UniFirst Corp (UNF) 2009 Q1 法說會逐字稿

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 John Bartlett, Senior Vice President.

Please go ahead, sir.

Thank you and welcome to UniFirst's conference call to review our first quarter operating results for fiscal 2009, and to discuss our expectations going forward.

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

Joining me are 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 the results of the first quarter of our 2009 fiscal year.

Revenues increased 6.2% to a record $262.3 million(Sic-see press release), and our net income increased 14.5% to a record $18.9 million or $0.97 per share.

Ron Croatti and Steve Sintros will provide additional details regarding these results, but I can say that we are very pleased with our first quarter performance.

However, I would like to stress that UniFirst is not immune to the challenging economy in which we operate.

Since November, we have seen a significant increase in the shrinkage in our customer orders, as well as increased lost accounts.

Nevertheless, we are cautiously optimistic that our full year results will still approximate the results we achieved in fiscal 2008, which we believe is both a testament to the recession-resistant industry in which we operate and our hands-on conservative management.

Now before I turn the call over to Ron and Steve, 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 the continued availability of credit and the performance of the capital markets, 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.

Welcome all of you who are joining us for the review of our first quarter, a fiscal period that produced record revenues and profits for our company once again.

Steve will cover the details in a few minutes.

Let me start with a brief recap.

Revenues for the first quarter of fiscal 2009 were 262.3 million(Sic-see press release), a 6.2% increase over the 247.3 million for the same period a year ago.

Income from operations increased 17% during the quarter as compared to 2008, and earnings per diluted share for the first quarter were up 14.5% to $0.97 as compared to 2008's $0.85.

Despite considerable economic pressure during the fiscal weeks of the quarter, our core laundry operations continue to drive our company's growth, showing a 6.9% revenue increase as compared to the same period a year ago.

Decreases in merchandise amortization cost, payroll related cost, as a percentage of revenue, helped to boost our income levels.

Our specialty garment business, which is our nuclear decontamination and clean room business, continued an upward trend in growth with 2.8% gains in revenue for the comparable quarter in 2008.

Which also resulted in a modest increase in income from operations compared to last year's first quarter.

Meanwhile, our First Aid business saw revenues decrease by 7.4% as compared to 2008 first quarter, due to the sales of the Quick-Aid division, then negative effect of the economic downturn.

We expect this division to continue to have challenges in '09 as a result of the financial culture and climate, and accompanying trend toward service cutbacks in the marketplace.

In our uniform business, new sales from our professional field reps came in essentially flat as compared to last year, due to the continued softening of the economy.

Which became particularly noticeable during the last weeks of the quarter.

Likewise, our national account sales were adversely affected by the unfavorable conditions.

To counter these ongoing challenges, our reps had to work harder and more creatively to achieve their first quarter numbers.

Overall sales results were positively influenced by a slight elevation in sales rep headcount.

Our sales team continued to reap the benefits associated with the unique productivity and automation tools we implemented over the past couple of years.

And the new prospecting database partnerships we put in place are offering more selling opportunities for us in the market.

Additionally, our reps are targeting specific industries that have historically shown themselves to be less sensitive to troubled economics.

And this is helping to bolster results also.

We continue to see good balance coming from our facilities service products, which reflects on our moderate improvement in root sales reps showed during the quarter by expanding the use of ancillary service products and services in our existing customer base.

Although we are generally pleased with our overall first quarter performance, we are feeling the pinch of the continued difficulties of the economy.

Over the past several weeks we have seen substantial increases in account shrinkage and customer losses.

Our growth rate is starting to see slight week to week declines.

The bottom line is, when our customers' businesses are adversely affected, we are affected too.

Most experts agree that the current economic condition will be with us throughout '09.

That means we will have to be more careful with every facet of our operations.

As a result, we have implemented a three phase profit protection plan to aggressively cut spending, reduce overall costs on a company-wide basis.

We are now in phase II of this plan, calls for tougher spending restrictions that include across the board wage freezes for virtually all our team partners in fiscal 2009, discretionary spending limits to only those efforts that directly add value to our customers.

If our growth rate reversal continues, we will be looking to further implement the next phase of our profit protection plan, which is to reduce further cost controls, including headcount reductions.

All of these preventative measures are designed to protect both our near and long-term profits, as well as the interests of our shareholders.

Difficult business conditions are nothing new to UniFirst.

We have felt that all of our business units are strategically positioned to sustain reasonable performance levels in the current downturn.

So barring an event more significant erosion of the economy, we remain cautiously optimistic about achievement of our previously provided guidance.

Like the rest of the business community, we don't know exactly how the economy will track in 2009, but as we have in the past, UniFirst will be prepared to meet the challenges ahead and to come out even stronger on the other side.

Now for more financial details, I will turn it over to our Corporate Controller, Steve Sintros.

Thanks, Ron.

As Ron discussed, in spite an increasing challenging economy, we had a strong start to fiscal 2009.

Consolidated revenues for the first quarter were 262.6 million, a 6.2 increase from the previous year's first quarter of 247.3 million.

First quarter net income was 18.9 million, or $0.97 per diluted common share, a 14.5% increase from the first quarter of 2008, when net income was 16.5 million or $0.85 per share.

This performance continues to be driven by strong results of our core laundry operations.

Revenues from the core laundry operations grew 6.9% in the first quarter compared to 2008.

Revenues from the core laundry operations, net of the impact of acquisitions and changes in foreign currency increased 6.6%.

Acquisitions accounted for 1.5% of the growth, and the strengthening of the U.S.

dollar versus the Canadian dollar reduced revenues by 1.2% compared to the same quarter a year ago.

Based on the current exchange rates, we expect the growth rates of our core laundry operations to be negatively impacted by approximately 1.4% for the remainder of the fiscal year.

Although we have been able to hold our growth thus far, due to this economic downturn, the already high headcount reduction rates in our wearer base that we have seen over the last six to nine months, accelerated significantly in November and December.

These reductions will significantly challenge our ability to grow at the rates we have recently produced in future quarters.

Income from operations from our core laundry business was up 17.9% compared to the first quarter of 2008, and its operating margin increased from 12.4% in the first quarter of 2008 to 13.7% in the first quarter of 2009.

The improvement is primarily due to lower merchandise amortization, as well as lower payroll costs as a percent of revenues.

The core laundry operating results in the first quarter was also helped by lower healthcare and workers compensation costs compared to fiscal 2008.

These costs can fluctuate from quarter to quarter, however we do not anticipate that this benefit will continue throughout the year.

In addition, other production and administrative costs overall were lower as a percentage of revenues, as we have been challenging all non-essential expenditures in anticipation of growth slowing over the remainder of the year.

These benefits were partially offset by higher energy costs, as well as a $1.6 million accounting charge relating to our environmental obligations.

Accounting rules require that certain liabilities are discounted using a risk free interest rate.

The company's projected liabilities for environmental remediation are discounted in this manner, as disclosed in our quarterly filings.

Due to the significant drop in interest rates during the first fiscal quarter, the company discounted its liability using a lower interest rate, resulting in this non-cash charge to earnings.

Further reduction in these rates in the second quarter could result in additional non-cash charges.

Overall, our specialty garments and first aid segments operating results were comparable in the first quarter of 2008.

First quarter revenues of our specialty garments business was up 2.8% from 17.3 million in the first quarter of 2008 to 17.7 million in the first quarter of 2009.

Income from operations from this segment was up slightly as well.

Based on the planned timing of nuclear reactor outages, we project that the third quarter of this fiscal year will be the strongest quarter for this division.

Revenues from the first aid segment, as Ron mentioned, decreased 7.4% from 7.9 million to 7.3 million.

The majority of this decrease relates to a product line that was discontinued in the second quarter of fiscal 2008.

This segment continues to be challenged by economic conditions and an overall unwillingness of many businesses to add cost.

We are working hard to bring the cost of this segment in line with these adjusted revenue levels, and we will continue to work on new strategies that will allow us to further take advantage of the cross-selling opportunities with our core laundry customer base.

On a consolidated basis, depreciation and amortization was 5.2% of revenues for both the first quarters of fiscal 2009 and 2008.

Net interest expense decreased from 3.0 million in the first quarter of 2008 to 2.1 million in 2009, related to lower interest rates affecting our variable rate debt.

As discussed in our October 29 webcast, we have begun to show the impact of foreign exchange gains and losses as a component of other expense on our income statement.

Previously these amounts were included in selling and administrative expenses, and have not been very significant.

As these amounts are becoming larger due to the recent volatility of the U.S.

dollar, we feel that breaking out these gains or losses help show a clearer picture of our operating results.

During the first quarter of fiscal 2009, we recognized that the foreign exchange losses totaling 0.9 million compared to foreign exchange gains of 0.5 million in the first quarter of 2008.

For the first quarter of 2009, our effective income tax rate was 39.7%, compared to 38.5% in the first quarter of 2008.

The increase in tax relates primarily to higher state income taxes as well as timing related to certain tax reserve items as required by FIN 48.

For the full year, we expect our income tax rate will be between 39% and 39.5%.

Our capital structure and cash flows continue to be very strong.

Our cash flows from operations increased 3.6% to $26 million from an already strong 25.1 million in the first quarter of 2008.

Free cash flows decreased however, as capital expenditures in the first quarter of 2009 were 20.5 million, up from 14.8 million in fiscal 2008.

The high level of capital expenditures during the first quarter was due primarily to the completion of various large building projects started last year, as well as the high percentage of projected annual vehicle purchases being completed during this quarter.

We are aggressively challenging all capital requests from an ROI standpoint, and wherever possible are cutting back on or pushing out any major new projects until we get further visibility as to the state of the economy.

Despite the high level of expenditures in the first quarter, we anticipate capital expenditures will be between 55 and 60 million for fiscal 2009.

Total debt decreased to 232.1 million at the end of the first quarter, from 235.5 million at the end of 2008.

And total debt as a percentage of capital decreased from 29.7% to 29.2% at the end of the first quarter.

We continue to be well in compliance with all of our financial covenants and under our debt agreements, and don't have any significant debt maturing before 2011.

We did not complete any significant acquisitions in the first quarter, and in this environment we will scrutinize acquisition opportunities even more to ensure that the valuations make sense.

However, based on our overall financial strength, we are still well-positioned to make further strategic acquisitions.

In our October call, we communicated our preliminary guidance for fiscal 2009, which was that revenues would be between 1.015 billion and 1.045 billion.

And that income per diluted common share would be between $3.05 and $3.25.

Since that call, the level of reductions in our adds versus stock metric have accelerated significantly.

On a positive note, the cost of gasoline and natural gas has continued to decline since this original guidance was communicated.

Taking into account these additional factors, along with the results of our first quarter, we are leaving our full year guidance unchanged at this point in time.

As a reminder, both the revenue guidance and earnings guidance reflects one less week of operations as fiscal 2008 was a 53 week year for the company, and 2009 will be a 52 week year.

The extra week for fiscal 2008 was in our second quarter.

The effect of one less work week equates to a reduction in our revenues of approximately 2% of full year revenues.

We are also reflecting these estimates a decline in our consolidated revenues of a revised 1.4% based on the current strength of the U.S.

dollar.

This guidance continues to be highly dependent on certain conditions that have recently been very volatile and out of the company's control.

These conditions include overall unemployment rates, the cost of energy and other commodities, exchange rate fluctuations, as well as the cost to capital.

A significant change in any of these factors could have a material impact on the guidance we have provided.

We continue to closely monitor these factors and take the actions necessary for the company to stay on target with its short term and long-term objectives.

We continue to implement stringent cost controls and challenge all capital projects.

The goal is to make sure our cost structure is aligned with our revenues through this period of economic contraction that is currently indefinable with respect to its future length and depth.

However, based on these steps we are currently taking, as well as our overall financial strength, we feel we are well-positioned not only to weather the storm but take full advantage of opportunities that will be provided by an eventual economic recovery.

This concludes our prepared remarks, and we are now pleased to answer any questions you may have.

Thank you.

(Operator Instructions).

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

Please go ahead.

Good afternoon, guys.

Want to get a little bit of color from you, just about the quarter.

Obviously your organic growth continues to be pretty amazing.

I was hoping you could give us a little color on what drove the organic growth in the quarter, maybe what key metrics were the most surprising to you, how strong they were.

And maybe what, it sounds like add/stops are showing weakness, but I'm just trying to understand what's driving the growth right now.

John, this is Ron, I'll try to give you a rough answer to it.

I think, in September if you'll recall, energy prices were pretty high, gasoline and so forth.

And we were able to sustain a fairly decent price increase that was part of it.

Our new sales have held up the entire quarter comparable to 2008.

We have really seen the drop off in the new sales the last five weeks, I mean right up till today.

And then the shrinkage within our customer base was fairly typical for September, accelerated a little bit in October, was greater in November and greater in December.

To the point where, every week we had during the quarter, we were positive growth.

The last five weeks, we are seeing the line cross the other way between the shrinkage in our base, our customer losses and our new business, the line has crossed.

So that's our concern.

But it really was a combination of good sales, and we were able to get a little price along the way.

Okay.

That's helpful.

So I want to make sure I'm understanding what you mentioned there, over the last five weeks, have we seen organic growth rates in any of these weeks begin to be negative on a year over year --

That is correct, no, they are negative year over year.

Well, they are negative week over week.

Week over week, to try to explain it to you, if the wearer base is negative, the customer losses are negative, the new business is a positive but the negative is outweighing the positive.

Okay.

That's helpful.

Then, when I think about you guys talking about your guidance, you said that add/stops is a little bit, organic growth a little bit worse than maybe you thought, but you're getting the offsetting benefit on the energy side of things.

Were you reaffirming the earnings guidance or are you reaffirming both the revenue and the earnings guidance?

I was a little confused on how those two metrics seem to be going in opposite directions, and how both revenue and EPS can be where we thought they were going to be three months ago.

I think we are reaffirming both guidance, the revenues of about 1.015 to 1.045 billion, and earnings per share of 3.05 to 3.25.

Which is essentially, we are really saying we think we are going to be flat, that's our best.

But I think to answer your question, I think the revenues in the first quarter were probably a little better than the first quarter that we had projected in our original guidance.

We don't project the quarter, though.

But for the remainder of the year it's going to be a little worse, but we still think we'll be able to fall within the guidance we projected from a revenue side, even though the growth is flipping a little bit.

And then the energy will make up some of the shortfall on the profit side.

Okay.

That's helpful too.

And then just, I guess from an industry standpoint, there was a lot of discussion a few weeks back about how a lot of manufacturing facilities were shutting down for the holidays, maybe a little bit earlier than they normally do.

Have you seen the facilities open up as they normally do?

Are you seeing some of your business not come back as quickly as you thought?

Any color you can give as regards to that?

Well, I think, John, it's only two days back from the holidays, so we really can't give you any color.

There's no question that a lot of businesses shut down for the two-week period, it seemed fairly typical from '08 to '09.

We didn't see any more than usual.

Okay.

That's incredibly helpful.

And then the last question was just, if I remember your comments from last quarter, you guys talked about being ready to make acquisitions potentially if the right ones came about to you.

Any color about the acquisition environment, if you are seeing more properties come up for sale, if you are seeing prices for properties as the environment is a little bit more stressed, become more attractive, any thoughts there?

I think because of the holidays, we really haven't had much activity quite honestly in the last couple of months.

I think people are thinking about other things.

I think the real issue, John, is the sellers really haven't adjusted to the market, and so they are still looking or hoping to get the prices that they've traditionally got, and so we are still talking and interested but I think the price has to come down a little bit before we pull the trigger on anything significant.

Okay.

Great.

Thank you, guys, so much.

Our next question comes from the line of Andrea Wirth with Robert W.

Baird.

Please go ahead.

Good afternoon, gentlemen.

Impressive quarter.

Just warranted to be clear again about what you are seeing and what we should expect for organic growth from the rental division.

Based on what you've seen in the last five weeks, essentially being negative growth, essentially with it switching over, so we should essentially see growth go from 6.6 this quarter to negative next quarter, negative year over year growth, am I understanding you right?

No, I think what we are talking about is, each week's revenues we are getting now Andrea are a little bit less than the prior week, so our week over week revenues are declining in the last probably eight or ten weeks.

Got it.

So you are just saying sequentially they are declining.

So I think if you plotted it and put it on a graph, we think we will have positive growth in the second quarter but it will probably be significantly less than the first quarter, and it will probably decline, if that continues, which we don't know whether it will or not, but if it continues to go downward, the year over year growth will decline each quarter through the year.

We will have a better handle at the end of next quarter where it's going to go, but--.

And if it starts declining more rapidly then it will be worse.

No, fair enough, that makes sense.

I don't know if you can give us somewhat of a sense, but just given, just trying to understand the magnitude of the shift in what you saw from November to December, I mean is this a case where we should maybe expect growth rates to be cut in half, so maybe we would see something more along the lines of 3% growth next quarter or is that even a little bit optimistic?

It's, we are just, I wouldn't be surprised at that but I think we are really guessing.

Okay.

All right.

No, that's--.

Keep in mind, next quarter too you lose the extra week and continue to have the head wind from the FX, so total growth next quarter probably or very well could be negative, because for the quarter it's about a 7%, losing the extra week.

It's almost 8% for the week and it's one-thirteenth, and plus the foreign exchange, so it's likely that quarter over quarter revenues will be negative.

Sure.

Revenues will be, but you feel like the organic growth of the rental, you probably should still see positive growth, at least given how conditions are right now.

Correct, correct.

Okay.

And I guess, I don't know if you've done this type of internal analysis, but if you look at your guidance range, what type of unemployment rate are you generally assuming?

At this point I know it's kind of a crap-shoot, but what are you looking at, 8%, 9%.

I think we are really looking at, what we think our revenues are going to do, that's kind of tied to an increase in unemployment, I guess, but--.

I think said another way, I think we look at these weekly net, are we positive for the week or negative?

We mentioned for the last several weeks we've been negative after taking your new sales less your reductions less your lost accounts.

So we kind of have a number of scenarios we look at, how far may that continue, is it going to get better, is it going to get worse, we look at it that way.

But assuming it stays the same as kind of the bad numbers from the last eight weeks, that kind of assumes unemployment is going to continue to accelerate.

So it's indirectly factored into our scenarios but not necessarily in that way.

Switching over to margins, obviously very impressive number, I want to say according to my model, one of the best operating margin number I've seen since, it looks like '86.

Just wondering if you could talk a little bit about how the benefits broke out, I mean obviously it sounds like you got some great benefit on the merchandise cost side.

Sounds like you did get a little bit extra benefit from healthcare, wondering if you could maybe try to quantify that?

Maybe on top of that, maybe talk a little bit about, actually energy costs were higher, but did you get maybe a little bit of an additional bump because maybe energy costs were coming down a bit but you still had some fuel surcharge benefit, trying to understand the 13.1% margin, how much of that is really sustainable at this point and how much is some one time benefits that may not remain.

I think to answer a couple of those pieces of that question, on the payroll related side and the healthcare and so on, that probably helped us about a half a point.

And again as I mentioned in my scripted remarks, I think we have had quarters in the past that those kind of costs have jumped up and down and helped us or hurt us, so that's not what I would necessarily consider a long-term sustainable benefit.

From the energy side, it was somewhat higher than over the prior year, and we do expect to get the benefit of that.

And I think your comment was a good one and I think as Ron alluded to, if some of our annual price increases did go through and energy was a little higher there might have been some benefit of that, but that's part of what we are seeing in our shrinkage numbers is some of that we're forced to back off as the costs have come down.

So maybe the timing during the quarter I think helped us a little bit, but again we don't anticipate that being fully sustainable, other than the fact that the energy on the other end is going to help us.

Right, right, and obviously you've done a fantastic job with your cost structure in general.

So just trying to understand what kind of level is sustainable, I mean obviously barring, depending on a huge decline in volumes overall that could happen, do you think a margin level in the 12% range would be sustainable?

Throughout the rest of '09?

Well, I think it's -- we are looking at each other Andrea, and we think that might be a little strong.

A little strong.

Okay.

Fair enough.

That's probably my best answer.

I think it's not just, it's going to be affected by the revenues probably as much as the cost side Andrea, because I think the costs are going to probably be what they are.

They are relatively, I won't say fixed but a lot of them are fixed and as the revenues come down, obviously the margins get squeezed, so we are really concerned where the revenues are and we are doing everything we can to control the costs.

Right.

And just--.

The one big benefit we've had is the merchandise continues to benefit us, and I think hopefully that will continue because in, as our revenues shrink and we are not putting on new customers, we don't have to spend as much on new garments, so that hopefully will continue to help us.

Got it.

If revenues go down, the delivery costs don't change too much.

We don't, it's not that easy to cut a route or a driver or things of that nature.

No, definitely.

Fair enough.

Just one last question.

On headcount, sounds like your sales force headcount is up, but I guess the rest of your headcount, is that maybe actually down?

I know you haven't done actually any wholesale headcount reductions but through attrition, things like that, is your headcount maybe actually down when you look at the operations side.

I think on the operations side we've given them a difficult time on replacing anybody.

So the headcount might be down slightly.

The sales force is, as I said in my scripted statement, up slightly.

But at this point, we are in our phase II, if things deteriorate significantly we will go to our phase III and we will make a headcount reductions.

Got it.

Got it.

Great.

Thanks so much.

Fantastic quarter.

Thank you.

(Operator Instructions).

Our next question comes from the line of Andrew Steinerman with JPMorgan.

Please go ahead.

Hi, gentlemen.

Last conference call which goes back to end of October, when asked about the underlying organic core growth within your revenue assumptions, you had indicated 2 to 4%.

I wanted to get a sense of what do you think the underlying core organic growth would be in the revenue assumptions at this point, and even if you say that we are not sure, my question is of course revenues have deteriorated.

How are you confident that you are able to maintain the general range of revenues at this point?

I think the 2 to 4% we gave in the last call, and again I mentioned that the guidance kind of assumes a number of different scenarios that we are trying to project out based on what's going to happen with the economy and unemployment, I still think it's a fair range.

I think it would be the higher end of the range that we've provided, we might be a little less optimistic about the, being at the higher end than we were a quarter ago, but it was still a fairly broad range.

And again, given significant further deterioration, I think we still feel we can be within that range.

But we have some scenarios that still allow us to be between that 2 and 4% organic for the year.

And considering we were 6.6% for the first quarter, that really isn't that positive for the remaining part of the year.

Okay.

I think you're saying the strong start really helps get you towards the goal of 2 to 4%.

Exactly what we are saying.

Exactly right, yes.

Okay.

Thank you very much.

Our next question comes from the line of Ali Motamed with Boston Partners.

Please go ahead.

Great quarter, you have a buy back authorization if other people's, values of their own businesses on the M&A side isn't coming down the market, value of yours certainly did, and you seem to be executing as well as we could have imagined.

Any comments on the buy back.

We don't have any buy back authorization right now.

We had a brief conversation at our last Board meeting, and we are going to have a meeting next week and we may discuss it again but there's no authorization currently.

You are going to be discussing it at the Board meeting.

I believe so.

Okay.

Thank you.

Mr.

Bartlett, there are no further questions at this time.

I will turn the call back to you.

This is Ron.

I want to thank you all for coming to our webcast and having an interest in our company, and I can assure you that we are pushing forward both on the revenue side and have a good cost containment plan to reach the projections that we put out there.

We look forward to talking to you next quarter, and may things improve in the economy.

Thank you.

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.