UniFirst Corp (UNF) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

And welcome to the third quarter earnings conference call.

(OPERATOR INSTRUCTIONS).

Your speakers for today are Mr.

Ronald Croatti, Chief Executive Officer, and also Mr.

John Bartlett, Chief Financial Officer.

I would like now to turn the conference over to Mr.

John Bartlett.

Please go ahead, sir.

Thank you, and welcome to UniFirst's conference call to review our third 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 President and CEO.

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

Before I 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 on environmental matters.

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

Good afternoon.

I would like to welcome all of you who are joining us for the review of our third fiscal quarter, another period of record revenues for our Company.

John will cover the financial details in a few minutes, so let me begin with a general overview.

Revenues for the third quarter were a record $229.8 million, an 8.5% increase over the same quarter a year ago.

Revenues through three quarters of fiscal 2007 were $674.6 million, a 10% increase over a comparable period in fiscal 2006.

Internal growth rate and price increases accounted for 6.3 percentage points of the quarter's revenue increase, with acquisitions' revenues making up balance.

First Aid division revenues were up slightly quarter-to-quarter, but our Specialty Garments segment showed more than an 18% revenue increase.

Net income for the third quarter was $13.7 million, a 25.3% increase over the same quarter of fiscal year 2006.

Earnings per diluted common share for the quarter were $0.71 compared to last year's third quarter of $0.57.

And three quarters net income was $34.4 million or $1.78 per diluted common share, a 20.1% increase over last year's third quarter and income of $28.6 million or $1.48 per diluted common share.

Our nine-month earnings were affected by some unbudgeted expenses related to the departure of the Company's Senior Vice President of Sales and Marketing, as well as by adjustments made to our environmental reserves.

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

Without these adjustments, diluted earnings per share for the first nine months of fiscal 2007 would have been $1.85.

Income from operations for the Company overall was up 21.1% on a third quarter to third quarter comparison basis, and up 18.8% compared to the first three quarters of fiscal 2007 and with the same period of fiscal year 2006.

Excluding the two unbudgeted expenses I just mentioned, income from operations for the Company's Core Laundry business increased 13.8% and 15.1% in the third quarter and the nine-month period as compared to fiscal 2006.

These increases result from revenue growth of 8% and 9.4% in the third quarter and nine-month period, combined with somewhat lower operating costs.

We experienced reduced energy and production costs as a percent of revenue, though these were partially offset by higher merchandise costs.

Revenue growth in the Core Laundry was affected in the quarter by slightly higher combined lost accounts, and reductions over add numbers, and by a dip in our national accounts sales.

Our field sales performance was slightly better than last year, as new account sales by professional reps improved slightly (inaudible) from quarter and year-to-date.

With more reps on board and selling, our weekly dollar average suffered slightly versus '06.

Year-to-date rep turnover was slightly down as compared to fiscal 2006.

And rep work weeks were up, both (inaudible) positive performance indicators.

As I said, sales averages were off on a quarter-to-quarter basis slightly, largely due to lower employment, reduced service usage, and diminished sales responsiveness in certain of our traditional business areas.

To help counter that we have been shifting more rep activity to current growth industries and niche market applications and newer type of users.

Despite this report, the field continues to indicate a general stable selling environment, and this is supported by the broad market indicators.

Yet employment rate continues to hold steady at a 4.5% and overall payroll unemployment was up again in May.

The ISN Report on business indicates continued growth, but the manufacturing index at its highest level in 12 months were 12 and 14 nonmanufacturing industries reporting increased activities in May.

So we are optimistic that our new sales growth rate can be maintained through the fourth quarter.

Our capital expenditures remained on track, with spending running at budgeted levels on all projected plans.

With no additional demands, we expect full year spending will come in right around our original budget projections.

Consistent with past practice, we are constantly evaluating various acquisitions opportunity in our primary business areas.

We're active in pursuing good quality business that can aid growth, and permit us to aid our presently out-serviced geographic areas.

During the quarter we completed the acquisition of Rental Uniform in Fayetteville, North Carolina.

This acquisition provides increased penetration in a growth market where we already had a strong presence.

We have no other specifics to report at present.

We are exploring several additional opportunities.

I'm pleased with our year-to-date performance and look forward to our last quarter that will complement the record results we have seen through the first nine months.

Now to give you all the financial details, I would like to reintroduce John Bartlett, Chief Financial Officer.

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

Revenues for the 13 weeks ended May 26, 2007 were a record $229.8 million, an 8.5% increase over the prior year.

Of the 8.5% increase approximately 2.2% was from acquisitions, and the balance of 6.3% was from internal growth and price increases.

Revenues for the first nine months of fiscal 2007 were a record $674.6 million, a 10% increase over the prior year.

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

Looking at the results by segment, the income from operations in fiscal 2007 for our Core Laundry operations increased 13.8% from $18.8 million to $21.3 million for the third quarter, and 10.6% from $52.1 million to $57.6 million for the first nine months.

However, as Ron mentioned, the results for the nine months of fiscal 2007 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 nine months ended May 26, 2007 increased from $52.1 million to $59.9 million, or 15.1%.

Again excluding these amounts, income from operations as a percent of revenues for the Core Laundry Operations increased from 9.5% in the first nine months of fiscal 2006 to 9.9% in the first nine months of fiscal 2007.

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

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

The revenues for the Specialty Garments business, which includes our nuclear and clean room laundries, increased from $40 million to $48.8 million -- $48.4 million, I'm sorry -- or 20.9% for the first nine months of fiscal 2007, and from $15.5 million to $18.3 million or 18.2% for the third quarter.

The income from operations for this segment increased from $0.5 million in the first nine months of fiscal 2006 to $5.5 million in fiscal 2007.

We're very pleased with the improved profitability of this segment, and continue to be optimistic about its future results.

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

The revenues for the First Aid segment increased 3.4% from $22.7 million in the first nine months of fiscal 2006 to $23.4 million in the comparable period in fiscal 2007.

For the third quarter the revenues increased 1.1% from $8.2 million to $8.3 million.

Income from operations for this segment was $900,000 for the nine months ended in fiscal 2007, or $500,000 less than for the comparable period in 2006.

Income from operations for the third quarter fiscal 2007 increased $400,000 to $300,000 from the $700,000 profit in fiscal 2006.

These results were not unexpected, as this segment continues to consolidate its operations.

During the second quarter the Company closed the distribution center in Chicago and transfer the inventory to its new facility in Florida.

This transition has not only impacted some sales during the year, but resulted in some onetime costs.

Depreciation and amortization increased $2 million for the nine month period, from $32.7 million in fiscal 2006 to $35.7 million in fiscal 2007, and from -- and increased $800,000 from $11.5 million to $12.3 million for the third quarter.

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

The net results of the above factors was that our consolidated income from operations increased 18.8% or $10.1 million, from $53.9 million to $64.0 million for the nine months period, and 21.1% or $4.3 million from $20.3 million to $24.6 million for the third quarter period.

However, excluding the amounts arising from the previously noted executive severance and the increase in our environmental reserves, income from operations increased 23.1% from $52.9 million in fiscal 2006 to $66.2 million in fiscal 2007.

Net interest expense for the first nine months increased from $6.8 million to $8.1 million, and for the third quarter from $2.6 million to $2.8 million.

These increases were due to higher interest rates on the Company's variable interest rate debt, as well as slightly higher debt outstanding during the fiscal 2007 period.

The provision for income taxes was 38.5% for the first nine months of fiscal 2007 as compared to 39.1% in the same period in fiscal 2006.

For the 13 weeks ended in May of 2007 the income tax provision was 37.3% as compared to 38.5% in fiscal 2006.

The income tax provision in the second quarter of fiscal 2006 was increased by $300,000, and in the third quarter of fiscal 2007 was reduced by $400,000 to adjust for tax exposures assessed by the Company.

The Company anticipates the full year income tax rate will be approximately 38.5%.

Finally, net income for the first nine months of fiscal 2007 increased $5.8 million or 20.1% from $28.6 million or $1.48 per diluted common share to $34.4 million or $1.78 per diluted common share.

For the third quarter net income increased $2.8 million or 25.3% from $10.9 million or $0.57 per diluted common share to $13.7 million or $0.71 per diluted common share.

Without the adjustments previously discussed, the Company's diluted earnings per share for the first nine months would have been $1.85.

Overall we are pleased with results of operations for the first nine months 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 $36.5 million at August of 2006 to $39 million at May of 2007.

Merchandise and services decreased from $85.9 million at August of 2006 to $84.2 million at May of 2007.

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

Net property and equipment has increased 4.6% from $318.9 million at August of 2006 to $333.4 million since May of 2007.

During the first nine months of fiscal 2007 the Company funded $43.1 million of capital expenditures.

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

We now believe these expenditures will be approximately $55 million for the full year.

We expended about $23.1 million on several acquisitions.

The largest acquisition was Rental Uniform in Fayetteville, North Carolina, which complements our existing operations in this market, and will provide increased route density in this desirable market.

None of the other acquisitions were significant in size.

Total debt has increased slightly from $210.5 million at August of 2006 to $218.1 million at May of 2007.

And total shareholders equity increased from $452.5 million at August of 2006 to $488 million at May of 2007.

Total debt as a percent of capital is 30.59% at May of 2007, a slight reduction from the 31.8% at August of 2006.

Looking ahead, we are optimistic about the final quarter of 2007.

In our March 2007 conference call we provided guidance that our full year revenues would be between $890 million and $895 million, and diluted income per common share would be between $2.25 and $2.30 per share.

We now believe that revenues for the full year will be between $895 million and $900 million, and that our diluted income per common share will be between $2.30 and $2.35 per share.

These amounts include the $0.07 per share of adjustments recorded in the second quarter fiscal 2007 relating to severance expense and to increase the Company's environmental reserves.

In providing these estimates for the full fiscal 2007 year, we would like to remind those of you who follow our quarterly results closely that in our 2006 year-end press release we noted that certain adjustments made to insurance and environmental reserves in the fourth quarter of 2006 had the impact of increasing our results of operations by approximately $0.04 per share.

In addition, our First Aid business had income from operations of $1 million in the fourth quarter of fiscal 2006, which we do not expect to duplicate in the fourth quarter of 2007.

That completes our prepared remarks.

We will now open the call to any questions you may have.

(OPERATOR INSTRUCTIONS).

Mike Fox.

Congratulations on the quarter.

Can you talk at all about the organic growth in the core business?

It was down a little bit from the prior quarter, but still pretty strong.

I was wondering if you can talk about the outlook for that, and whether or not the industry is more or less competitive than it normally is, or what type of environment you're in in that regard?

This is Ron.

I think what we have seen in the last quarter, we have seen a slight softness.

The salesforce sold slightly more about what we expected.

Our lost accounts were up in the quarter.

which affected the revenue growth, and we have seen an increase in adds versus reductions for the quarter inside the traditional customers we service.

I think what we're trying to say with our forecast, we think that our sales performance for the fourth quarter will be relatively consistent with what we did in the third quarter.

Then with regard to add stops were they -- did they turn positive in the quarter?

No, they were negative.

They have been negative, I have said this numerous times.

In my 40 years with the business I have never seen add stops were as positive.

But they were a little bit better this quarter than last quarter's?

No, they were a little worse.

Worse, okay.

They were worse.

Mike Schneider.

Ron, maybe we can run through just the components of the growth in the quarter, performance around the topic of add stops.

We can can do that for you.

Our new business was about 15.1, down slightly from what it was the previous quarter.

Our lost business was up.

It is at 8.4.

Our adds versus reductions was up at 1.3.

Pricing was relatively flat quarter-to-quarter, 1.3, giving us a net of 6.7.

The acquisitions made the difference.

Just to clarify that, that is our best estimate of the year-to-date number, that isn't really the quarter, that is our best estimate of the year-to-date.

Do you have just Q3 to see what the trend was?

We really quite frankly make our best estimate of these based on -- as you know, it is very difficult to calculate numbers from the way we keep our books, and so we're trying to give our best estimate of what we think is --.

But new business having at least year-to-date moved to about 20 basis points lower means that there was probably a material shift or decline in that new business rate.

Ron, is there anything to explain?

Is it sales headcount being lower year-over-year, or is it all productivity, or is there something about the pricing environment that has changed?

I think it is two things.

Number one, I mentioned that the street salesforce was almost flat, slightly improved.

The national account salesforce was off.

We have seen increased competition in the national account arena.

And then we have lost some significant accounts in the quarter to competition.

Have you changed your pricing strategy on national accounts?

I know you have been aggressive on price as you're building that business.

Have you changed that and that might explain why absolute dollars are lower?

I don't think I really changed it.

I think it is performance.

You think it is performance.

Okay.

And the loss of the significant accounts, what do you read into that?

And it is it the typical culprit we have talked about?

I think we have lost to all the majors, four significant accounts.

You say four?

Yes.

Okay.

But do you read anything into that competitive environment, or is it just coincidence all of four occurred this quarter?

I don't really know.

I really don't know.

I really can't answer that.

John, so year-to-date -- well, can we focus on Q3, John?

What was organic growth in the laundry business this quarter?

I guess I am confused on the numbers.

I read different things in the press release and then what you stated on the call.

Just for the laundries?

Yes.

The growth for the laundries is 8% overall.

And of that about 2.5 was from price increase and 5.5 was organic.

The acquisition in the quarter, did I hear you correctly, you spent $21.3 million in the quarter?

No, that's year-to-date I think.

Year-to-date, okay.

I guess can you comment on the number (multiple speakers)?

$23.1 million, wasn't it?

Yes, $23.1 million year-to-date.

I think I might have had a bad number actually.

$23.1 million for that.

Ron, the pipeline of acquisitions today given that the environment is slowing down have you seen more or less properties being shown to you?

I think there is more properties going on right now.

The prices are up there, but there seems to be a lot of properties out there right now.

Then as you look into '08 now, now that we're starting to talk about this I suppose as we get close, Ron, tell me the dynamics I guess you would expect to play out in 2008, both organic growth in laundry, and then in particular margins in laundry as well, and how you would lay out the plan for fiscal 2008?

I think our strategic plan is obviously we would like to certainly try to keep that growth rate relatively consistent.

As I have said numerous times, our operations are like on a bell curve.

We have some that are exceptionally profitable or highly profitable, and then we have a bunch in the middle.

And we have some that we don't do so well, and we're constantly working on the ones that we don't do so well.

We're just going into our first budget tomorrow.

Until we pull everything together, it is tough to say.

But we look to continue the growth and improve the profits.

What initiatives will you or do you have planned for fiscal '08 on the operations, Ron?

Because it looks like you're taking some actions in First Aid, anything new or significant to occur in the coming 12 months within laundries?

Not really.

Not really.

Do you anticipate building anything in fiscal '08?

We have six additions that we would like to do.

We have two new plants.

Whether we will get the permitting is questionable.

And we just purchased a building, or will purchase a building, within the week for the Nuclear division in Europe.

So we've got a lot going on.

In fact, on the nuclear topic, can you give us a sense now with the renewed interest globally in nuclear power, and certainly the number of plants in Asia, talk about the European plants and what you have at least in the pipeline of projects there?

And then what else is on the docket say for the next 24 months within nuclear?

We see -- we don't have the contracts in our hand yet, but we are working France very hard.

We hope to be able to penetrate that France market.

We have one test outage we're doing.

If the boys will deliver me a contract, hopefully we will put a site in France sometime in '08, and maybe early '09.

That is really our driving focus.

One we are putting in the UK, we have a good portion of that work, and we're taking it to Holland.

But when the plant goes in we will pick up about another 40% is what I am told.

So it will keep that plant pretty well going.

And then the boys would like to get a third plant in '09 in Canada.

And we really haven't been to the Far East yet.

We figured we would go with France where there is a lot of reactors and a lot of activity or so.

But I would say in '09 the boys will be exploring.

Just one clarification on the headcount.

Ron, you mentioned national accounts are down.

The street force is flat.

But do you mean in headcount or in sales?

Sales.

Okay.

And where does the headcount stand today, and I guess whether your expectations now?

The headcount will move up commiserate with the volume.

Is it up today commiserate with the volume or have you --?

Yes.

But yet rep turnover is down.

Rep turnover is down, and the productivity number is down slightly because the headcount is up.

And as those guys are coming online, it kind of pulls that average down a little bit.

Got it.

And you made some cursory comment about sales responsiveness being tough in the quarter.

What did you mean there?

That came back from the field that some of the businesses in our traditional segments are slowing down their spending.

I don't know how valid that is, but that came out of two or three areas.

And the traditional businesses being automotive, manufacturing?

That's correct.

And anything else?

And housing, in housing support.

We do a lot of plumbers, electricians, dealerships and -- you know, the wheel industry.

Then just finally on the guidance.

The results for the quarter were basically $0.07 better than expected.

You raised the range by $0.05.

I guess I wonder why wouldn't you raise it by the full amount, or are we just talking rounding at this point?

I think we're just rounding, and we just want to caution that the fourth quarter of fiscal 2006 was actually a little stronger in some areas, and so you can't just take that number and add 10% or something to it.

Yes.

We're saying you've got to subtract a little bit in 2006 and then add.

(OPERATOR INSTRUCTIONS).

[David Linn].

Congratulations on a good quarter.

Can you tell me what regions of the country are you experiencing the strongest and then the slowest growth in the Core Laundry business?

Are you guys still seeing a little softness in the Northeast up there?

Yes, we are seeing a little softness in the Northeast, and we are seeing a little softness in the -- what we call the Midwest.

It may not necessarily be the Midwest, but the Michigan and Chicago and Ohio area.

Your area.

The heartland.

The heartland, okay.

And then what about some of the better performing areas, regions?

We've got to say that oil patch is doing well, very well -- that Texas, New Mexico area is doing very well.

Then as you guys go through for the First Aid business, as you guys continue to consolidate that, what is the strategy for growing that business in 2008?

The basic strategy is once we get it consolidated and under all one roof, and we hopefully recoup the orders that we have lost on the [pill] manufacturing and the dig sites (multiple speakers).

But just growing that business, is that organic or are there, I guess, small players out there can be bought?

And if so --?

We are always looking to buy van businesses to expand our van presence.

Okay.

And are you guys generally seeing pretty healthy multiples on that side as well, like uniforms?

Not as high.

Not as high.

Then just one housekeeping item on modeling.

John, for all the onetime gains and losses that were recorded in the second quarter of this year and then the fourth quarter of last year, now that you guys break out the components for Core Laundry and Specialty Garments and First Aid, how can we -- since there is no corporate expense line item, can we just back that out of the Core Laundry business -- all of it?

That is what I would do if you want to make it adjustments.

You guys were getting kind of caught up when we started adjusting the recorded numbers, so we --.

But yes, I think unless we specifically identify something with either First Aid or Specialty Garments, Core Laundry is where it is appropriate (inaudible).

And most things would go there anyway.

Pete Carrillo.

I may have missed something here on your organic growth numbers you gave earlier.

Did you say in the areas of Specialty Garments how much of that was organic and how much was overall growth?

For the Core Laundries the growth in the quarter was 8%, and of that 5.5 was internal growth and price increases and 2.5 was price increase.

For the combined Company I think it was 6.3 and 2.2 were the numbers.

Then for First Aid, I assume none of that was acquisitions, just pure -- just 1.1% organic?

That's correct.

Yes.

How much was Specialty Garments?

Was there any kind of acquisition?

There was no acquisitions in Specialty Garments.

Mr.

Bartlett, there are no further questions at this time.

I would like to turn the conference back to you for your presentation or closing remarks.

This is Ron.

I certainly appreciate everybody's interest in the Company.

We are fairly confident of where we are, and where we think we will be for the year grade.

We're looking forward to a better '08.

And I think you for the interest in the Company.

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

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