you see any kind of change in focus from the people against whom you're competing, or is it simply a question that your sales people are little hungrier and have more tools than they used to have that's driving that differential in growth rates?

I think it's just better management of the sales force, and pushing them to make the calls that they should have been making.

And I think we've not seen any great difference in pricing.

We think new account pricing has been relatively flat.

But we're still writing about half our business coming from no programmers, or people who were basically into purchasing -- purchasing uniforms.

So do you see any noticeable change either from Aramark now that's changing ownership structure, or [Cintos] or anybody else?

No, we haven't.

Okay.

John, can you talk about your expectations for cash flow for the full year?

Well, I think it's fairly predictable.

I think, absent acquisitions, I think we probably will be spending in capital expenditure roughly equal to our depreciation and amortization.

So I think basically our net income will turn into cash less what we spend on acquisitions, and we do have -- there are several acquisitions we're talking to currently.

We're hoping to conclude one in the next few weeks and there's two or three others we're talking to, so it's -- so absent that, I think it's relatively predictable --

Okay.

-- where we will be.

All right.

And then do you think that working capital, John, at this point is pretty stable?

Or are you looking for changes to inventory or accrueds that aren't reflected in the balance sheet at the end of Q1?

No, I think, our inventory and our merchandise and service is relatively flat from year end.

Our receivables are up a little bit and I think our accruals there's nothing there that really should be abnormal from prior years.

Some of them kind of grow through the year.

For example, we accrue our profit sharing plan.

We pay a portion as a match each pay period, but the Company portion we basically accrue through the year and make in one lump [inaudible] -- that payment's actually going to be made in the next month or two for last year.

That's a couple million dollars that'll make the things dip.

But other than that, it's pretty ratable over the year.

Not many --

Okay.

-- major payments --

And then on unitec, would you say that this first quarter -- is that a business that is seasonally slanted towards the first quarter?

In other words, are we less likely to have this kind of volume-driven leverage to the operating margin in the subsequent quarters than we saw in this quarter?

Well, I think we've said for years that the unitec business -- the nuclear business is strongest in the fall and in the spring.

And that's -- to the extent the business is driven by power reactors, we get most of our business when the power reactors shutdown.

And they try to shutdown in the spring and fall when there's less demand for power, so we typically see our spikes from that portion of the business in that time period.

To the extent it comes from the Department of Defense for clean up efforts, it's a little more regular.

But I think this spike was really coming more from Canada and Europe.

With power reactors.

And with power reactors.

So we do not anticipate we'll have this kind of profits in the second quarter.

But we're certainly optimistic we're going to do a lot better than we did last year, and we feel very positive of the business overall.

It's always been up and down, and I guess it always will be.

And, you know, if you look back at the quarters it was reported, you'll see that.

Is there anything else in the unitec business as you look out over fiscal '07 that's particularly or potentially lumpy?

Any other runoffs of large contracts or possible big contracts that you're aware of that are in RFP that you might participate in?

Not that I'm really aware of, Bruce, but the nature of the business is we don't have lots and lots of customers.

We have a few big customers and we -- you know, when they're in for a refueling, we get big spikes in revenues for periods of time and then when it's over, it's kind of over.

So it will continue to be lumpy, I guess is what I'm saying.

Okay.

And then the last question, just in terms of the cost to manufacture garments.

Where do you see that going moving forward as a percentage of your sales?

Have you extracted all of the cost savings that you're getting out of increasing the percentage of self-made garments and offshoring those?

Bruce, we're currently at that 55% to 60% range of our requirements.

We were looking at going into Nicrawa -- Nicaragua very seriously until the election happened.

We're now moving afoot to put a third plant in Mexico and expand that 55% up.

We're currently contracting quite a bit, and we know there's some margin on the table.

And once we get the third plant going, maybe the end of '07 to '08 in Mexico, we will get a little gain.

Okay.

Thanks for taking the questions and congrats to your team on all of your success.

Thank you.

Thank you.

[OPERATOR INSTRUCTIONS] And our next question comes from the line of [Steve Balog] with [inaudible] .

Please proceed.

Thank you.

Ron, you made the comment about being encouraged by the new sales development effort.

Can you put some kind of flesh on to that as to how you measure that, or is that a gut feel kind of a thing?

I think we -- we obviously monitor the new sales on a weekly basis.

We monitor the productivity of the rep, the calls that they're making, where they're calling, how they're using the data base, the size of the accounts they're calling on.

And basically what we're seeing is we got off to a slow start and we're coming back strong. and we think that momentum will continue.

The turnover is actually a little bit better than last year, not much, but a little better.

And that gives us the good feeling that we can keep [inaudible] sales moving at a better pace than what we did last year.

That's a good segue to my next question, is how in this business do you understand or make sure you're not pushing too hard?

That you push so hard for metrics on a number that you shoot the turnover up?

That happens.

Yes, we -- we expect so many phone calls, so many cold calls, so many presentations and so many needs analysis of -- by rep, by week, based on their tenure, and actually, the actual size of the account, A account, B account, C account.

And if we don't get that productivity out of them, we do it a weekly sales presen -- what we call a P&R session with the sales individual to help them plan the following week to see that he gets the activity.

If they don't do the activities, they don't get the results, and no activities is no sales, and it can push up the turnover.

The trick is to find that balance of getting so many calls, so many presentations.

And where they're calling, how they're using that data base.

You don't want them running from one end of the territory to the other.

So a key component is trying to get that equalization.

But we have people who don't make the calls, the required calls, or don't make the number of customer needs analysis.

And when they don't do it, we try to mentor them along, coach them along that you have to do this and you have to do that, this many calls, and this is where you get a work.

And if they don't do it, we usually have a problem.

All right.

Thanks.

A question from the line of Mike Schneider with Baird.

Hi, Ron.

Ron, the analysis of just some of the competitive losses.

I guess another way to ask an earlier question is have you seen the composition of who is stealing accounts change at all?

That is, are different competitors now showing up on the list as most competitive in the competitive losses category?

Mike, that hasn't changed.

It's pretty much the same ratios of driven by the largest competitor.

Okay.

Fair enough.

And then, John, were there any unusual benefits this quarter?

I know we had some insurance and environmental reserves that swung the numbers last quarter.

Was there anything this quarter, positive or negative, that we should take note of?

No, I think it was a pretty clean quarter from that aspect.

Okay.

And I believe that's it.

Thank you.

[OPERATOR INSTRUCTIONS] And our next question is another follow-up question from the line of Bruce Simpson with William Blair.

Please proceed with your question, sir.

Hey, guys, just a quick follow-up because this came up in your prepared remarks.

About how much business are you doing in the core laundry business that is not uniforms, i.e., is facility services and related?

We are about 56 % garment.

Is that 56% of the core laundry or all of the revenue?

Of core laundry.

Okay.

Thank you.

And there are no more questions on the phone lines at the moment.

No more -- gee, I want to thank everybody's interest in the Company.

We are very confident that 2007 will be one of our banner years, and we look forward for your participation and following the Company going forward.

Thank you, and good night.

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.