UniFirst Corp (UNF) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the UniFirst Corporation second quarter earnings conference call.

(Operator Instructions).

It is now my pleasure to turn the conference over to Mr.

John Bartlett, Senior Vice President of UniFirst Corporation.

Please go ahead, sir.

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

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

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

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

Before we begin, I have 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; 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.

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

Thank you, John.

I would like to welcome all of you who are joining us for the review of our second quarter and first half of fiscal 2007.

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

Revenues were a record $222.4 million for the quarter and $444.7 million for the first half of fiscal 2007.

This represents a 10% increase compared to the $202.2 million in the second quarter of last year and a 10.8% increase over the $401.5 million posted in the first half of 2006.

All business units contributed to the revenue increase for the quarter just completed with the majority of the growth coming to -- come from the core UniFirst Laundry operations.

Net income for the second quarter was $7 million, a 10% increase from the $6.3 million in the second quarter of fiscal 2006.

Net income for the first six months of fiscal 2007 was $20.7 million, a 16.9% increase over the $17.7 million reported in the comparable period last year.

The Company's second quarter and six-month earnings were affected by two factors -- a onetime severance charge related to the departure of the Company's Senior Vice President of Sales and Marketing, and by the adjustment made to the Company's environmental reserve to account for [remediation] issues related to the property of Summerville, Mass., which the Company formerly had ownership interest.

These adjustments combined to decrease the Company's income from operations and net income by approximately $2.3 million and $1.4 million, respectively.

John will explain the comparative impact on diluted earnings per share in just a minute.

Excluding these items, income from operations from the Company's core Laundry business increased 20.9% and 15.8% in the quarterly and six-month periods as compared to fiscal 2006.

This was the result of solid revenue growth of 10% and 10.2% in the quarterly and six-month periods combined with lower operating cost as a percentage of revenue.

These cost reductions can be primarily attributed to lower energy costs, production costs, delivery payroll costs as a percentage of revenues, though these improvements were partially offset by higher merchandise cost as a percent of revenues.

After countervailing profit impacts for fiscal 2007 has continued higher interest rates resulting from higher average borrowings in fiscal 2007 as compared to 2006 as well as higher interest rates affecting the Company's variable rate debt.

UniFirst Laundry operations revenue were up 10.2% year-to-date over 2006 with 7.3% of that coming from organic growth and the balance related to acquisitions, the largest being the April 2006 acquisition of Uniform Supply Lines.

Our Specialty Garment segment revenues were up 16.1% for the quarter and 22.6% for the first half as compared to fiscal 2006 with increases primarily attributed to strong revenue growth from UniTech's Canadian and European customers.

And our First Aid segment showed a slight revenue improvement for the quarter and a 4.7% improvement for the first half.

This relatively modest increase here were anticipated and results primarily from some consolidation-related business disruptions, primarily shipping delays associated with our wholesale operation arising from the movement of the warehouse operations from Chicago to the Company's Florida facility.

New sales in our core Laundry business continue to track well through the second quarter.

Professional sales rep turnover was down slightly.

Rep work weeks were up, percent of quota performance held steady and weekly averages of tenured reps improved.

Additionally, our service sales showed substantial continued improvement, largely due to the impact of ongoing route sales promotion programs directed at introducing new products and services to our current customers.

We continue to press our professional sales team for improvements both at the same time giving them increased levels of training and support.

All sales managers as well as location managers are cycling through another round of sales management classroom training to enhance skill levels and to ensure they have the tools they need to effectively deliver results.

The goal is to make certain there is a continued focus on both process and accountability at the location level and to help individuals gain the incremental success that will keep them personally motivated and involved as a contributor.

As an aid to productivity, we also continue to process in converting all sales regions and all individual sales reps from the older generation PDAs to a new generation of BlackBerries.

These are more compatible communication tools and allow for greater flexibility and scheduling, record activities and reporting results.

At present, we believe we will see a continual and continual favorable selling environment in the months ahead.

Despite mixed economic signals, including a downtick in some key indicators and the recent slight uptick in stocks, we think the outlook in most of the business categories we service remains pretty positive.

While consensus estimates points to a continued GDP growth of only around 2.3%, job growth in the non-manufacturing areas remains reasonably strong.

Retail sales are holding up, corporate earnings reports are generally good and the Institute for Supply Management induces continued through points to growth.

The housing market will remain a drag for awhile longer, but some sector watchers are starting to see hints that the worst may be over.

With an upturn here, no spread of the sub-prime rate mortgage melt-down to other financial markets and absent any further energy disruptions, we think the economic outlook is more positive than negative and should have a neutral impact on our results for the balance of the year.

But for now, let's concentrate on what we are sure of, and that's the details of the Company results for the first two fiscal quarters.

So, to fill you on specifics, let me turn it back over to UniFirst's Chief Financial Officer, John Bartlett.

Thank you, Ron.

As Ron explained, we're pleased with our operating results thus far this year.

Revenues for the 13 weeks ended February 24, 2007 were a record $222.4 million, a 10% increase over the prior year.

Of the 10% increase, approximately 2.5% was from price from acquisitions and the balance of 7.5% was from internal growth and price increases.

Revenues for the first six months of fiscal 2007 were a record $444.7 million, a 10.8% increase over the prior year.

Of the 10.8% increase, approximately 2.6% was from acquisitions and the balance of 8.2% was from internal growth and price increases.

Looking in more detail at our results, the income from operations in fiscal 2007 for our core Laundry operations increased from $13.8 million to $14.3 million for the second quarter and from $33.3 million to $36.3 million for the first six months.

However, as Ron mentioned, fiscal 2007 amounts were negatively impacted by severance expense related to the departure of the Company's Senior Vice President of Sales and Marketing as well as by adjustments made to the Company's environmental reserves.

These amounts combined to reduce the income from operations in the core Laundry operations by approximately $2.3 million.

Excluding these amounts, the income from operations for the second quarter increased from $13.8 million to $16.6 million, or 20.9%.

The income from operations for the six months ended February 24, 2007 increased from $33.3 million to $38.6 million, or 15.8%.

Again excluding these amounts, income from operations as a percent of revenues for the core Laundry operations increased from 9.2% in the first six months of fiscal 2006 to 9.7% for the first six months of 2000 fiscal 2007.

This increase is primarily attributable to lower energy costs, primarily natural gas, as well as a slight decrease as a percent of revenues in our production and delivery payroll costs.

These decreases were partially offset by higher merchandise costs as a percent of revenues.

The revenues for the Specialty Garment business, which includes our nuclear and cleanroom laundries, increased from $24.5 million to $30.1 million or 22.6% for the first six months of 2000 fiscal 2007 and from $11.1 million to $12.9 million or 16.1% for the second quarter.

The income from operations for this segment increased $2.9 million from a small loss of $0.4 million for the first six months of fiscal 2006 to a profit of $2.5 million in fiscal 2007.

However, as the Company expected, this segment incurred a small loss of $500,000 in the second quarter of fiscal 2007 versus a loss of $1.5 million in the prior year.

As we have explained in the past, this business is very cyclical and traditionally its best results are achieved in the fall, our first quarter, and in the spring, our third quarter.

We are optimistic about the results during the second half of the year for this segment.

Finally, I will briefly comment on the results of our Fist Aid segment.

The revenues for the First Aid segment increased 4.7% from $14.4 million for the first six months of fiscal 2006 to $15.1 million in the comparable fiscal 2007 period.

For the second quarter, the revenues increased 1.1% from $7.3 million to $7.4 million.

Income from operations for this segment was $600,000 for both the six months ended in fiscal 2006 and 2007.

Income from operations for the second quarter of fiscal 2007 decreased $600,000 to $100,000 from the $700,000 profit in fiscal 2006.

These results were not unexpected as during the quarter the Company closed the distribution center in Chicago and consolidated the inventory in its new facility in Florida.

This transition not only impacted some sales during the quarter but resulted in some onetime additional costs.

Depreciation and amortization increased $1.2 million for the 26-week periods from $22.2 million in fiscal 2006 to $23.4 million in fiscal 2007 and $0.5 million from $11.3 million to $11.8 million for the second-quarter period.

As a percent of revenues, depreciation and amortization declined in both periods.

The net result of the above factors was that income from operations increased 17.4% or $5.8 million from $33.6 million to $39.4 million for the 26-week periods and 7.4% or $900,000 from $13 million to $13.9 million for the 13-week periods.

However, excluding the amounts arriving from the executive severance and the increase in our environmental reserves, income from operations increased 24.3% from $33.6 million to $41.7 million for the 26-week periods and 25.1% from $13 million to $16.2 million for the 13-week periods.

Net interest expense for the first 26 weeks increased from $4.3 million to $5.3 million and for the second quarter from $2.2 million to $2.5 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 2007 periods.

The provision for income taxes was 39.25% for the first 26 weeks of fiscal 2007 as compared to 39.5% in the same period in fiscal 2006.

For the 13 weeks ended February of 2007, the income tax provision was 39.25% as compared to 41.3% in fiscal 2006.

The income tax provision in the second quarter of fiscal 2006 was increased by $300,000 to provide for tax exposure assessed by the Company.

Finally, net income for the first 26 weeks of fiscal 2007 increased $3 million or 16.79% from $17.7 million or $0.92 per diluted common share [to] $20.7 million or $1.07 per diluted common share.

For the second quarter, net income increased $600,000 or 10% from $6.3 million or $0.33 per diluted common share to $7 million or $0.36 per diluted common share.

Without the adjustments previously discussed, the Company's diluted earnings per share for the second quarter and first six months would have been $0.43 and $1.14, respectively.

Overall, we're pleased with the results of operations for the first half of fiscal 2007 and remain optimistic for the balance of the year.

Our balance sheet continued to be very strong.

New inventories increased slightly from the $36.5 million at August of 2006 to $39.7 million at February of 2007.

Merchandise in service has decreased from $85.9 million at August of 2006 to $82.2 million at February of 2007.

This is a very positive change and is an indication that the increases we experienced in our merchandise expense may be moderating.

Net property and equipment has increased 1.9% from $318.9 million at August of 2006 to $324.9 million at February of 2007.

During the first 26 weeks of fiscal 2007, the Company funded $25.9 million of capital expenditures.

In our January conference call, we estimated fiscal 2007 capital expenditures of approximately $50 million.

We continue to believe this is a reasonable estimate for the full year.

We expended about $4.1 million on several small acquisitions, none of which were individually significant in size.

Total debt has decreased slightly from $210.5 million at August of 2006 to $209.2 million at February of 2007.

Finally, total shareholders equity increased from $452.5 million at August of 2006 to $471.2 million at February of 2007.

Total debt as a percent of capital was 30.7% at February of 2007 as compared to 31.8% at August of 2006.

Looking ahead, we are optimistic about the balance of fiscal 2007.

In our January 2007 conference call, we provided guidance that our full-year revenues and diluted income per common share would be at the high end of the ranges provided in our year-end conference call of revenues between $875 million and $890 million and diluted net income per common share would be between $2.25 and $2.30 per share.

We now believe that the revenues for the full year will be between $890 million and $895 million and that our diluted income per common share will be between $2.25 and $2.30 per share including the $0.07 of adjustments recorded in the second quarter.

That completes our prepared remarks and now we would like to open up the call to any questions you may have.

(Operator Instructions).

Mike Schneider, Robert W.

Baird.

Guys, maybe first you can address just the guidance.

John, the raise in revenue of just $5 million at the high end, is that due to the acquisitions you did during the quarter, or are you expecting organic growth to be slightly better than you were expecting?

Well, I think in our last call, we kept the guidance where we were although we were optimistic we would be at the high-end and we've just raised it a little bit.

I think the $895 million contemplates I think about a 7.5% year-over-year growth for the second half of this year, and we hope we can do that or maybe a little bit better.

Okay.

I guess given the GDP outlook, Ron, is it reasonable to assume you can sustain this rate of organic growth at 7.5, or is there some sales initiative or sales productivity impact you are expecting to get a boost from?

No, we're pretty happy with the way the sales are going right now and we just think based on the economy right now we can continue with that direction.

You know, it's toned down from that 10 because we had the acquisition in there of USA Alliance and we think we can do that internal growth of 7%-7.5% the way things are going.

Okay.

Can you break down the components of growth for us in this quarter, Ron?

Sure.

Again, it's how we keep them, a little different.

The new business was 15.3, the lost business is 8.1, the adds versus reductions was 1.3 negative, the price increase was 1.2 positive, and that gives you the 7.3, and then the acquisitions were 2.9 for the 10.2.

Right, right.

Well, it looks like add puts did at least deteriorate a couple of decimal points.

Are you seeing what at least our survey work in this space has shown, which is on the margin, slightly tougher employment conditions?

We are.

And is it concentrated by sector or by geography?

At this point, it's still pretty much across the board.

We really haven't studied it as far as type of businesses.

But it's pretty much across the board, other than oilpatch.

Which is strong (multiple speakers)

Still very strong down in the West Texas area.

Okay.

And on the delivery costs, you guys mentioned delivery costs are down again year-over-year this quarter and are somewhat of a help to the margins.

What has changed there?

Is there some new route density program or something that's driving the savings?

Do you want to go, or do you want me to go?

Go ahead, Ron.

I think it's a combination of two things.

I think as we write more new business, we fill in these routes and get higher revenue on the routes and that's helped.

We've always had a reconsolidation program in the Company and we're always trying to tighten the routes and make sure the routes are above guarantee.

So it's just an ongoing effort and I think we've seen some benefits from our efforts over the last year.

Just so it's clear, they are down as a percent of revenues, they are not down in absolute dollars (multiple speakers) to increase.

And then, final question, John, did I hear you correctly, that the EPS guidance hasn't changed though, from 225 to 230?

It hasn't changed, but there's $0.07 in there that as we started the year we really didn't anticipate.

So, --

Okay, and I was going to ask that, because we were talking about the severance charge last quarter already.

So in the guidance, you hadn't already (multiple speakers)

We haven't changed it.

We didn't change last quarter's guidance either.

When we did last quarter's call, we knew really about that.

We didn't know about this environmental charge that we incurred.

Peter Carrillo, Citigroup.

Just a follow-up [perhaps from] the last question to clarify -- when you say the 230 to 235 is still in effect, that assumes a $0.43 quarter this quarter, right?

This quarter being the second quarter?

Right, the one you just reported.

That assumes $0.43, right?

Correct, yes.

It's (multiple speakers) 225 to 230, not 230 to 235.

Oh, sorry, I'm pushing you up a little bit, aren't I?

Okay, nevertheless, it assumes the $0.43 quarter.

(multiple speakers) Second question was actually just on kind of a small little thing here.

On your organic growth breakout, you gave 15.3, 8.1 lost business, negative 1 point through add stops, and then 1.2 price, correct?

Correct.

I think that adds up to 7.1, unless there's something I'm missing on how you took your overall number?

No, I think it's just rounding.

And the final question, just on the -- in terms of First Aid.

Should it return back to sort of normal growth rates I guess next quarter; what we've seen in previous quarter -- recent quarters?

Yes, we expect First Aid to come back on track.

There was a lot of I guess you would call it delayed shipments and costs for moving and a little obsolete product we took care of.

So, we expect First Aid to come back online.

So everything is going to be now in one Florida plant, and Chicago is shut down, is that correct?

Well, we still have a distribution center in St.

Louis.

The original business was in St.

Louis that we bought seven or eight years ago.

The business we acquired as part of the Textilease acquisition was both in -- it was kind of spread around.

Some was in Atlanta, some was in Chicago.

The big piece was in Chicago and we bought a new building and then when we started manufacturing in Florida; now, we've consolidated all that that was in -- down in Fort Myers, Florida facility.

This might be a dumb question, but I'm just kind of curious.

Florida is about as far away as you can get from sort of the middle and the rest of the country.

Does it increase your expenses by manufacturing way down there and then having to ship all over the country?

You might spend a little more in freight, but you're saving it in labor.

And this stuff isn't very heavy that we're shipping.

It's pills and small things, so it's not --

Right.

In Specialty Garments, is there anything going on there at all these days, anything new or any new trends?

Do you expect the seasonal pickup in May to occur once again?

Well, the Unitech division -- the nuclear division, they pick up their outages right now in this spring period.

So you know, they are starting to go like gangbusters right now.

So that's our normal pickup.

So I mean, we're doing a little better in Europe.

We've got another couple of accounts in Europe, although they are not long-term accounts.

But we did get some business out of France.

This is the first time.

You know, it's not a great deal of money, but it's something, and we picked up a German reactor.

Ron, you seem to be in touch with the economic numbers every (indiscernible) conference call [is] here.

Any sense of why you don't think there's a risk as the year goes along?

If the economy does indeed slow a bit, some economists in the last couple of days are talking about GDP growth estimates falling down a little bit, and just a lot of little (multiple speakers) about it.

Well (multiple speakers) last week.

(multiple speakers) a reason every day.

Yes, even some of the competitors are starting to hint at sort of things being a little slower.

I'm just kind of curious as to how you're going to power through the year.

We haven't -- I checked with the field as of Friday, and we really haven't seen any anything.

There's -- new sales are coming in at the same level.

But, I think what we're seeing -- $890 million to $895 million in revenues -- is not dramatic growth over the second half, if you look at the numbers.

So I think we are expecting it to moderate a little bit in the second half.

Terry O'Connor.

Cedar Creek.

I want to give you a chance to just go back to this new guidance.

I think you may have misspoken.

You were asked -- does it include the $0.43 for this quarter?

-- and I don't think I heard it that way.

I think what you said is that your guidance remains 225 to 230, even after the $0.07 of charges, which implies 232 to 237 ex-charges.

Is that correct?

That's correct.

Okay.

So the second half is $1.18 to $1.23, so we're just adding it to the $1.07 first half?

That's correct.

Okay thanks, that's what I thought.

Mike Fox, JP Morgan.

I just had two quick questions really.

I was wondering -- you talked about the strength in the specialty business in the first and third quarters.

So should we expect on the operating margin from that business somewhat of a similar margin in the third quarter that we saw in the first quarter?

We hope so, yes.

Quite frankly, it's much less predictable than our other business.

But that has been the trend -- I mean, for the 30 years I've been here, it's been strong in the first and third quarter and weak in the winter and the summer.

(multiple speakers) that that's going to happen, yes.

Then can you just talk about some of the things that you might be doing to get that organic growth that's much higher than some of your larger competitors?

And then you obviously seem very confident that that's going to continue.

Does it seem like it's more competitive on the new business because the larger competitors aren't able to get as much organic growth, or is it your geographic exposure just benefiting you at this point?

Can you just talk a little bit about that?

We think it's just pure execution and it's something we constantly work on.

It's as competitive as it has always been, particularly in the national account arena.

As a matter of fact, our national accounts are behind last year's base, but the feet on the street has picked it up.

So I think it's just strong execution and with our street sales force.

And as I said, we continually -- we're upgrading the training programs, the people and holding them accountable.

We look for 40 face-to-face contacts from our sales rep on a week basis so they can get that eight or 10 presentations a week and a couple of closes out of that.

Mike Schneider.

In talking to a number of private companies in this space, it does sound like pricing has become more aggressive now as -- basically as employment has slowed.

Have you guys witnessed that and have you changed your pricing strategies at all?

We have not changed our pricing strategies at all, Michael.

I think again where we see the -- and go back to our Company, we are the street business company and that's been pretty consistent.

In the national account arena, the prices are competitive -- very competitive and very thin.

And since you've changed or at least eliminated the position of VP of Sales, I guess two questions.

Do you intend to fill it?

And two, if there was a disagreement over vision as you put in the press release, or the conference call last quarter, how has the vision changed, or what has changed in the sales strategy looking forward, Ron?

Well I think the -- we will replace the position, obviously, going forward.

I think the basic focus is more of a street focus versus the all the eggs in one basket national account arena.

I mean, we're going to play in that arena but maybe not to the extent that some of the other people may have liked.

Peter Carrillo.

Ron, another quick question for you.

Can you comment at all for us on what your position would be in terms of -- with respect to any kind of leveraged buyout or manager buyout that you might be approached by other people?

Oh, I'm sure our directors would look at anything seriously, but at this point, it's our intention to keep the Company going as it is.

The family aspect of it doesn't bother you at all?

It wouldn't necessarily have an emotional tie there to prevent you from doing it?

Well, there's an emotional tie.

It is my child.

(Operator Instructions).

Mr.

Bartlett, there are no further questions at this time.

I will turn the conference back over to you to continue with your presentation or closing remarks.

This is Ron.

I think the Company is having its second great successful year.

We're very confident in the remainder of the year, the efforts of our people and our sales force, and we're very comfortable with the projections that we're putting out there.

I thank you for the interest in the Company and we look forward to talking to you in the spring.

Have a great spring.

Ladies and gentlemen, the does conclude the conference call for today.

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

Have a great evening, everyone.