UniFirst Corp (UNF) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the third-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 call over to John Bartlett, Chief Financial Officer.

Please go ahead, sir.

Thank you and welcome to UniFirst's conference call to review our third-quarter operating results for fiscal 2008 and to discuss our expectations going forward.

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

Joining me is Ronald Croatti, UniFirst's President and CEO, and Steve Sintros, our Corporate Controller.

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

Today, we released our results for the third quarter and first nine months of fiscal 2008, which ended on May 31, 2008.

Our net income for the third quarter increased 23.8% from the amount earned in the third quarter of last year.

The increase is due to the improved performance from our core laundry operations and in simple terms resulted primarily from the fact that our strong revenue growth was accompanied by tight cost controls, which increased our operating margin from 10.5% in the third quarter of fiscal 2007 to 12.3% this year.

We are pleased that our focus to increase our operating margins is yielding results, particularly at locations performing below our standards.

Now, before I turn the call over to Ron Croatti and Steve Sintros for more details, 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 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 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 third-quarter and first nine months' fiscal results for fiscal 2008.

Steve will get into the details in a few minutes, but I will begin with a brief recap.

We are very pleased to report our best third-quarter and first-three-quarter performance for revenue and profits in the Company history.

Revenues for the quarter were a record $254.6 million, and for the first three quarters they were a record $772.2 million.

This represents a 10.8% increase for the quarter compared to $229.8 million in the third quarter of last year and a 14.5% increase for the first three quarters compared to the $674.6 million posted for the comparable period in fiscal 2007.

The primary contributors to these results continue to be our core laundry operations, which have sustained strong performance throughout the year, and our specialty garment business unit also aided in revenue growth.

Net income for the third quarter was $16.9 million, a 23.8% increase over the $13.7 million recorded in the third quarter of fiscal 2007.

Net income for the first nine months of fiscal 2008 was a record $48.7 million, a 41.6% increase over the $34.4 million reported in the comparable period last year.

Again, laundry operations led the way, showing solid profit increases both for the quarter and for the nine-month period.

Similar to last quarter, profits were aided by a combination of lower merchandise costs; lower payroll costs as a percent of total revenues; and the fact that we booked an additional week's results for the first nine months, 40 weeks in fiscal 2008 versus 39 weeks in fiscal 2007, obviously helped bolster both revenues and profits.

The slowness which we have had and increased impact on the economy from the beginning of our fiscal year finally caught up with us a bit in the third quarter as we saw professional weekly averages for new sales slip behind the previous quarters.

Even so, due to an increase in total rep work weeks, overall new sales results continue to move ahead.

Sales turnover reversed its downward trend from the previous quarter and ticked up slightly, due largely to the effects of tougher selling conditions and the greater difficulty for lower-performing reps to sustain minimum standards.

Selling expenses as a percent of revenue continue to increase slightly, but pricing on new sales held very steady.

In light of the economic uncertainty, buyers continue to show some reluctance in committing to new programs.

But our sales promotions to current customers continued to provide revenue increases from the previous year.

And our national account sales team delivered above-budget results.

There is no question the economy is having an impact on our business and making it more difficult to retain customers, control our [ads over] reduction metrics, and sell new accounts at both the local and national level.

In light of all that, we're gratified we were able to sustain such solid numbers through the first nine months.

And though we don't expect conditions to ease, we think the momentum we have built will carry us through to the year end.

The general economic outlook calls for subpar growth, with weakness continuing in consumer spending, residential investment and capital spending by business.

The government stimulus checks may help a bit, but most experts are predicting that the resulting spending will be concentrated on core needs and personal debt reduction, not on the purchase of discretionary items that traditionally have a greater impact on the economic growth.

Even though business inventories are already extremely weak, they're expected to decline further over the next couple of quarters.

Overall business profits are expected to shrink, oil prices to remain high, credit markets to continue unsettled, and the dollar's relative value to remain low.

As if to emphasize the economic weakness, the Dow slipped to a bear market territory, off more than 20% from its high in October of last year.

In short, the outlook calls for continued caution.

The Institute for Supply Management May index for nonmanufacturing industries came in at 51.7, indicating service sector expansion for the second consecutive month.

Indeed, 13 nonmanufacturing industries reported growth in May.

But the ISM manufacturing index was reported at 49.6 and held below the 50% mark, indicating sector contraction for the fourth consecutive month.

The unemployment rate rose to 5.5, up a half a percentage point, and the number of unemployed persons increased by over 850,000.

Only healthcare and food services showed any significant employment increase.

The combination of job losses, low consumer confidence and the desire by business buyers to hold the line on new expenses are all negative factors that will likely affect us over the next three months into fiscal 2009.

As we already noted, we've seen an ongoing increase in our wearer reduction numbers, and we expect that trend to continue.

Combined with the continued challenge of sales conditions, we believe some slowdown in revenues and profit growth is likely, but with the impact being mostly felt in the first quarter of our next fiscal year and beyond.

Like everyone else, we're astonished at the almost weekly increases we're seeing in fuel costs, up over 50% from a year ago, and are struggling with the additional price increases on everything from soap and chemicals to fabric and wire hangers.

We will do our best to offset some of the impact from these price increases, but part will have to be absorbed by operations, and that will be putting additional pressure on our bottom line.

As I said at the start, we're very pleased with the performance year to date that is resulting from adherence to our strategic plan, maintenance of our tight operating controls, quick adjustments to changing market conditions, and the absolute dedication and continued hard work of all our team partners.

These factors have been effective in guiding us through three successful quarters, and it is what we'll rely on to carry through the balance of the year.

So though we expect tough economic conditions and a challenging market environment, we will prevail.

We will continue to be optimistic about the results we will be able to achieve for the full year.

Now to fill you in on the financial details for the third quarter and first nine months, I would like to turn back over to Steve.

Thanks, Ron.

As Ron and John discussed, we're excited to report revenues and profits that are the best we have ever achieved for the third-quarter and nine-month periods.

Revenues were $254.6 million and $772.2 million for the third quarter and first nine months of 2008.

This represents increases of 10.8% and 14.5%, respectively.

As we have discussed in prior calls, fiscal 2008 is a 53-week year for the Company.

The extra week fell in the second fiscal quarter and account for approximately 2.9 percentage points of year-to-year revenue growth for the first nine months.

Third-quarter net income increased 23.8% to $16.9 million or $0.87 per diluted common share from last year's third-quarter net income of $13.7 million or $0.71 per share.

Net income for the first nine months of 2008 increased 41.6% to $48.7 million or $2.52 per diluted common share from $34.4 million or $1.78 per share in 2007.

As a reminder, our nine-month earnings in fiscal 2007 were affected by severance expense, as well as adjustments made to our environmental reserves.

These adjustments combined to decrease our income from operations and net income by approximately $2.3 million and $1.4 million, respectively.

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

The increase in earnings continues to be due to strong revenue growth as well as higher operating margins in our core laundry business, which makes up approximately 90% of our consolidated results.

Core laundry revenues increased 11.5% and 15.0% for the quarterly and nine-month periods compared to fiscal 2007.

Core laundry organic revenue growth, which excludes the effect of the extra week, acquisitions and fluctuations in the Canadian exchange rate, was 7.8% for both the quarterly and nine-month periods.

The core laundry's operating margin increased from 10.5% in the third quarter of 2007 to 12.3% in the third quarter of 2008.

The 2008 year-to-date operating margin was 11.9%, which is up from a pro forma operating margin of 9.9% in 2007 after adjusting for the impact of the severance and environmental charges discussed earlier.

The improvement in the third-quarter margin is consistent with the first two quarters of this year and is related primarily to lower merchandise amortization, as well as lower payroll and payroll-related costs as a percentage of revenues.

The negative impact of fuel costs associated with our fleet of delivery vehicles continued to accelerate during the third quarter and partially offset these benefits.

The third-quarter and year-to-date revenues of our Specialty Garments segment were up 11.7% and 13.2%, respectively.

However, income from operations decreased from $3 million in the third quarter of 2007 to $1.9 million in 2008 and from $5.5 million in the first nine months of 2007 to $4.4 million in 2008.

As we discussed last quarter, much of this segment's growth has come from direct sales, which have been less profitable than incremental service business.

In addition, overall costs for this segment have increased as a percentage of revenues due to higher energy, payroll, and other production- and delivery-related costs.

Revenues from our first aid segment fell 9.5% to $7.5 million in the third quarter of 2008 and have been relatively flat year to date, excluding the effect of the extra week.

Income from operations for both the quarterly and year-to-date periods are down as well.

This segment has faced increased competition in the challenging economic landscape that has caused new sales to slow, customer losses to increase and margins to be squeezed.

In addition, the decline in third-quarter revenues is partially due to a product line that was discontinued in the second quarter of fiscal 2008.

We continue to invest in the training and reorganization of this segment's salesforce with a focus on reversing these trends.

Our overall results were also impacted by lower interest expense in both the quarterly and year-to-date periods due to lower interest rates affecting our variable-rate debt.

Our effective tax rate was 39.1% in the third quarter of 2008 compared to 37.3% in the comparable 2007 quarter.

The variability in the quarterly rate relates to changes in state tax legislation, as well as adjustments made to the Company's reserve for tax exposures.

The year-to-date effective rate was up slightly from 38.5% in 2007 to 38.7% in 2008.

We expect our effective tax rate to be approximately 39% on an ongoing basis.

Turning to the balance sheet, we had merchandise in service of $91.7 million at the end of our third quarter, which represents a $5.5 million increase from year end.

This increase is primarily the result of acquisitions, as well as strong new sales of our flame-resistant and other protective apparel.

Overall, however, our merchandise levels have increased at a rate much lower than our revenue growth, which has clearly led to the lower merchandise amortization discussed earlier.

One factor affecting our merchandise is the decrease in wearer levels of our existing customer base.

Although this is not a positive overall trend, we have shown over the years that during higher periods of unemployment, we were often able to achieve better overall garment utilization by deploying the used garments we received back from customers.

We continue to invest in our infrastructure, with capital spending totaling $50.5 million for the first nine months of 2008, and we anticipate capital spending to finish the year between $60 million and $65 million.

During the first nine months of 2008, we also spent a total of $51.1 million on acquisitions.

In May 2008, we closed on the acquisition of Quality Linen & Towel Supply Co.

in Salt Lake City, Utah.

Quality Linen, along with Western Uniform, which was acquired in the first quarter, have expanded our presence in two attractive markets.

As always, we continue to be active in pursuing acquisitions which we believe will fit our long-term growth and margin expansion strategy.

Total debt increased from $206 million at year end to $236.4 million as of the end of our third quarter.

Total debt as a percentage of capital also increased slightly to 30.1% at the end of the third quarter from 29.3% at year end, due to the increase in debt used to fund acquisitions of Western Uniform and Quality Linen.

Heading into the fourth quarter, we now expect that our fiscal 2008 revenues for the full year will be between $1.015 billion and $1.025 billion, and our diluted earnings per common share will be between $3.15 and $3.20.

We're very pleased with the results we have delivered thus far this year and the progress we have made expanding our margins despite challenging economic conditions.

We look forward to closing out a record-breaking year for the Company and providing you with some insight towards what promises to be a challenging 2009 when we meet again for our fourth-quarter earnings release in the fall.

This concludes our prepared remarks, and I will now turn the call back over to the operator to facilitate any questions that you may have.

(OPERATOR INSTRUCTIONS).

John Healy, FTN Midwest Securities.

Question -- you guys continue to post better organic growth rates than your public peers, and your margins continue to show a really nice pickup despite the more challenging cost environment.

When you look at how you're managing the business today, is there any difference in how you're, say, managing it today compared to a year ago, and maybe any ways you see how you're managing the business and you're able to achieve these successes that your competitor -- is different than how your competitors are managing their business?

I don't think so, John.

I think it's just that we've been focusing on a lot of operations and on the sales side, and the automation of the salesforce has helped us, and that has really driven a lot of the growth.

I think as far as the structuring, we've made some minor changes of responsibilities for the sales, and certainly back at the Regional Vice President level, and then the corporate people are more in a support role.

But that is really the only structural change we have made.

I think the margin has improved because of our focus on a couple of the operations that weren't doing well.

Great.

Well, you guys are doing a great job.

And then when you guys look at 2009 and you look at the challenging environment, in your past experience with the industry, I was hoping to just get your thoughts on how you see this slowdown compared to slowdowns we see in the past, maybe your thoughts on maybe how it compares or maybe how it's maybe dissimilar to what we have seen in the past?

This is Ron again.

About an hour ago, I went and got some numbers.

And the wearer numbers we're forecasting to basically be at the 2002 and 2003 levels.

So at this point, we're saying it is going to be comparable.

It is that type of slowdown, as far as we're concerned.

And just lastly, you guys talk about acquisitions.

Just your thoughts there on what type of opportunities you are seeing, maybe -- are you seeing more small operators saying, hey, the business is getting tougher.

We don't want to deal with this downturn.

Are you seeing more opportunities than you have seen in the past?

And how does the competitive environment look for those acquisitions?

I think we mentioned this in our last call.

I think we've seen more businesses basically looking to be divested in the last six months.

And I think that is driven by two things.

It is always driven by people and their estate issues, and I think the people are looking at the tax law changes that are forthcoming with the new Democratic presidency and Congress that may impair them.

So I think that's what's driving it, and I think we've seen both midsize and small companies at this point.

Andrea Wirth, Robert Baird.

Great quarter.

Just want to still focus a little bit more on the operating margins.

Obviously, you're posting some phenomenal numbers there.

It really sounds like the fuel wasn't as much of an issue this quarter.

I guess maybe talk a little bit about what you expect the impact to be heading into the fiscal fourth quarter and your ability to really keep offsetting that with lower merchandise costs and lower payroll costs.

The fuel, I guess I wouldn't say the fuel wasn't as much of an issue in the quarter.

It actually -- it definitely was a bigger issue than it has been in the last two quarters, obviously, given the fuel -- the levels.

Between natural gas and fuel for the trucks, that hurt our margin about 0.9 points for the quarter, which is up from about 0.5 points last quarter and a little -- only about 0.1 points in the first quarter.

So it has definitely been hurting us more as the year has gone along, but the benefits related to the merchandise and the payroll have more than offset it at this point and continue to keep our margin growth pretty constant throughout the year.

So we do expect that number that I gave you, the 0.9 points, to continue to accelerate.

To what point, it's difficult to project, obviously.

I think the key is going to be to keep those other positive factors as much as possible, and that is really going to be tied to our sales and our revenue growth.

Sure.

And I guess just on the merchandise costs specifically, is there ability to continue to improve that even further from where you are at, or you kind of have -- have you hit a plateau as far as the amount of benefit you're getting from the efficiencies there?

I think it is hard to say, Andrea.

I think Steve mentioned in his comments that the merchandise and service on our balance sheet has grown at a slightly lower rate than our revenue.

And that is a good sign that we have just less merchandise to amortize as we go forward.

So I think that is a key number to look at.

If that number is growing faster than our revenues, that means we will have more expense to absorb as we go forward.

So I guess at this point, I don't think there is going to be a lot of future benefit, but I don't think we have bottomed out yet on that.

Yes.

Put another way, I don't think it is turning imminently, but I am not sure that we will be able to do better than what we're doing right now (multiple speakers).

Some quarter it is going to turn, go the other way.

Sure.

And then just in terms of really what you are seeing here, obviously your growth rate was very impressive this quarter, holding at constant despite what seemed like a deteriorating environment.

I guess really what have you seen or what did you see throughout the quarter as things progressed?

Did things actually get worse for you, or was it more volatile, and just trying to get a sense of what you have seen during June as well?

This is Ron.

I think the wearer shrinkage accelerated at the beginning of May.

We have seen it accelerate May and June, to be exact.

And that is what makes us think that we are going to be at that 2002, 2003 level if it stays based at that type of rate the next three months.

We will be right there.

As far as competitive action on the street, we have seen more competitive action due to price on the street, whether it is a big account or a small account.

And whether it is a big supplier or a small supplier, everybody is running around trying to maintain their revenue, and they are trying to do it any way they can.

Sure.

And has pricing generally been stable for you, though, this quarter, probably 2%, 2.5%?

We're pretty stable on the pricing.

We measure it in weeks of return on investment merchandise.

And we were stable this quarter on the new business side, anyway.

Great.

Thanks so much.

Great quarter, guys.

Terry O'Connor, Cedar Creek.

Ron, maybe you could talk a little bit about the range of operating margin, either by facility or region or however you measure that, because improving a few of the underperformers having this sort of dramatic impact on the margins suggests your better-performing regions or facilities must be in the mid- to high teens.

And secondly, could you talk a little bit about specifically what you do to fix or improve underperforming operations?

Is this largely you cracking a sales whip on the guys there, or are you folding in acquisitions and underutilized facilities, or is it both?

Just talk a little bit more about high, low and underperforming facilities, please.

It starts with management, that is the number one thing.

We certainly look at the management and we certainly look at the sales effort.

And then we also look at the pricing in those locations.

And we may push for higher price increases in those locations than some of the others and try to get that margin going.

So it really comes back to management and following the systems that we've got and getting the pricing for our service that we should be getting.

Okay, got it.

Can you maybe bracket the range of operating margins?

I'm sure there are some outliers that you don't need to talk about, but are your better-performing operations in the midteens area?

I don't think we give that out.

I don't think we go there.

I think we have talked in general in the past that there is a wide range, and we go from basically locations which are on a fully allocated basis to breakeven, or in some cases a new market's a loss, but some locations are performing extremely well.

It's a bell curve.

I think in addition to management, and management is the key, as Ron said, it's really market share and your raw density.

Where you are in an area where you have -- you are one of the major players, it's a little easier to get the pricing and do the service when you are in a new market.

There are no further questions at this time.

I will now turn the conference call back over to you for your closing remarks.

I certainly appreciate everybody's interest in the Company, and we are very confident for the remainder of fiscal '08 with the guidance we're putting out there.

And we are looking forward to having a successful '09.

I appreciate your interest in the Company, and we look forward to reporting to you in the fall.

Thank you very much.

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.