UniFirst Corp (UNF) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

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 over to Steve Sintros, Chief Financial Officer.

Please go ahead, sir.

Thank you, and welcome to the UniFirst Corporation conference call to review our third-quarter results for fiscal 2010 and to discuss our expectations going forward.

I'm Steven Sintros, UniFirst's Chief Financial Officer.

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.

Now, before I turn the call over 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 future results may differ materially from those anticipated depending on a variety of factors, including but not limited to volatility in employment levels and general economic conditions; the continued availability of credit; the performance of acquisitions; fluctuations in the cost of materials, fuel and labor; and the outcome of pending and future litigation in 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 Ronald Croatti for his comments.

Thank you, Steve.

I'd like to welcome all of you who are joining us for the review of UniFirst financial results for the third quarter of fiscal 2010.

Steve will be covering the details in a few minutes but let me start with a brief recap.

Revenues for the third quarter were $261.2 million, a 3.6% increase compared with the same period of fiscal 2009, with all business operations contributing to the top-line gain.

Our Core Laundry operations continued to drive overall Company performance, achieving a revenue increase of 1.8% over last-year's third quarter.

But it was our Specialty Garments business, which provides uniform and ancillary services for the nuclear cleanroom industry, in a particular strong quarter, with a 22% revenue increase as compared quarter-to-quarter basis against last year.

The Specialty Group recording-setting performance can be credited to a combination of existing account growth, including improved activities with Canadian customers, safety supply sales and positive results with the European operation.

Revenue from our First Aid business were also up, delivering a 6.6% increase over the same quarter in fiscal 2009, although this segment's green guard operation, which installs services and services first aid cabinets continue to be hard hit by the recessionary environment.

Its (inaudible) operation, which private labels and supplies over-the-counter medication for resale, continued to grow with retail market and was responsible for most of the segment's improvement.

Net income for the quarter was $19.3 million, an 11% decrease when compared to the third quarter of fiscal 2009.

However, net income year to date was in line with the same record-level period of last year.

Our Core Laundry operations continued to stabilize during the quarter with the dramatic uniform wear loss we experienced throughout the recession, although our uniform losses were still greater than adds in the third quarter.

But despite this negative matrix our Core Laundries drove the Company's positive performance with new sales coming in ahead of the same period last year.

In our Core business we continue to focus on sales of service fundamentals, as well as productivity improvements.

With increased number of corporate training programs being delivered to more team partners through our new highly-effective video conferencing network, via this network, our management teams are also receiving more in-depth instructions in sales and service techniques, consistently becoming more involved in both of these critical areas.

All of our training efforts are designed to increase overall sales productivity, re-enforce our consistently-higher customer service levels and provide career path opportunities for our team partners.

Several key measurements we use to track professional sales are now validating the efforts of our ramped-up training efforts, including more strategic and more targeted selling by our teams, which has increased overall sales productivity over last year.

Unfortunately, our new accounts and customer [attention] pricing continues to be negatively impacted by competitive pressures and overly-cautious business decision makers.

But our reps are countering by finding more prospects willing to make their uniform program choices based on overall value versus per wear line item costs.

In the service area our customer-retention rates have been climbing steadily each quarter in fiscal 2010, demonstrating that our back-to-basics approach to servicing our customers, as we would like to be serviced, is having a measurable positive effect.

And we are continuing to implement new customer routing technologies Company-wide.

This provides us with significant return on our investment.

These programs direct our thousands of service delivery vehicles to consistently follow the most-efficient geographic routing plans.

Drive times are always minimized and never overloaded although allowing for more face-to-face time serving customers.

Overall we were pleased with the results during our first three quarters of 2010 but we continue to proceed with fiscal caution as strict Company-wide cost controls, as we keep a close watch on national employment trends and consumer spending.

Unemployment levels have a direct relationship to the demand for UniFirst products and services and in the month of May employment improved slightly in the US, dropping to 9.7% from 9.9% while holding steady in Canada at 8.1%.

The US improvement, however, was attributed to hiring of 431,000 temporary federal census workers, suggesting that private employers still remain reluctant to hire back laid-off workers.

As far as spending goes, a Federal Reserve survey released in June found the economic activity improved across all US regions for the first time since the recession began in 2007.

This was certainly good news for the economy, but the modest rate of growth suggests that the consumers are still reluctant to resume the kind of spending needed for true market recovery.

We also continue to see positive economic indicators within our customer base relating to our adds over reduction matrix.

As I mentioned earlier, the dramatic rate of sequential loss in uniform wearers in customers that plagued us throughout last year continued to decrease on a week-to-week basis throughout the first three quarters of the fiscal year, although not yet returning to pre-recession levels.

We remain hopeful that all these signs of market stabilization but we know there will be long road to ultimate recover all the uniform wearers lost throughout 2008 and 2009 and for national business spending to normalize.

Meanwhile, our ongoing recessionary recovery plan positions us to maximize our opportunity in today's marketplace and to take best advantage of invigorated economy.

We are fully confident that we have the right people, the most efficient systems in place to ensure long-term growth and returns and as always, we will accomplish this by providing our customer the most-consistent, high-quality service available.

We'll also continue maintaining a strong cash flow to allow for any competitive acquisitions that make sense for us.

And I have said many times again, no matter what the economic conditions, consistently exceeding customer expectations will always be our top priority at UniFirst.

We look forward to reporting our continuing progress in the quarters ahead.

And now to fill you in the financial detail I'll turn it back over to Steve Sintros, Chief Financial Officer.

Thank you, Ron.

As usual I will provide some additional insight to our operating results for the quarter, our overall balance sheet position, as well as our outlook for the remainder of the year.

Revenues for the third quarter of fiscal 2010 were up 3.6% to $261.2 million compared to the previous year's $252.1 million.

Third-quarter net income was $19.3 million, or $0.98 per diluted common share, an 11% decrease from the third quarter of fiscal 2009 when net income was $21.7 million, or $1.12 per diluted common share.

The Company's Core Laundry revenues in the third quarter increased 1.8% compared to the same period in fiscal 2009.

However, Core Laundry revenues were down 1% when excluding the 1.4% benefit from acquisitions and the 1.4% benefit from a stronger Canadian dollar.

The Core Laundry revenues increased slightly from the second quarter of fiscal 2010 and we continue to be encouraged by the further improvement in our adds versus reductions metric.

Core Laundry operating income declined to $26.2 million in the third quarter of 2010 from $33.3 million for the same quarter last year.

The operating margin also fell to 11.5% from 14.9% in the third quarter of fiscal 2009.

The margin decline primarily relates to higher costs of revenues, including energy, payroll and merchandise costs.

Total energy costs for our Core Laundry operations as a percentage of revenues increased to 5.8% during the quarter from 4.9% in the third quarter of fiscal 2009.

Payroll costs were also higher than the same quarter in 2009, primarily the result of January 1st salary increases.

In addition, we continue to experience increased merchandise costs in terms of total dollars, as well as the percentage of revenues.

Overall merchandise amortization for the Core Laundries was higher than the second quarter of fiscal 2010, as well as the third quarter of 2009.

As expected, the significant benefit that we realized over the last two years from the utilization of garments received back from laid-off workers is beginning to turn.

We continue to see an increase in garments that we are placing into service to support both our existing customer base, as well as to support higher new sales levels compared to 2009.

Although utilization of our used garment stock is an important aspect of maintaining our profitability, ensuring our customers are provided with high-quality garments, continues to be a top priority.

Increased salesforce headcount, as well as the January 1st salary increase, contributed to higher selling and administrative costs during the quarter compared to 2009.

Also, as we discuss in our previous-quarter's earnings calls, over the next six years we will be recognizing noncash stock compensation expense in conjunction with restricted stock awards granted to our Chief Executive Officer during April of this year.

During the current quarter we recognized approximately $0.8 million of noncash stock compensation expense related to these grants, and in our fourth fiscal quarter we will recognize $1.2 million.

Also as a reminder, during the third quarter of fiscal 2009 we incurred a $1.1 million charge related to certain environmental contingencies.

Our results this quarter benefit from the absence of a similar charge when comparing them to the same period a year ago.

Overall the results of our Core Laundry operations for the quarter were in line with our expectations, as the margin decline coming off last-year's record highs was anticipated.

The Company's Specialty Garments segment increased its revenues $4.6 million, or 22%, compared to the third quarter of 2009.

This increase in revenues was the result of certain US and Canadian reactor projects continuing longer than expected.

Project-based work within this segment can be unpredictable with respect to the time and effort associated with completing reactor rebuild and refueling projects.

The longer these projects take the more uniforms and related processing our customers require to support these efforts.

In addition, this segment's European operations had a solid quarter and continued to expand their customer base following the opening of a new laundry plant in the United Kingdom last year.

As a result of this revenue -- increase in revenues, operating income for this segment increased to $5.2 million from $3 million in the third quarter of 2009.

We do want to caution that several of these reactor projects will not repeat in fiscal 2011 and therefore we expect that this segment's revenues and profits will decrease from the current fiscal year's record results.

Third quarter revenues for our First Aid segment increased to $7.8 million, up 6.6% compared to the same quarter a year ago.

Income from operations for this segment also increased to $0.7 million in the quarter from $0.4 million in 2009.

These stronger results were driven primarily by the segment's wholesale distribution business.

The van operations within this segment, which install and service First Aid cabinets continued to be pressured by a difficult economy where customers are still hesitant to add back expenses that were cut during the last couple of years.

Net interest expense for the quarter was $1.7 million, down slightly from $1.8 million a year ago.

Due to the weakening of the euro and the pound against the US dollar, we also recognized $0.6 million currency loss during the quarter compared to a $0.8 million gain in 2009.

The effective income tax rate for the quarter was 35%, down from 39.3% in the third quarter of 2009.

The lower rate for the quarter was the result of reductions of tax contingency reserves due to statute expirations as required by FIN 48.

We expect our income tax rate for the fourth quarter will normalize at approximately 39.5%.

Our balance sheet and overall financial position continue to be very strong.

At the end of the third quarter, the Company had $104.5 million of cash and cash equivalents on hand compared to $60.2 million at the end of our most-recent fiscal year.

Total debt outstanding remained constant at approximately $181 million and total debt as a percentage of capital decreased to 20.8% from 22.5% at year end.

Accounts receivable increased by $8.4 million, or 8.6% from year end.

This increase is primarily due to increased billings in our Specialty Garments segment, as well as sequential increases in our Core Laundry revenues, including the impact of a stronger Canadian dollar.

Merchandise and service increased $9.8 million, or 13.5% since the end of fiscal 2009.

As discussed, we continue to see a rise in new garment additions needed to support our customer base and expect that this trend will continue over the remainder of fiscal 2010 and into fiscal 2011.

For the first nine months of fiscal 2010 we generated significant cash flows from operations totaling $99.8 million.

Capital expenditures were $37.3 million for the first nine months of fiscal 2010 and we now expect that they will be approximately $50 million for the full fiscal year.

During the first nine months of the year free cash flows were primarily used to increase the Company's cash balances by $44.3 million, as well as to fund $17.8 million in acquisitions.

We continue to evaluate acquisition targets based on our long-term strategic objectives, as well as the appropriateness of their valuations.

We have significant borrowing capacity under our existing line of credit and can clearly take on additional leverage.

Based on our financial strength and ability to generate significant cash flows we continue to be well positioned to take advantage of strategic opportunities as they arise.

Based on the stabilization of our Core Laundry revenues, as well as the strong performance of our Specialty Garments segment, we are raising our previous revenues and earnings estimates for the full year.

We currently project that our revenues for fiscal 2010 will be between $1.017 billion and $1.022 billion.

We also project that our income per diluted common share for fiscal 2010 will be between $3.70 and $3.80.

We are very proud that the Company's record of always growing its full fiscal-year revenues, at least on an even work week basis, will likely remain intact despite enduring what some have called the worst recession since the great depression.

This achievement is a testament to the value of the services we provide, the resiliency of the Company and the ability of our employees to execute during difficult times.

We look forward to speaking with you all again in October to discuss our results of our fourth quarter, as well as to provide our outlook for fiscal 2011.

This completes our prepared remarks and, operator, we'll now be happy to take any questions they may have.

Thank you.

(Operator Instructions).

Our first question comes from the line of Chris McGinnis with Sidoti & Company.

Please proceed with your question.

Morning, guys.

Good morning.

I guess just in thinking about the operating margin and how it's -- obviously it was aided by the Specialty business this quarter.

Just going forward you talked about it declining, can you think of directionally in the Core Laundry operations how much pressure you think's still to come, or do you think that's -- I guess where we're at now at 11.5% is kind of a run rate?

I think where we will still have pressure going forward is in the merchandise area, and we're starting to see some of it now.

I think -- without getting too specific, I think there could be another point of pressure there.

Now a lot of that really depends on where the revenue ends up for next year.

Some of the pressure we're seeing is coming regardless of the growth that we're achieving.

It's more the lack of used garments that we have available and an increase in the garments we're placing in service.

So I think if we can gain some momentum on the top line and the adds reductions continue to improve, we can keep that deleveraging to a minimum, but we still have some ways to go in the merchandise side.

All right.

And then just on the -- obviously the acquisition side, is anything opening up, maybe getting a little -- I guess prices coming down at all, or is there any freeing up in that kind of market?

This is Ron.

We really haven't seen anything significant to this point.

We have talked -- there's a lot of smaller guys out there we're talking to, but nothing of the major size at this point.

And just to follow that, what's the driving -- I guess what would be the motivating factor for them at this point if the economy starts to improve here?

I think most of the time we're dealing with people that are older and want to resolve their estate issues or their family fighting over money.

That's really seems to be what's driving it at this point.

The driving factor.

If their volumes can recover a little bit, as well, that make them more likely to sell.

I think a lot of them didn't want to sell when the volumes were at their lowest.

Right.

All right, that's what I was hoping.

I'll step in the queue and then jump back once other people ask.

Thank you.

Thanks.

(Operator Instructions).

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

Baird.

Please proceed with your question.

Good morning, gentlemen.

Morning.

Wondering if you could just talk a little bit more about the Specialty Garments business and just how long we should at this point expect a little bit more elevated levels?

Essentially are some of these projects in the US and Canada that have continued longer than expected also going to continue into the fiscal 4Q, or should we already expect levels to drop off already starting next quarter?

I think typically the fourth quarter is one of their down quarters.

Just from a volume perspective there are less outages in that quarter.

So if you look at the historical trend, Q4 will clearly be down from Q3.

I think from a comparative perspective it may be a little better.

Some of these projects probably will have a little carryover into Q4, but they're starting to wrap up and that's why we cautioned as 2011 comes we'll have a whole new batch of outages but some of these special projects that caused the revenues to jump this year will clearly be over by that point.

Is there a way that you can give us an idea what the run rate may look like once we get into fiscal 2011, especially with the UK starting to ramp a little bit more?

That's probably fairly difficult for us at this point.

We have yet to go through the annual budgeting process that we'll walk through with that group where they really layout the outages for us, so we'll clearly have more insight to that next quarter.

But just from a comparative standpoint they've already cautioned us that overall full-year fiscal revenues will likely be down somewhat next year, but to what extent we'd be hesitant to say at this point.

Okay, fair enough.

On the add/stop, because it sounds like they -- is it fair to say that they just -- they're still negative but they continue to be less negative and that they have not quite yet turned positive, is that correct?

That's correct.

Okay.

And then in terms of how we think about the organic growth rate in the Core Laundry business, do we think we can start getting to positive organic growth already next quarter, or is that a little bit optimistic just given what we're seeing in the environment out there?

That might be a little optimistic, but we do expect that we'll continue to narrow that gap and then as we move into next year hopeful that we're starting to show organic growth rates at the very latest early next year.

Okay, okay.

No, that's fair enough.

And then just trying to attack the merchandise question just a little bit more, could you maybe tell us what the merchandise cost hit was this quarter versus last year?

From a percentage margin perspective, or the --

Yes, from a margin perspective, yes.

It was in the neighborhood of about 0.5% It's still not -- and that's why we think there's still some left to come.

I think we've said in the past few quarters that our merchandise costs last year especially were probably 1.5 to 2 points lower than a historical level, and I'm not sure we'll give all of that back but we clearly haven't even really given back a full point compared to last year, and I think we'll at least do that.

All right.

I guess even then in that perspective -- sorry just to play a little bit of devil's advocate to me feels like maybe holding 11% margins may be a little bit challenging.Tell me where I'm wrong in that perspective, especially given that it sounds like pricing in the industry is still pretty challenging?

I think that's still our goal but we don't disagree that that could be challenging given the merchandise and the environment.

It really depends on how much momentum we can get from a top-line perspective and to really move the revenues, but I think you're looking at it the right way.

Okay.

And then just final question, just can you give us an idea as to in terms of how much your salesforce headcount is up at this point?

We're up about 6%.

Okay, great.

Thanks so much, guys, great quarter.

Thank you.

(Operator Instructions).

The next question is from William Lee with JPMorgan.

Please proceed with your question.

Mr.

Lee, your line is open.

Please proceed with your question.

Hi, gentlemen.

Can you hear me now?

Yes.

Okay, great.

When you look at the add/stop improvement can you help us understand is that additional uniforms at existing clients or is that new services so mats at existing clients that's driving that improvement?

It's primarily an improvement in the net wears at existing accounts.

So it's not solely an improvement from new products going into accounts like mats or mops, it is an improvement in the wears.

And again, it's a less negative number at this point from a purely wearer perspective.

Right, I see.

Okay, great.

And then if we look at the operating margins, operating margins improved 80-basis points sequentially and can you just go through what were the large components of that driving that improvement?

What were the pluses and what were the minuses in basis points?

From the second quarter I don't have that full analysis, but if you go back and look at some of the items we highlight that are always higher in our second quarter we have some annual sick pay payouts and some things that are specific to the second quarter that the absence of those items in the third quarter was the largest part of the margin improvement.

Some of that is offset by the stock-compensation expense we mentioned that was in the third quarter and not the second quarter and we continue to have merchandise pickup.

So those are really the key items that cause that difference.

Right, I see.

Okay, great.

Well, thanks again.

There are no further questions at this time.

We'd like to thank you all again for your interest in our Company.

We feel more and more confident each day that the worst is behind us with the recession, allowing us to refocus our primary efforts on sustaining long-term Company growth, and investor return by delivering the highest quality customer service in the industry.

We look forward to talking to you next quarter when we'll be reporting on our fourth-quarter and our year-end performance.

Thank you and have a great day.

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.