UniFirst Corp (UNF) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the UniFirst Corporation second quarter earnings results conference call.

During the presentation, all the participants will be in a listen-only mode.

Afterwards, we will conduct a question-and-answer session.

(Operator Instructions).

It is now my pleasure to turn the conference over to Steve Sintros, Chief Financial Officer.

Please go ahead, sir.

Thank you, and welcome to the UniFirst Corporation conference call to review our second quarter and year-to-date operating results for fiscal 2009 and to discuss our expectations going forward.

I am Steven Sintros, UniFirst's Chief Financial Officer, joining me today is Ronald Croatti, UniFirst President and Chief Executive Officer.

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

Now before I turn the call other to Ron, 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, optimistic, believe, estimate, expect, intend, and similar expressions that indicate future events and trends identify forward-looking statements.

Actual results may differ materially from those anticipated depending on a variety of factors including but not limited to the continued availability of credit in the performance of capital markets, performance of acquisitions, fluctuations in the cost of materials, fuel and labor, and the outcome of pending and future litigation and environmental matters.

I refer you to our discussion of these points in our most recent filings with the Securities and Exchange Commission.

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

Thank you, Steve.

Welcome all of you who are joining us for the review of our second quarter performance.

Steve will be covering the financial details in a few minutes, but let me start with an overview.

Revenues for the second quarter of fiscal 2009 were $257.3 million, a 4.8% decrease over the $270.3 million for the same period a year ago.

However, it should be noted that last year's second quarter benefited from an extra week of reporting.

When adjusting for the extra week in '08, the quarter revenues were actually up 2.5% from a year ago.

Meanwhile, net income was $0.94 per diluted common share and 19% increase for the second quarter of fiscal 2008.

Although we felt the increased economic pressures in the market throughout the quarter, our quarterly operations continued to grow showing a 3.1% revenue increase as compared to the same period a year ago.

Excluding the extra reporting week in 2008, the impact of acquisitions, fluctuation of foreign currency, decreases in fuel costs, merchandise amortization, payroll as a percentage of revenue, and increased focus on discretionary spending all helped to boost profit levels.

Our specialty garment business which is our nuclear decontamination and clean room division produced a strong quarter as compared to a year ago, and was a significant contributor to our overall growth in profits.

Our first aid business, saw revenue decreased by 23%, as compared to 2008.

Second quarter reflecting the continued negative impact of the troubled economy.

The financial climate resulted in significant lower demand for its products and services, and caused the segment to operate at a near break even level for the quarter.

In our core uniform business, new sales from our professional field reps came in essentially flat as compared to last year, due to the growing challenges we face with the struggling economy.

Our national account sales was similarly affected by unrelated economic conditions in the marketplace.

Despite these difficulties, ongoing challenges, our reps stepped up and performed admirably throughout the quarter.

They worked harder than ever making necessary adjustments following our latest sales programs and used our productivity tools to their fullest in order to produce positive contributions in the second quarter numbers.

Our exclusive sales productivity and automation tools as well as our prospecting database partnerships continue to pay dividends for us by presenting additional selling opportunities into the market.

A slight elevation in rep head count also contributed to the positive sales achieved.

Our reps are well trained, remain intensely focused on our latest sales program, developed to increase closing ratios during a down economy and they continue targeting specific industries that have historically shown themselves to be more resilient during economic downturns.

Additionally as business continued to slow, we have placed emphasis on team when referring to sales and our 9500 team partners.

For example our top managers at every location are now contributing with their own day-to-day sales efforts.

It is all part of a slight cultural shift hat now calls for all team partners from production personnel to top executives to make contributions to our sales initiatives.

In the national account arena our sales teams secured preferred vendor agreements during the quarter, that we believe bearing substantial financial results in the coming quarter.

Also we continue to see good results with our facility service products in part, a reflection of our ramped up second quarter emphasis on year-round selling efforts that expanded sales of ancillary products and services within our existing customer base.

We feel our overall new sales performance was reasonable for the quarter, when factoring in the ongoing financial troubles in the market.

Of course, it will come as no surprise as the economic troubles deepen toward the end of the quarter, our sales productivity followed suit as our perspective customers tightened spending, laid off workers or stopped hiring.

As for our existing customers, substantial increases in account shrinkage and account losses followed similar patterns, as a result our growth rate like those others within our industry experienced significant declines.

Simply put, as employment rates rise, as they have been doing, there are fewer uniform wearers in the marketplace and of course this has a negative trickle down effect on us.

We expect the slumping economic conditions will be with us throughout 2009 into 2010.

If the current unemployment trends do not level off in the coming months, and accompanying spending habits in the marketplace do not loosen up, year-over-year revenue growth in 2010 will be particularly challenging.

So this means we have to be even more careful, more frugal with every facet of our operations.

As I mentioned in our last webcast we've implemented a multi-phase profit protection plan to aggressively cut spending, reduce overall costs on a Company-wide basis.

In the second quarter we initiated phase three of this plan which is what our Company is operating under today.

This calls for tougher spending restrictions, strict travel limitations, head count adjustments directly correlating to revenue, a moratorium on capital spending, discretionary spending is now limited to only those efforts that directly supply value to a customer.

If our negative growth trends continue we will be looking to implement the next phase of our profit protection plan which will cal for even deeper cost cutting measures.

Be assured all of our cost containment initiatives are designed to protect both the short and long term profits as well as the financial interests of our shareholders.

UniFirst has been around since 1936, has weathered all the storms of the past recessions, and will certainly come out ahead on the other side of this one too.

Our business units have made operational and procedural adjustments to handle the challenges to remain strategically positioned to maximize their performance levels throughout the current economic crisis.

And now for further details, I will turn it over to Chief Financial Officer, Steve Sintros.

Thanks, Ron.

Total revenues for the second quarter, as Ron discussed were $257.3 million, a 4.8% decrease from the 2008 second quarter of $270.3 million.

The second quarter of 2009 is one less work week compared to the second quarter of 2008 which accounted for a decline in revenues of 7.3%.

On a comparable work week basis consolidated revenues increased 2.5% for the quarter and 4.2% year-to-date.

Second quarter net income was $18.3 million or $0.94 per diluted common share, a 19.6% increase from the second quarter of fiscal 2008, when net income was $15.3 million or $0.79 per diluted common share.

Through six months net income is up 17% compared to 2008.

Our core laundry operations continue to drive our strong overall results.

Revenues from the core laundry operations decreased 4.4% in the second quarter of fiscal 2009, however the core laundries organic growth is 3.1% which net of the impact of acquisitions, the extra work week and changes in foreign currency.

The extra work week had the effect of reducing revenues by 7.3% in the current quarter compared to a year ago.

Acquisitions accounted for 1.3% of the growth, and the strengthening of the US dollar versus the Canadian dollar reduced revenues by 1.6%.

Based on the current exchange rates we expect the growth rates of our core laundry operations to be negatively impacted by approximately 1.5% for the remainder of the fiscal year.

The decrease in organic growth rate from 6.6% in the first quarter to 3.1% in the second quarter for the core laundries is primarily due to the high rate of wear reductions in our existing customer base.

Since October, the US economy has lost over 3 million jobs and our broad customer base is clearly being impacted by the current recessionary conditions.

The net reductions in head count at our customers not only leads to less weekly revenue per stop but also negatively impacts revenues that we typically generate when normal turnover does occur at an account.

We have seen revenues from emblems, make up charges and lost garments also decrease in an environment where customers are not actively adding back positions that they have turned over.

Lost accounts have increased as well over the prior year as a larger number of accounts have either gone out of business or are in financial distress.

On a positive note, we continue to have success selling new business as well as increasing our product offerings to our existing customer base.

In many cases we have been able to add volume to accounts through the rental of ancillary products that are not as closely tied to employee head count.

Despite growth slowing during the quarter, income from operations for our core laundry business was up 18.7% compared to the second quarter of fiscal 2008.

The operating margin for this segment also increased from 11% in the second quarter of 2008 to 13.7% in the second quarter of 2009.

One significant factor contributing to this quarters margin improvement over last year was lower fuel costs for our fleet of delivery vehicles.

Overall energy contributed about 1% to the margin improvement over 2008.

In addition, the core laundry business also benefited from lower merchandise amortization, reduced payroll costs as a percentage of revenues and a continued focus on controlling overall spending.

The lower merchandise amortization is due to an overall reduction in demand for new garments.

This is partially the result of increased utilization of used garments we received back from customers who are reducing head count.

We are able to reuse these garments for other customer needs instead of having to put new garments in service.

Over the course of the quarter we have also reduced the head count of our core laundry operations by approximately 5%.

As most of the reductions were toward the end of the quarter, the benefit from these reductions was largely offset by severance and other exit costs in connection with these terminations, however our second quarter did benefit from a wage freeze that was put into effect at the beginning of the quarter.

Going forward we will continue to adjust our labor costs to the volume being processed in our facilities.

Partially offsetting these benefits was significantly higher bad debt expense incurred during the quarter.

Our results were also negatively impacted by considerably higher health care claims in the quarter as compared to the prior year.

Health claims can fluctuate from quarter to quarter and in the first quarter of 2009, we benefited from lower costs compared to the prior year.

This trend reversed in the second quarter and overall health care costs are higher as a percentage of revenues on a year-to-date basis.

Our specialty garment segment also contributed to our quarterly growth in operating income.

Income from operations from this segment increased to $1.7 million in the second quarter, from $0.3 million in 2008.

Both the nuclear decontamination and clean room operations contributed to the improved profitability of this segment.

The increase in profitability of the nuclear business was due to increased reactor outage f business from its Canadian customers as well as an increased control of our operating costs.

This segments profitability has always been volatile due to the fluctuation and timing of power reactor outages and other project based revenues.

Revenues for the first aid segment decreased 23% from $8.6 million in the second quarter of 2008 to $6.6 million in the second quarter of 2009.

The extra work week in the second quarter of 2008 accounted for 7.2% of the decline in revenues for this segment.

The demand for this segments products however is clearly being negatively impacted by the overall economic environment.

The usage of first aid products is being affected by head count reductions at our customers, as well as by customers who are simply looking for new ways to cut costs.

This sharp decline in revenues has caused this segment to operate at near break even levels despite aggressively cutting its cost structure.

On a consolidated basis, depreciation and amortization increased from 5.2% of revenues in second quarter of 2008 to 5.6% of revenues in the current quarter.

Based on our current revenue expectation, we anticipate that costs that are relatively fixed in the short term such as depreciation and amortization will continue to increase as a percentage of revenues in the quarters ahead.

Net interest expense decreased from $2.8 million in the second quarter of fiscal 2008 to $1.8 million in 2009.

This decrease relates to lower interest rates affecting our variable rate debt as well as lower average debt balances outstanding during the quarter compared to a year ago.

The benefit related to lower interest expense was more than offset by a higher effective income tax rate during the quarter.

The effective rate for the quarter was 42.7% compared to 38.5% in the second quarter of 2008.

The higher rate related primarily to increases to the Company's reserves for tax contingencies, as required by FIN 48 as well as a higher state income tax rate compared to fiscal 2008.

We expect our income tax rate over the second half of our fiscal year to be between 39% and 39.5%.

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

Our cash flow from operations were $60.3 million for the first six months of 2009 up from an already strong $59.7 million in the first half of 2008, which also included an extra week of operations.

The improved cash flows are partially due to a decrease in merchandising service from $92.3 million at the end of our prior fiscal year to $80.4 million at the end of our second quarter.

As I discussed earlier, less new garments are being placed in service, partially due to utilization of garments being returned from customers via head count reductions as well as lower overall demand for new garments.

These factors have caused our supply inventory balances however to increase from year end.

We are actively managing the production levels in our manufacturing facilities to adjust for the decrease in demand.

From a financial standpoint, cost control and cash generation will continue to be our top priorities until we get a better indication of when the economic environment will stabilize.

Until then we are aggressively cutting back on capital projects.

For the first six months of the year we spent $39.2 million on capital expenditures.

We we still expect the full year capital spend to be between 55 million and $60 million which assumes a significant cut back over the next six months.

The high level of capital expenditures during the first six months was a result of decisions that we made to complete several building and renovation projects, that were already in progress, at the beginning of our fiscal year.

In addition we completed the majority of purchases of new trucks, for our delivery fleet during the first half of the year.

We were also being very selective with respect to acquisition targets.

We have not completed any significant acquisitions thus far this year.

Based on the strength of our balance sheet and capital we have available under our revolving credit agreement, we are well positioned to pursue strategic acquisitions.

However we will only do so at valuations we consider to be appropriate given the current economic landscape.

Due to our strong operating cash flows, as well as the reduced acquisition activity, we were able to reduce our total debt outstanding to $218.7 million at the end of the second quarter, from $235.5 million at the end of fiscal 2008.

Total debt as a percentage of capital also decreased from $29.7 million at the end of fiscal 2008 to $27.5 million at the end of the second quarter.

Although we are pleased with the overall results of our second quarter, we expect the negative impact of reductions in our weekly volume will continue to put significant pressure on the top line for the remainder of the year and into fiscal 2010.

As a result, we now project that our full-year fiscal 2009 revenues will be between 1 billion and $1.01 billion.

We continue to project that our income per diluted common share for the full year will be between the previously communicated range of $3.05 and $3.25.

Despite reduced revenue targets we were able to hold our guidance for earnings per share based on the strength of the profits generated in the first six months of the year as well as the benefits we expect to realize during the second half of the year with respect to favorable energy comparisons as well as the cost cutting initiatives that we have implemented.

It is clear however that rapidly declining revenues will put significant pressure on our operating margin during the second half of the year and into fiscal 2010.

We want to stress that this guidance continues to be highly dependent on conditions that have recently been very volatile and largely out of the Company's control.

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

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

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

Operator, we are ready for questions.

Thank you, sir.

(Operator Instructions).

Our first question comes from the line of Kartik Mehta with FTN Equity Capital Markets.

I had a couple of questions on your cost control.

I think you indicated that a lot of the head count reduction happened at the end of the quarter so as a result, you didn't really get the savings in this quarter.

So I was wondering going forward what type of cost savings you would anticipate because of the actions you have taken this quarter?

This is Steve.

We project that, we mentioned in our script it was about 5% of the work force, it is not 5% of the payroll based on a number of those workers being production workers.

However we are projecting that it is going to be within, between the 3 million and $4 million range on the quarterly basis going forward, kind of compared to the second quarter.

And Ron maybe you can talk about, a little bit about the trends in the ad stops, what you saw in the quarter, did you see any improvement or stabilization or are you continuing to see fairly--?

We basically saw the acceleration of the ad reductions from the come out of the Holidays the second week of January, it has accelerated.

It is not flattened out as of last week.

We are hoping to see some kind of flatten out but it has not.

Again we are lagging but it is of high concern to us that we have not plateaued.

So Ron I know this is going a little far out, but if the trends kind of stay where they are, would you expect in '10, fiscal 2010 it will be difficult to have revenue growth or is there, are there new sales or are there other opportunities that might allow you to at least have some revenue growth?

Well, we expect if these trends continued all the way down for remainder of the fiscal year, we will have negative growth in 2010.

Thank you very much.

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

Baird.

Please go ahead.

Hi Ron, hi Steve.

Hi, Andrea.

Wondering if you could first talk a little bit about the rental organic growth rate of 3%.

Ron I think you said that, while you are still having some success new business, they're still relatively flat.

Sounds like national accounts are still flat.

And then with your ad stop actually being negative, is it fair to assume that 3% growth is probably all price?

No.

I wish that was, but no.

I think what we tried to say is we've written as many dollars of new business on the first 26 weeks as we wrote in last year and it comes back to that rolling effect.

Obviously we've had the acceleration in the -- wears shrinkage base we have been trying to offset that through our power outs, and we have had some good promotions in the power outs, but a long ways from holding up to the shrinkage we're seeing in the wears.

So we for the last quarter, really we haven't been able to overcome the shrinkage in the lost business through new accounts.

That's kind of a new record for us.

We have always been way over those numbers.

Okay.

But it is fair to say you are still getting some price at this point?

Yes.

That's a fair statement.

That's a fair statement.

We've had to, in a number of cases as we mentioned we have put through in the past price increases, and the environment has become more competitive.

So we are finding more situations where you'll end up negotiating with your customers and coming to some agreement to try to either keep the account or help them with their cost concerns.

And so I think it has become a more pressured cost environment or price environment.

But there still is a positive price component in the numbers.

Just in terms of where you stand on fuel surcharges, are those pretty well all rolled back now, or are you still seeing some benefit from that?

They're pretty well rolled back, it is been handled on a customer by customer basis but as the fuel came down, the customers really put the pressure back on you.

Then just one last question, Ron, you mentioned that your sales force is trying to target more economically resilient end markets.

I was wondering if you can give us an idea of specifically which markets you are talking about?

I think no secret the health care market primarily that we are all shooting at.

Okay.

Great.

Thanks I appreciate it.

(Operator Instructions).

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

Please go ahead.

Hi, Ron, hi, Steve.

This is Willie in for Andrew Steinerman.

Hi, Will.

I was just wondering now that you're (inaudible) could you just describe what the differences are between two and three, and just more on the qualitative side?

Let me make sure I understand the question.

The difference between what, Will?

Between phase two and phase three.

You mean the cut backs?

Right.

So you indicated that is good--?

Phase three amounted to a more detailed lay off of people to the volume.

We manage the hours here to the tonnage going through the plants on a weekly basis and between the tonnage and the hours per employee, we monitor that closely and we work on head count reductions whether it is in the production department or service department, and what have you.

Will, it was more the wage freeze as well as more focused on just discretionary spending and travel, whereas as Ron said, phase three went into a more organized reduction to the volume.

Right.

And any plans to potentially consolidate routes?

Well, that's an ongoing thing that we are looking at, it is not an easy process, as you well know.

All of the clothes have to be remarked and all of that.

But we are definitely pursuing that under, we bought that UPS software system.

And that key component of the route consolidations and we are route consolidating.

The lost customers have ticked up the, we haven't lost a lot of customers that take off a lot of routes, what you have seen is the volume come down on the routes through the account size shrinking but we are consolidating routes, there's no question about it.

Right.

And I am not sure if I missed this.

Could you mention what the exit rate for the uniform organic growth rates has been in March?

I don't think we give those numbers out.

Which rate was that, Will?

So, do you give out the exit rates in March?

So, in the second quarter, the organic growth rate for uniforms was at 3.1%.

How does that compare in March so far?

Oh, well, March just kind of closed down so it's tough to say.

I think, as Ron mentioned just kind of qualitatively we continue to see the shrinkage that we experienced throughout the first and second quarters as well as the lost accounts and sales are hanging in there.

So I am not sure we've seen much a change in the trend in March so far.

Right, right.

Great.

Thanks a lot guys.

Mr.

Sintros, there are no further calls at this time.

I'll turn the call back over to you.

I certainly appreciate everybody's interest in the Company, and it is certainly challenging times.

We have certainly demonstrated we can manage in challenging times and going forward we will work hard for our shareholders and all our team partners to continue UniFirst to be successful.

I thank you for your time.

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

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