UniFirst Corp (UNF) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the UniFirst Corporation first quarter earnings 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.

Steve [Cintros], Corporate Controller.

Please go ahead, Sir.

Thank you and welcome to UniFirst's conference call to review our operating results in the first quarter fiscal 2008 and to discuss our expectations going forward.

My name is Steven Cintros, and I am the Corporate Controller.

Joining me is Ronald Croatti, UniFirst's President and Chief Executive Officer.

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

Before I begin I would like to give a brief disclaimer.

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

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

The words anticipate, believe and other expressions that may 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.

Now I will turn the call over to Ronald Croatti for his comments.

Thank you, Steve, and I would like to welcome all of you who are joining us for this review for our first quarter, a fiscal period that produced record revenues and profits for our Company.

Steve will cover the details in a few minutes.

Let me start with a brief recap.

Revenues for the first quarter of fiscal 2008 were a record $247.3 million, an 11.2% increase over the $222.4 million in the same period a year ago.

The major upside influence came from growth in our Core Laundries, with these operatings showing a 12.5% increase.

Internal growth and price increases accounted for 8% of the laundries' operational increase.

Our Specialty Garments and First Aid business which showed solid revenue increases in last year's first quarter generated smaller increases in this year's first quarter.

Specialty Garments showed a 4/10 of a percent revenue increase as compared to the same period a year ago.

The UniTech business suffers from the effects of certain utility customers rescheduling planned shutdown period which are times when our garment cleaning and decontamination services are in prior demand -- primary demand, as well as for some delayed revenue flow from new account installations.

As we have noted several times in the past, this business is somewhat lumpy and it has a tendency to exhibit ups and downs.

While showing reliable growth over the long-term, so despite the flat interval we expect the unit to hit its revenue and profit targets for the full year.

Our First Aid business showed a 2.1% revenue growth as compared to the same period a year ago.

This was about what we anticipated, based on organizational operational changes we are making, particularly in regards to our Route Service operations.

We are also in the process of shifting the new business development focus of our Medique business to put more concentration on the institutional and wholesale distribution markets and we come placing greater emphasis on securing third-party private labeling contracts for our private -- Prestige Packaging operation.

The combination of these initiatives with the tactical shifts that entail absorbed considerable time and energy during the quarter and resulted in some temporary dilution of sales efforts.

Net income for the quarter was a record $16.5 million, a 19.9% increase from the $13.7 million reported in the first quarter last year.

Earnings per diluted common share were $0.85, as compared to last year's first quarter earnings per diluted common share of $0.71.

The Core Laundry business was the biggest contributive profit growth with results benefiting from lower merchandise amortization as a percentage of revenue.

Net income growth was also aided by lower effective tax rates in the quarter as compared to the same period a year ago.

Our Core Laundry Operations continue to drive the Company's growth and during the quarter we saw good results from both our professional sales and national account selling team.

Our programs in particular continue to benefit from the sales automation tools we have installed and experience better contact and closing ratios as a result.

Even though we've held the line on pricing during the quarter, the number of new accounts closed was up as compared to the same period a year ago.

Part of this was due to increased rep headcount and lower turnover and, also, a result from smarter and more efficient selling.

Average account size for new sales continues to trend up and our overall selling ratio held fairly steady against reflecting efficiency improvements in the selling process.

Rep weekly averages were up in all regions.

We saw good balance products in our new business.

Facility service products continued to grow in importance as a revenue category.

This category growth is further aided by the results from our route sales team, which did a good job of adding the same items as new or expanding services at our current customers.

One thing we did see in the quarter, however, was an increase in reductions over our ad matrix from current accounts, indicating that we are starting to experience some softening in employment and usage at current accounts.

While this doesn't necessarily raise a caution flag for the quarters ahead, it does support the fact the overall economic conditions have slipped since our last quarterly report.

That simply means there are uncertain times ahead which we've called for constant monitoring and careful management.

But most of the experts don't believe a recession is likely.

The consensus does point to economic growth of only about 2% for 2008.

That means the softening trend in the private sector jobs is likely to continue.

The latest report from the Bureau of Labor Statistics shows November unemployment unchanged at 4.7.

With slow economic growth and rising producer pricing, plus the ongoing triple whammy of higher oil prices, lack of credit availability, and slumping housing prices affecting consumers, we think both business and consumer confidence is likely to slip further.

That means that maintaining our first quarter revenue growth for the balance of the year may be a difficult task.

Still, difficult conditions are nothing new to us and we feel that all our business units are positioned to sustain momentum even in sluggish markets.

So barring a serious further deterioration of economic conditions, we remain optimistic that we can stay on track towards achieving our previous supply guidance targets.

In that spirit, we look forward to the challenges of the year will present and to be able to report our progress to you on each quarter ahead.

Now to fill you in on our financial detail, I will turn it back over to Steve.

Thanks Ron.

As Ron discussed we had a very strong start to fiscal 2008.

Consolidated revenues for the first quarter of 2008 were a record $247.3 million, an 11.2% increase over the first quarter of 2007.

First quarter net income was $16.5 million or $0.85 per diluted common share, compared to the first quarter of fiscal 2007 when net income was $13.7 million or $0.71 per diluted common share.

The Company's performance was primarily driven by strong results for our Core Laundry Operations, 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 grew 26.1% from $22 million in the first quarter of fiscal 2007 to $27.7 million in 2008.

As a percentage of revenues, income from operations from the Core Laundries increased from 11.1% in the first quarter of 2007 to 12.5% in the first quarter of 2008.

The growth and profits in the Core Laundry Operations is primarily the result of strong revenue growth.

Revenues from the Core Laundry Operations increased 12.5% in the first quarter of 2008.

8% of the growth was due to organic growth in price increases while 3.4% was due to acquisitions, primarily the acquisition of Western Uniform & Towel Service, which was completed in September 2007.

Fluctuations in the Canadian dollars exchange rate also accounted for 1.1% of the overall growth of the Core Laundry Operations.

The increased profit margin in the Core Laundry Operations primarily relates to lower merchandise cost as a percentage of revenues.

In addition, production in administrative payroll costs decreased as a percentage of revenues compared to the first quarter of fiscal 2007.

These positive cost comparisons were partially offset by higher selling and health care-related costs.

The first quarter revenues of our Specialty Garments business were up slightly from $17.2 million to $17.3 million.

However, the income from operations of this segment declined from $2.9 million to $2.1 million.

This decline is due to higher merchandise costs associated with a number of new customer installations.

In addition the Company's European operations were affected by a delay in a funding for a large decommissioning project.

Certain other costs were also higher than in the prior period, but nothing that we view as an indicator of longer term profitability concerns and we are still optimistic that the full performance of this -- the full year performance of this operating segment will contribute to both our overall revenue and profit growth.

For the first quarter of fiscal 2008, revenues from our First Aid segment increased 2.1% from $7.7 million to $7.9 million.

The income from operations for this segment, however, decreased from $0.6 million in 2007 to breakeven in fiscal 2008.

As Ron discussed, this segment is making operational and organizational changes which resulted in some additional cost and minor sales disruptions in the near-term.

In addition this segment's profitability decreased due to some income -- excuse me, some inventory write-offs as well as the sales mix that resulted in lower margin sales compared to the first quarter of fiscal 2007.

We continue to believe that over the long-term, this segment will be a valuable contributor to the Company's overall growth.

Consolidated depreciation and amortization was 5.2% of revenues for the first quarters of both fiscal 2008 and 2007 and net interest expense increased from $2.9 million in the first quarter of fiscal 2007 to $3 million in fiscal 2008 but was down slightly as a percentage of revenues.

The provision for income taxes decreased from 39.3% in the first quarter of 2007 to 38.5% in fiscal 2008.

On an ongoing basis we expect our income tax rate will be approximately 38.5% for the balance of fiscal 2008.

The financial position of UniFirst continues to be very strong.

Merchandise in service increased from $86.1 million at August of 2007 to $93 million at November of 2007.

This increase was primarily due to the acquisition of Western Uniform as well as increases in safety merchandise in service, primarily flame-resistant garments which continues to be a high-growth market for us.

Net property and equipment increased from $334.1 million at August of 2007 to $341.1 million at November of 2007, due to capital spending in the first quarter of $14.8 million.

We now anticipate capital spending will be approximately $55 million in fiscal 2008.

We also expended $36.6 million on acquisitions during the quarter -- first quarter of fiscal 2008, the largest being Western Uniform, which had its headquarters in Wichita, Kansas, and served customers throughout Kansas as well as parts of Oklahoma from a total of seven facilities.

We continue to work towards integrating Western Uniform's locations into UniFirst systems and processes.

As always, UniFirst will continue to aggressively pursue other acquisitions that we believe will enhance our operations.

Total debt increased from $206 million at August of 2007 to $234.5 million at November of 2007.

Total debt as a percentage of capital also increased to 31.2% at November 2007 from 29.3% at August of 2007.

These increases were primarily due to the acquisition of Western Uniform.

Looking ahead, despite uncertain economic conditions we feel the remainder of 2008 will produce solid results for UniFirst.

In our October call, we communicated that our preliminary guidance for fiscal 2008 is that revenues will be between $980 million and $990 million and net income per diluted common share will be between $2.60 and $2.70.

At this time, our guidance for the year remains unchanged.

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

This extra week will fall on the Company's second fiscal quarter.

This concludes our prepared remarks and we will now be pleased to answer any questions that you may have.

(OPERATOR INSTRUCTIONS).

David Lin with William Blair.

Good quarter.

Can you provide a little bit more color on the 140 basis point year-over-year gain in the Laundry operating margins?

I guess how much of it came from the reductions in merchandise amortization?

How much is coming from automation improvements at the Kentucky plant, roll-out of handhelds?

And how much can we expect this to continue out throughout the balance of the fiscal year?

I mean are we eventually going to see the merchandise amortization reductions start to, I guess, dissipate a little bit?

Yes, David, this is Steve.

I think the bulk of that improvement was from the merchandise cost.

There were some benefits with respect to production payroll and administrative payroll and, again, I think your reference is a good one to some of the automation.

But the bulk of it was from the merchandise.

Some of this trend, I think we would expect, will start to turn at some point during the year.

At what point it's unclear.

With the strong growth that we have, it is inevitable that garments will be going into service; and that will start to ratchet back up again.

That is kind of how things have gone over the last several years.

It kind of trends up and down and we are at a good point right now.

Now whether -- I don't think it will all go away during the year.

That really takes time for it to happen so we will probably maintain some of that benefit, but to what extent it is tough to put our finger on.

In addition, we anticipate that the fuel will become a little bit more of a factor as the year goes on.

It really didn't hurt us too much in the first quarter given our growth, but we expect that to continue to be an uphill battle as the year goes on.

Okay, and I guess what is energy as a percent of revenues right now?

Since you brought it up.

The fuel and natural gas together -- just getting that detail for you.

A little bit under 4%.

In the first quarter?

In the first quarter.

And then you guys mentioned that you are still expecting in the Specialty Garments division to hit your targets in fiscal '08.

Does that mean that you expect margins in Specialty Garments to be higher than the 7.6% achieved in fiscal 2007?

I think it would have to be for the remainder of the year to get to the point where we can obviously beat last year's numbers.

Some of the things that happened in the first quarter were some delay of certain work and I think certain onetime costs that we don't expect to be a trend.

So our management there is pretty confident that they can meet their budget goals.

I don't think we are quite as confident as they are, but we still think that they can meet and beat their overall numbers from last year.

I don't know, Ron, if you want to add anything.

I think that is totally right.

I think it centers back into the UK.

Their large decommissioning project started slightly and then the funding was held back and we expect that funding to come through and that revenue will pick us up and improve that margin we're doing in Europe.

Okay, and Ron, you mentioned the UK.

Are there any new developments with establishing a plant there?

We are in the process of working on it.

We are in the permitting process.

Okay, and then finally, just I was a little surprised that you didn't raise your guidance at all.

Is there any particular quarter that you are expecting a little bit more weakness than was originally thought?

Well, normally our second quarter is our weakest quarter.

The UniTech division is -- generally loses money during [their] quarter.

I think I tried to mention it in my comments.

We are seeing that shrinkage from our wearers increasing and that's a concern for us.

We just have to sell that much more to try to make that up.

(multiple speakers) we are a little cautious on that side.

Okay, and I guess you were a little cautious last quarter, but you seemed to over -- I guess power through it in the first quarter (multiple speakers).

We powered through it.

Exactly what happened.

We powered through it with a couple of good sales.

Okay, All right.

Thanks, guys .

Ashwin Shirvaikar with Citigroup.

Congratulations on a fabulous quarter.

The question I have is, first, to clarify, does your CapEx include the proposed -- the UK plant for UniTech that you talked about?

Yes it does.

It does.

So you do expect that to happen this fiscal year?

We hope so.

Okay, the new client in Specialty, was that all the decommissioning project basically?

Or is the new contract in Continental Europe as well?

It's a combination of three things.

It's a combination of the decommissioning and cleanup projects at the UK.

It's getting more reactor sites which we addressed in the UK.

British nuclear fuels.

And we are hoping that we can pick up a small contract once again in France.

That's what the boys are telling us that -- why they are still optimistic.

Okay, and I guess my last question is with regards to the First Aid business.

When do you expect the reorganization to be complete?

Well, I think we've taken the reorganization and moving the people around pretty much as under -- pretty much done.

It will be done by the end of the month.

It is developing the sales team and changing the concept of the way they were selling to get the growth going that we would like to get going and that will take a little longer.

That is going to take another six months at least.

Okay, so another six months of that and once that takes off if that happens what kind of margin should we expect in that -- ?

I think we should expect the growth to get near that 8% to 10% range and we would expect margins to return to where they were.

Maybe even a little better than where they were.

Okay, great.

Thank you.

Mike Schneider with Robert W.

Baird.

Happy new year, guys.

Ron, maybe you can just go back to a comment you said -- a couple of nice wins helped you power through the stock deterioration during the quarter.

By that did you mean you signed or installed a couple of big national accounts this quarter?

We have.

We got them installed.

We basically inked them last quarter, but we were able to take advantage of the revenue buildup this particular quarter.

And were they fully installed this quarter or will there be some incremental gain next quarter?

No, no.

They were pretty much fully installed this quarter.

Okay, and national accounts then as a percent of revenue now?

It must be running at 8%, 9% is that --?

You got it.

You are right there.

About that 8.5% range.

Okay, and [ad stops] to go back to that.

The monthly trend, did it actually deteriorate through the quarter?

It deteriorated through the quarter.

I know you follow those numbers.

We have seen a deterioration greater each month.

Okay, and how about since November?

What have you seen through December?

[I couldn't tell you.] December was not good.

And this week is probably going to be the worst week of the year for us.

People put -- don't lay off last two weeks of December and we expect a pretty good size hit this week.

(multiple speakers)

It's a concern of ours.

Again going back to our business we do a lot of street business; and a lot of that street business was related to the housing business.

You know the air conditioner, the plumber and so forth.

They are not replacing these people.

That's what we're seeing although our region 4, our Florida region is the hardest hit.

That's pretty unusual because usually that builds up this time of year with all the snowbirds going down there.

That region is hard hit for some reason.

So then in terms of your initiatives on the sales force, it sounds like things are unfolding as you would have hoped in terms of headcount increases, turnover being down etc.

How -- I guess I'm still perplexed as to how the -- how the organic growth at 8% was able to overcome the deterioration in the ad stops.

I presume new account sales must be running near 20% this quarter up from 15% last quarter?

Not quite.

We put through a pretty good price increase too at the -- probably near the end of September to compensate for the increase we saw coming in the fuel and oil.

So we made a pretty heavy adjustment in that and that helped us along.

And as you well know the sales organizations reported directly to me and I've been pounding sales like no tomorrow and we are getting the results.

And pricing now, historically the industry I guess ran somewhere just over 2%.

In the last three, five years you have been running at 1%.

Do you think you can re-achieve that 2% to 3% rate?

I can tell you we did better than 2% for the quarter.

Okay, and then the selling ratio you mentioned in the release that selling costs were higher but yet you made the comment in your prepared remarks that the selling ratio held flat during the quarter.

Can you reconcile those?

I imagine they are different numbers.

Well, I think we look at it two different ways.

We look at it as a percentage of sales and then we look at it as a multiple of new business that we write.

I think you heard me mention this numerous times, what our selling cost is and what our dressing cost is and we put those two together, we use that to basically look at our acquisition costs.

So I think what we're saying is as a percentage of revenue, the selling cost has gone up because our headcount has gone up and perhaps more management, but the better sales performance that we have been getting out of our people has lowered the ratio.

So for every $1.00 of business that we are writing, all-in is down slightly.

Okay, then on the merchandise cost it's been my experience, I don't know, following these companies for almost a decade now, that is, if organic growth is accelerating the merchandise cost as a percent of sales accelerates as well; and then vice versa, you get relief when organic growth is slowing down in the laundry division.

That didn't happen this quarter.

In fact we've seen it for the last several quarters that merchandise has been favorable for you because the organic growth rate has been decelerating.

This quarter it accelerated and yet it was still a boost.

Is there something unusual about the national accounts that were rolled out this quarter?

Is something unusual about the mix?

No, not really.

I think as long as you keep writing more and more new business that amortization rates can stay in line.

It's when you get less new business coming in the door that amortization rate climbs.

I think because there is a little bit of a lag as well, Mike, and I think that is partially why with our guidance we're being a little cautious.

Because like you said we are -- we had a good quarter writing new business and we don't expect that that margin benefit for the merchandise is going to be there all year especially to the extent that it was.

Okay, no, that's helpful.

That's all I've got for now.

Thank you, guys, and great quarter again.

I guess I should add you probably guys are wondering where John is.

Mr.

Bartlett is on vacation in Europe and he will be returning next week.

(OPERATOR INSTRUCTIONS) Mike Schneider.

Ron, just one final one.

You mentioned that facility service products are growing as a -- or growing in importance as a percent of revenue.

Do you have some of those breakouts now given that the division has been growing?

I don't think we've ever put those out.

All right, care to give us a ballpark?

You know as a percentage of revenue I think we are still strongest in the garment.

We are over 60% garment.

[Hartek Mehta].

Ron, I had a question.

You talked a little bit about the economy in Florida slowing and you talked about maybe ad stops weakening.

Is it all related to housing or have you seen other sectors slow as well on that's having an impact on that?

I really can't qualify it.

All I can tell you is some of the other companies have a larger national account footprint than we do and maybe it's more automobile related.

Maybe they are not seeing it.

Again we're the street business company.

We do a lot of business with the plumbers, the air-conditioning guys, the electricians and so forth down the line and we see that shrinkage happening in there.

I think the housing market in the Florida area, the trades down there are pretty well slowed.

We don't do much restaurant business.

Some of our competitors do and we don't -- we didn't get that pickup that we normally get when the snowbirds go to Florida.

We actually got shrinkage down there this year where normally we get a pickup.

The other thing you mentioned that I found interesting was you said you were able to push a pretty decent price increase through.

Is this just a normal price increase or was this -- because gas prices are going up, energy prices are going up and -- ?

I think we pushed something through because we saw stuff coming.

Gas going up and we wanted to get ahead of the curve.

You would think in this environment no attrition as a result or normal attrition?

Nothing out of the ordinary?

So far it's been normal.

But these things take time to react.

So to this point I would say it's normal.

Steve Balog with Cedar Creek Management.

Actually on that last point, I was curious about this price increase and what pushback or loss of clients you saw in that?

Does that show up right away when you go see somebody or does it take them a while, a couple months to -- for a contract to roll out then to look around for another vendor?

So when might we see the ripple effect on that?

I think it is basically a ripple effect.

We basically follow our rental agreements.

Our rental agreements are worded so that we can put more specialty charges on I guess you would call it; and we've implemented a higher specialty charge to anticipate the fuel going up, which it has, along with our normal price increases.

But also I think to answer your question I think it's hardest hit as far as customer push back right away, but there is a lag on it.

And we will see the effect of that over the next quarter or two but at a reduced rate.

Are these special charges unusual for you all because I was under the impression that one of your strategies was a simple bill and not a lot of nickel and diming on stuff?

Well, our basic strategy is a simple bill, but we anticipate gasoline going at $3.50 a gallon and our natural gas costs keep raising that we had to make a move and so be it really.

Okay, seen anything from competitors?

Are they following and everybody breathing a sigh of relief that somebody took the first step?

Or actually were you the first step or are you the second guy?

What's the competition look like?

I really can't answer that.

There are no further questions at this time.

I'll turn the call back to you, Sir.

Very good.

I certainly appreciate you following the Company and the interest in the Company and we look forward to talking to you next quarter and we are confident that we will hit our numbers for the year as we keep moving along.

We will keep the sales coming through the door and hopefully we can overcome this shrinkage problem that the country is experiencing with the economy.

Thank you much.

Ladies and gentlemen, that does conclude today's conference call.

We do appreciate your participation and ask that you please disconnect your lines.