UniFirst Corp (UNF) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Fourth Quarter and Full Year Results 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).

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

John Bartlett, the Chief Financial Officer.

Please begin.

Thank you, and welcome to UniFirst Conference Call to review our operating results for fiscal year 2007 and to discuss our expectations going forward.

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

Joining me are Ronald Croatti, our UniFirst President and CEO and [Steven Cintros], our Corporate Controller.

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

Before we begin I'd like to give a brief disclaimer.

This conference call may contain forward-looking statements that reflect the companies current views with respect to future events and financial performance.

These forward-looking statements are subject to certain risks and uncertainties.

We are to 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.

And now with that behind us I'll turn the call over to Ron Croatti for his initial comments.

Thank you, John, and welcome to those who are joining us for this review of our fourth quarter and full fiscal year 2007 results.

Our numbers were released earlier today and I'm pleased to report that they showed another year of record revenues and record profits for our Company.

During the year, we experienced continued growth in various business units.

Expanded our service into new geographic areas, benefited from our targeted market selling programs, added new products to enhance the services we bring to our current customers and made organizational and operational improvements in a number of areas.

For the full year, revenues were a record $902.1 million, a 9.9% increase over last years $821 million.

Net income was $45.2 million or $2.34 per diluted common share, a 15.3% increase from the $39.2 million or $2.03 per diluted common share reported in fiscal 2006.

These results have revenues finishing ahead of our estimate, net income and earnings per share coming in right around the revised guidance we provided during the year.

Most of the revenue improvement resulted from a combination of internal growth, price increases, with acquisitions accounting for about 2.4%.

Core laundry operations saw a 9.2%, revenue increase over the previous year which demonstrates the solidity of our uniform rental business and even under slow growth economic conditions.

Our specialty garment business bounced back from last years revenue dip, showing an impressive 21.9% increase over fiscal 2006 results, and our first aid business delivered revenue growth of 5% with round sales and wholesale both contributing into the events.

For our core laundry business, income from operations was in line with net income growth; however, if we exclude some unanticipated expense items, income from operations would have grown approximately 15% and we will provide some additional focus on this in a few minutes.

During the year, this business area experienced a slight reduction in managing costs and somewhat lower payroll costs as a percentage of revenue.

These were partially offset by increased costs in our healthcare benefit areas.

For our Uni Tech business unit we saw operating income increase to $4.8 million from $400,000 last year.

Most of the resulting contributions from our European, Canadian and clean room operations.

Profits from our first aid units were down somewhat year to year due to continued consolidation cost resulting from the centralization of the operations.

For the fourth quarter, total company revenues were $227.5 million, and net income was $10.8 million.

Again, the income performance comparison was affected by certain adjustments made to insurance and environmental reserves in the comparable fiscal 2006 quarter.

We'll talk more about this in the financial details.

Our uniform business showed steady growth throughout the year.

Professional rep sales held up well, with slightly improving weekly sales averages reflecting a higher percentage of larger, newer comps in the overall sales mix.

We also benefited from the complete rollout of our sales force automation system which has helped our front line sellers be more efficient in their prospect contacts and has improved the overall territory management.

Group sales continue to trend up well, showing steady improvement in the addition of ancillary products and services at current accounts.

Our national account organization had a new business during the year and continued to do an excellent job of gaining contract renewals with recurring customers.

In addition the account management team showed improved performance in expanding services to current customers via the selling of additional product efforts.

The integration of the uniform suppliance -- supply alliance business acquired in April of 2006 was completed during the year and that helped to free up resources during the second half of the year to work on new growth opportunities.

The specialty garment business has benefited from a broader revenue base due to introduction of more diverse services.

Once focused exclusively on garment cleaning and decontamination, this business has gained balance for the addition of equipment and tool decontamination services as well as the direct sales in a wide range of safety products.

With revenue sources in a broader geographic scope, its reliance on a narrow user base and limited service applications has been reduced.

In the first aid area, expansion of our professional sales team and the implementation of new training programs is beginning to generate improved sales results for Green Guard cabinet service.

Similarly we're seeing expanded wholesale professional users market opportunities via our Proprietary (Meniquian) product line.

As we move into fiscal year 2008 we are guardedly optimistic about the business outlook.

There is definitely some uncertainty out there and it's likely that the record breaking oil prices, continued fall out from the mortgage market crisis will have an impact during the year; however consensus premiums seems to support continued slow economic growth in the order of 2.3% (inaudible) remaining under control.

In job growth, steady at the current rate.

The unemployment rate for September was essentially unchanged at 4.7, while new job creation actually increased slightly.

Though consumer confidence has slipped, consumer retail spending seems to be holding up.

At the same time, the Institute for Supply Management indications for manufacturing and unmanufacturing industries both showed positive numbers.

The manufacturing index shows the trend is toward slower but continued growth and the non-manufacturing index also points in a growth direction with eight of the thirteen industries being tracked indicating increased business activity in September.

However, in light of the current economic conditions, the higher energy prices, expected upward pressure on payroll and benefit costs and continued strong price competition in the marketplace, we approach fiscal year 2008 with appropriate caution, and we will be prepared to adjust our strategies and plans as necessary.

We will be carefully watching conditions as we move through the year and we will advice you of any changes we think warrant our financial estimates.

In the meantime we are ready for the challenge the year holds ahead for us and look forward to reporting to you on the company's progress in the quarters ahead.

Let me turn it over to our Corporate Controller, Steve Citro s for more details.

Thanks, Ron.

As Ron discussed fiscal, 2007 was a very good year for UniFirst.

We are pleased with the growth and results of our core laundry operation and the rebound of our specialty garments business which includes our nuclear and clean room operations.

Consolidated revenues for fiscal 2007 were a record $902.1 million, a 9.9% increase over the prior year.

Of this increase 7.5% arose from internal growth and price increases in the balance of 2.4% from acquisitions.

For the quarter ended August 25, 2007, revenues were $227.5 million, a 9.6% increase over the prior year.

Of this increase, 7.5% was internal growth and price increases in the balance of 2.1% was from acquisitions.

Fourth quarter net income was $10.8 million or $0.56 per diluted common share compared to 2006 when net income was $10.

6 million or $0.55 per diluted common share.

As we disclosed last year the company's earnings in the fourth quarter of fiscal 2006 were affected by certain adjustments made to insurance and environmental reserves which combined increased the companies income from operations and net income by approximately $1.3 million and $0 .8 respectively.

Excluding these adjustments, the company's net income increased from a pro forma $9.8 million in fourth quarter fiscal 2006 to $10.8 million for the fiscal 2007 or 10.6%.

Net income for the full year increased 15.3% to $45.2 million or $2.34 per diluted common share compared to $39.2 million or $2.03 per diluted common share for fiscal 2006.

The company's full year 2007 results were affected by severance expense as well as by adjustments made to the company's environmental reserves in the second quarter of fiscal 2007.

These combined the decrease the companies income from operations and net income by approximately $2.3 million and $1.

4 million, respectively.

Without these adjustments the companies diluted earnings per share for fiscal 2007 would have been $2.41.

The company's improved performance was primarily driven by strong results from our core laundry operation which includes our U.S.

and Canadian, rental and cleaning business , our garment manufacturing business and our distribution and corporate operations.

Income from operations from our core laundry operations increased from $19.0 million in the fourth quarter of fiscal 2006 to $20.4 million in 2007.

For the full year, income from operations increased from $71.

1 million in fiscal 2006 to $78 million in fiscal 2007.

Excluding the adjustments in the fourth quarter of fiscal 2006 and the second quarter of fiscal 2007 discussed earlier , income from operations increased 15.1% for both the quarterly and full year periods.

Also excluding these adjustments, the core laundry operations operating margin was 9.9% for both the quarterly and full year 2007 period as compared to 9.4% for both 2006 periods.

The growth in profits is primarily the result of strong revenue growth.

Revenues from the core laundry operations increased 8.6% in the fourth quarter of fiscal 2007 and 9.2% for the full year when compared to 2006.

Organic growth for the core laundry operations was 6.3 and 6.6% for the quarterly and full year period with the remaining growth coming from acquisitions.

The margin expansion from the full year primarily relates to lower energy costs and production payroll costs as a percentage of revenue.

Although the energy costs for the fourth quarter of fiscal 2007 were flat compared to fiscal 2006, the core laundry operations benefited from lower merchandise costs as a percentage of revenues in the fourth quarter of 2007.

These positives are partially offset by higher healthcare costs as a percentage of revenue primarily in the fourth quarter of 2007.

As anticipated the results of the operations for our specialty garments business had a significant improvement in fiscal 2007.

For the full year the revenues for this segment increased 21.9% from $51.6 million in fiscal 2006 to $62.9 million in fiscal 200.

And income from operations increased from $0.4 million to $4.8 million.

These results reflect the segments continued expansion in the Canadian and European Markets.

In the fourth quarter of fiscal 2007 the revenues for this segment increased 25.5% but the segment recorded a loss from operations of $0.7 million as compared to a loss of only $0.

1 million in last year's fourth quarter.

The larger loss from operations in the fourth quarter of fiscal 2007 is due to higher merchandise and payroll costs as a percentage of revenues as well as an inventory adjustment recorded by the segment's European operations.

The result of this segment continues to be cyclical, but we believe that our specialty garment business will continue to make a positive contribution to overall results and we'll have a favorable year-over-year impact in fiscal 2008.

For the fourth quarter of fiscal 2007 the revenues of our first aid segment increased 9.7% from $7.6 million to $8.3 million and for the full year they increased 5% from $30.3 million to $31.8 million.

The income from operations for this segment decreased in the fourth quarter from $1 million in 2006 to $0.5 million in 2007 and from $2.4 million for the full year in 2006 to $1.4 million in fiscal 2007.

This segment continues to make progress consolidating its operations.

During the year the segment incurred some one-time transition costs from relocating its distribution center in Chicago to its facility in Fort Myers, Florida.

Consolidated depreciation and amortization declined as a percentage of revenues from 5.5% from 5.4% for the full year and with 5.6% of revenues in both the fourth quarter of fiscal 2006 and 2007.

Net interest expense for the year increased $9.5 million -- increased from $9.5 million to $10.8 million for the full year but was $2.7 million in the fourth quarter for both fiscal 2006 and fiscal 2007.

The full year increase was due to higher average debt outstanding in fiscal 2007 as well as higher interest rates.

The provision for income taxes increased from 39.0% in fiscal 2006 to 38.5% in fiscal 2007.

On an ongoing basis we expect our income tax rate will be approximately 39%.

The financial position of UniFirst continues to be very strong.

Merchandise and services increased only slightly from $85.9 million at August of 2006 to $86.1 million at August of 2007.

his is a positive result which suggests that merchandise expense may be moderating.

As I mentioned earlier, merchandise amortization in the fourth quarter of fiscal 2007 decreased as a percentage of revenues compared to the fourth quarter 2006.

This was the only quarter that showed a positive year-over-year comparison with respect to merchandise amortization.

Net property and equipment increased 4.8% from $318.9 million at August of 2006 to $334.1 million at August of 2007.

During fiscal 2007, the company funded $54.7 million of capital expenditures which was in line with our revised expectation from last quarter's earnings call.

On a preliminary basis we anticipate capital spending will be approximately $50 million in fiscal 2008.

We also expended about $20 million on several acquisitions during fiscal 2007.

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

In addition, at the beginning of our Fiscal 2008 year, the Company completed the acquisition of Western Uniform and Towel Service.

This business had had its primary facility in Wichita, Kansas but served customers in Kansas as well as parts of Oklahoma.

We believe it is an excellent fit with our Company as it will expand our market share in Kansas City, Tulsa and Oklahoma City.

Looking forward, UniFirst will continue to aggressively pursue other acquisitions we believe will enhance our operations.

Total debt decreased from $210.5 million at August 2006 to $206 million at August of 2007 and total shareholders equity increased from $452.5 million at August 2006 to $497.3 million at August of 2007.

Total debt as a percentage of capital decreased to 29.3% at August of 2007 from 31.8% at August of 2006.

Finally, our preliminary guidance for fiscal 2008 is that revenues will be between $980 to $990 million and that income per diluted common share will be between $2.60 and $2.70.

We would like to call your attention to the fact that fiscal 2008 will be a 53 week year and these projections include an extra week of revenue and profits compared to fiscal 2007.

This extra week will fall in the company's fiscal second quarter.

This concludes our prepared remarks and we would now be pleased to answer any questions you

We'll turn it back to the operator to respond to the questions.

Thank you.

(OPERATOR INSTRUCTIONS).

Our first question comes from the line of Mike Fox with JP Morgan.

Please proceed with your question.

Good afternoon, guys.

I just had a few questions about the specialty in the first aid.

Can you give us an idea on a, the margin impact of the European writedown for the specialty business?

The margin impact?

Right.

Well I think we disclosed that the decrease -- the loss increase from what was $100,000 to about $700,00?

Yes.

I think, help me, Steve, I think about $300,000 of that was from Europe.

Yes, that's about a right number, Mike, related to the inventory write-off.

Okay and then looking out to the next 12 months, do you expect margins in those businesses to improve or can you give us an idea of what to expect there?

We believe that the specialty garments margins will improve a little bit in fiscal 2008 and we believe that the first aid will probably remain relatively constant.

And I don't think the first aid will have a significant impact on our expectations next year, but we think we're going to do a little bit better in the Uni Tech business.

Okay.

On a $5 million contribution this year, we think it's going to be better than that next year.

And it's going to be lumpy again.

It's not going to be smooth through the year.

Right.

Can you give us an idea of how the first quarter is kind of tracking and should we expect kind of a, the margin was pretty strong last year's first quarter.

Is that something we should expect?

We don't -- we haven't gotten any numbers for the first part of the year because we hold off until we finish our budget process, so we're going to get both months probably the end of this week or next week.

Preliminary indications of the first quarter is pretty strong.

Great.

Thanks a lot.

(OPERATOR INSTRUCTIONS).

Our next question comes from the line of Mike Schneider with Robert W.

Baird.

Please proceed with your question.

Good afternoon, guys.

How you doing, Mike?

Good, thank you.

First, maybe we can just start on specialty garments again.

The growth rate this year benefited obviously from I guess easy comparison but a number of new contract wins as well.

What is in the pipeline in terms of new contracts or projects, and then maybe just I know this is a long term question, but are you well positioned or still really the only bit a around somewhat could be the new nuclear projects coming three to five years out?

Well I'll take a crack at it.

I think, Mike, that we foresee some contracts, more further contracts coming out of Europe, and we're in the midst of putting in a plant in the UK, so we're getting some additional business out of the UK.

We have gotten one contract out of France.

We think that's a longer term prospect and eventually, three years down the road, five years down the road, we hope to be putting a site in France.

There's a lot of potential there.

As far as the future in the United States, we're watching hopefully the addition of nuclear power reactors in the U.S.

very closely, and we'll be right in there with the plant design people and so forth to make sure the laundry don't go in and that we become the provider.

So the boys are out there already working in those directions with those prospects.

Well, Rodney, for example, just a couple of the new plants are proposed down in Texas City, Texas and then in Baltimore as well but a couple reactors.

Does that require you to put new facilities on site there or are you able to service most of these regions?

We will -- we can service, Baltimore, we can service from (inaudible) Pennsylvania and that's not a problem.

In Texas we can haul it back to Morris or to Richland, but that's not a problem.

We do business with Texas currently.

I think it's actually going to Ontario, I believe.

Okay, and then on to the laundry business.

Now so the merchandise cost fell for the first time this year and that just, isn't that really just a mechanical function of the growth rate decelerating through the year?

Or is there something actually about the garment costs themselves that is falling as well?

No, I think it has some impact is from the new accounts and new business going in but I think it's really largely just a control by our operating people of how many garments they've put in for existing customers and you can really monitor that balance sheet to merchandise and service account.

I mean, that's just a future expense but whatever is sitting there on the balance sheet will be an expense over the next twelve to eighteen months, and as Steve pointed out in his presentation, that number is basically flat year-over-year, which means that we will have less as our revenues grow, we'll just have less merchandise expense to amortize against those revenues next year so it's really a very positive sign.

Okay, so you will enjoy that leverage in fiscal 08 now?

Yes, it is appears so, yes.

Okay, and then looking into 08 as well just margins in laundry.

Gas prices seem to be going higher with $91 crude.

What other expenses, be it labor, overhead, just the different buckets do you expect a meaningful change in 08 up or down?

Well I think our overall projection that we've put out reflects that we think that overall we can hold our margins about where they are.

We're not really budgeting, we're not projecting maybe a tenth of a percent of improvement in margins and I think from an overall standpoint, we're hopeful that we'll pick up a little bit in merchandise and we may lose a little bit in the energy costs and the labor costs.

Want to add to that, Ron?

No, that's good.

That's what we're budgeting.

Okay, and then I guess just in terms of the metrics for the laundry business, Ron, as I ask each quarter, can you walk through each of the components of growth?

I certainly can.

I guess this is probably going to be our last time, Mike.

Okay.

Since all of our competitors won't give them out.

On the new business side, for August, it was 15%, on the loss business side, it was 8.4%, the adds versus reductions matrix was a negative 1.4%, the price increase was a positive 1.3%, and that gives you your 6.5 true internal growth and we had a 2.7 acquisition bringing us to a total of 9.2.

Can you comment just on what are the inputs into that and I guess what's the opportunity in fiscal 08?

Well we certainly budget less, I could tell you that.

What are the inputs?

The inputs are long term company goals we're looking around that 6% - 6 5% number.

We don't seem to get there, we seem to continually get wacked competitively and again, we lose, of our loss business about 38% is going to competition, and about most of that is moving because of price.

Okay, and national accounts, now what percent of laundry does or the total company do national accounts account for now?

About 7.

Okay, and since you've had a change of sales management, have you -- have you tempered the focus and the growth in that business by raising your pricing expectations or has the growth there really I guess gone unimpeded?

I think my answer to you Mike is I think the feet on the street price, we've done a little better job on the pricing.

We measure that on a monthly basis on a multiple of investments, so we're doing a little better job in that.

Where we're seeing price deterioration is at the national account level.

Okay, and the organic growth though for the year of 6.5%, I don't know how you'd measure this but how much of that actually came from national accounts versus local accounts?

I don't have that number, Mike.

But is a majority of the growth coming out of national accounts just given their size or is that not a major factor ?

It's coming out of the street business.

Okay, and then capital spending, John?

The $50 million in 08 is down a bit sequentially.

Can you just explore where the money is going in fiscal 08?

Why don't I take that one, John.

Go ahead.

I could tell you, it's $12 million in trucks.

It's about $5 million on the computer systems.

We got two new plants going for about $16 million, we got the UK operation we think that's about other $7 million, and then we've got a couple of additions going on and it will make pretty much the difference there.

Okay.

I wouldn't be surprised if we go over that $50 million.

Yes, I would suspect we might pierce that a little bit.

Okay.

And just ongoing replacement of stuff that always goes in there.

Yes, you got $2 or $3 million of just routine replacement equipment.

Okay.

All right, great.

Thank you guys.

Okay, thanks, Mike.

[OPERATOR INSTRUCTIONS].

Our next question comes from the line of Leann Young with Citigroup.

Please proceed with your question.

Yes, thank you.

I just have a small detailed question.

Any guidance for tax rate or any unusual changes you see below the line within your 260 to 270?

I believe we said we thought that it would be 39%.

Okay, I'm sorry.

Other than that, no other unusual below the line adjustments.

Exactly, yes.

Thank you very much.

Our next question comes from the line of David Linn, with William Blair.

Please proceed with your question.

Hi, guys.

I think you might have addressed this and I apologize if you did but last quarter the organic growth rate slid a little bit to 5.5% and one of the reasons you guys articulated was some weakness that was blamed on four competitive account losses.

I was pleasantly surprised to see that organic growth rate tic up again.

Was that not a head wind this quarter?

How did you guys make up for that?

That's a good question.

How did we make up for it?

I guess the real answer is we had some nice installs over the last quarter that kind of made up for it.

Were those kind of just competitive wins or add-ons for existing accounts?

I would say honestly, it's a combination of competitive wins.

It's just our total selling effort.

(inaudible)

Okay.

And then if I can just maybe get a little bit more color, if I do kind of a quick and dirty projection on your 08 and I kind of put in some of your margin expectations, is that -- would I be close if you guys were looking for maybe an organic growth rate of 8% for the full year for core laundry and maybe 15% specialty garments?

Is that kind of in the ballpark what you guys are modeling for top line growth rate?

I think what we are really modeling, from an overall standpoint, the specialty doesn't have a significant impact on the overall numbers.

Where we think we're getting about 2% from the extra week, we have a 53 week versus a 52 week year, and we bought this company, Western Towel and Uniform really at the beginning of the year and we think that together with an acquisition we made later in the year will add probably another 2% just as a start, and then we're expecting around 5% plus a little bit for internal growth net everything else, and that's down a little bit what we've done this year because we think it's think it's going tough year.

I think the economy everyone knows how the economy is going so we're just not as optimistic about the internal growth, so on an overall standpoint, where we think we're going and whether we do specialty at 9% or at 12% isn't going to make much difference than the total number.

Okay, thanks for the color on that.

I appreciate it, guys.

Thanks.

(OPERATOR INSTRUCTIONS).

Our next question comes from the line of John Healy with FTN Midwest Securities.

Please proceed.

Good afternoon, guys.

Curious to know your thoughts on headcount expansion in 2008 for the core business.

Curious to know if you're planning on seeing significant increases there and how much of your growth is probably dependent on economic conditions?

You mean headcount within our own company?

Within the salesforce, I'm sorry.

Oh, the salesforce.

[LAUGHTER].

Well, we basically ramp up continually during the course of the year and we generally do that comiserate with our percentage of growth, so we basically will be ramping up that 4 to 5% in our headcount.

Okay, great.

And curious to know if you guys as you said you're anticipating this year to be a bit more difficult than last.

Have you seen your competitors begin to kind of act accordingly and maybe get more aggressive on new accounts or have you seen anything change in the competitive landscape?

Well I think I tried to say it earlier, John, is we've seen the wearer margin of adds versus reductions open up over the last quarter let's say, so that's got us a little concerned.

That's telling us that things are slowing and then I think the other thing basically as I said earlier, we've seen intense competition on the national account side.

Okay, great.

And just last question, are you guys beginning maybe 08 a tougher year, are you seeing more acquisition opportunities out there, maybe some of the regional or dependent guys feel like this might be the best time for them to sell and curious to see what your acquisition pipeline looks like and maybe the prices being asked out there?

Well, I don't think we're seeing more, John.

I think we've seen quite a few over the last twelve to eighteen months.

Unfortunately we're not seeing reduction in the prices they 're looking for, but I don't think overall I've seen much change in the last few months.

Okay, well great.

Thank you, guys.

(OPERATOR INSTRUCTIONS).

At this time I am showing no evidence of any further pending questions.

Well, I'd like to close it up.

I appreciate you coming to our webcast.

we are very confident in the New Year.

We think we will begin record revenues and record profits and we look forward to reporting back to you in the next 90 days.

Thanks for joining us and go Red Sox.

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.