UniFirst Corp (UNF) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the UniFirst fourth quarter earnings results conference call.

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

Afterwards we'll 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 fourth quarter results for fiscal 2010 and to discuss our expectations going forward.

I am 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'll turn the call over to Ron Croatti for his comments.

Thank you Steve.

And welcome to all of those joining us for the review of the UniFirst's fourth quarter and full fiscal year 2010 results.

Our numbers were released this morning and I am happy to report they showed a year of record revenues and a record net income for UniFirst despite the many business challenges associated with the high unemployment levels and slow economic discovery.

I want to sincerely thank our entire management team and our thousands of dedicated partners throughout North America and Europe for their tremendous efforts to increase our customer satisfaction and loyalty levels, contributing significantly to another record-setting fiscal year.

For the full year, revenues were $1,026,000,000 a 1.2% increase from fiscal 2009's $1,013,000,000.

And net income was $76.4 million, up 0.07% from last year's $75.9 million.

Meanwhile, income per share decreased slightly in 2010 to $3.90 per diluted common share, a 0.5% decrease from the $3.92 per diluted common share that we reported in '09.

All these results were ahead of expectations and guidance we provided during the year.

Our Core Laundry operations which represent approximately 90% of our total business reported a decrease in revenues and operating income as compared to 2009, down 0.5% and 8.8% respectively.

However, it should be noted that in spite of the tough economic times, the comparative revenue shortfall was among the lowest in the industry.

Our Specialty Garment business made up of [nuclear and clean room] operations saw net revenues and operating income records in 2010 [entering] last year's revenues by 21.6% and operating income by 88.7%.

Our First Aid operations also saw positive growth in 2010 over 1009 with increases of 5.8% and an increase in operating income of 58.7%.

For the fourth quarter, the Company's revenues were $255 million, a 5.6% increase over the same period in fiscal 2009.

Net income was $17.3 million or $0.87 per diluted common share, a slight increase over last year's fourth quarter.

Steve will go over all the financial results in more detail in a moment.

Employment levels and general economic conditions directly affect our core rental market and demand for UniFirst products and services.

And throughout fiscal 2010 we witnessed national employment consistently near 10% in both the US and Canada causing widespread customer reductions in our uniform wearers.

We also lost many accounts due to business closings and decisions not to renew service agreements for financial reasons.

And we observed a general lack of confidence both in consumer spending and future market conditions caused many companies to delay the longer-term purchase commitments and to postpone rehiring laid-off workers.

But thankfully as the year progressed, we saw progressive week to week decreases in the recession-related wearer reductions and customer losses although still not returning to pre-recession levels.

This signals a long-awaited stabilization within our markets and through it all.

Our Company-wide commitment to service excellence along with intensified strategic selling efforts led to another successful year at UniFirst.

As a result of our proactive steps, our uniform rental business showed a solid performance in 2010 with customer retention levels improving over 2009 and new business sales were also up over last year, helping our top line.

The Company's overall sales advanced despite a particularly resistant prospect pool, overly aggressive pricing by competitors using price alone as a strategy to gain new business.

Our professional sales team continue to optimize our ongoing investments and sales productivity and prospecting technologies and benefited from the intense training programs that focus more on strategic selling during tough economic times.

Our national account sales organization in particular contributed throughout the year with a noteworthy year-over-year improvement singing several new large-scale customers as well as securing many important contract renewals.

Group sales also showed a slight improvement from last year, adding more and more products and services into our existing customer accounts.

Both Specialty Garments and First Aid safety business expanded their geographic coverage during the year, laying improved foundations for future growth.

Both businesses continue to show considerable upside potential.

Our Specialty Garment unit due to its unique technical expertise in the nuclear contamination area stands to realize substantial growth opportunities as nuclear energy is once again gaining favor worldwide as a practical cost-effective option to the use of traditional fossil fuels.

Our First Aid and safety business is positioned to service a broader range of customers in more ways than ever before due to its balance of direct user service programs, wholesale medication business and contract co-packaging operations.

So both of these business units are looking beyond the current downturn with justifiable optimism.

As we move ahead in fiscal year 2011, unemployment remains high.

The stock market continues to fluctuate and consumer spending remains low.

Experts [and prudence] agree that a full market recovery will ultimately take years, so we need to manage our business accordingly in 2011 and beyond.

For our part, we continue to maintain fiscal discipline and tight control over everything we do, limiting our expenditures that do not directly benefit our customers or our bottom line.

At the same time, we ensure all our team partners are effectively trained and remain committed to excellence in providing service to our client base.

We will also continue the to invest in our professional and national account sales teams as a key driver of organic growth.

We will maintain a consistently strong cash flow to allow for any competitive acquisitions that make sound business sense.

I have great confidence that all our team partners as always will effectively execute UniFirst's strategic plans and our Company will emerge an even stronger, more dynamic industry leader when a revitalized market reappears.

History has shown UniFirst's resilience and ability to succeed despite unfavorable market conditions.

And these corporate characteristics will once again hold true as we maneuver towards a healthier economy.

It all comes down to following the founding principles which demands we always do business within the Golden Rule.

To consistently service our customers as we wish to be serviced and to treat our people as we wish to be treated.

Through these basic ideals, we continue to grow the Company and produce long-term return for our shareholders.

Thank you for your continued support.

I look forward to reporting to you on the Company's progress in the quarters ahead and now let me turn it over to Chief Financial Officer Steven Sintros for a more detailed review of the numbers.

Thanks, Ron.

As usual, I will provide some additional insight into our our operating results for the quarter, our overall balance sheet position as well as our outlook for fiscal 2011.

Revenues for the fourth quarter of fiscal 2010 were up 5.6% to $255 million compared to the previous year's $241.5 million.

Fourth-quarter net income was $17.3 million, up 1.6% from the fourth quarter of fiscal 2009 when net income was $17 million.

Earnings per diluted common share were down slightly to $0.87 for the current quarter from $0.88 in the fourth quarter of fiscal 2009.

The earnings per diluted common share for the current quarter were impacted by approximately $0.02 per share by the dilutive effect of the restricted stock issued to our CEO earlier this year.

The Company's Core Laundry revenues in the fourth quarter increased 4.3% compared to the same period in fiscal 2009.

Core Laundry revenues were also up 2.2% when excluding the 1.5% benefit from acquisitions and the 0.6% benefit from the stronger Canadian dollar.

We are encouraged for the first time in six quarters, our Core Laundry revenues have shown positive organic growth.

Several factors have contributed to this segment's return to positive organic growth.

[As versus] reductions have continued to stabilize as headcount reductions at our customers have significantly decreased from a year ago.

As Ron mentioned, our sales force sold more new business in fiscal 2010 than in fiscal 2009.

Fiscal 2010 also saw improved customer retention levels as we had fewer customers go out of business than we did in fiscal 2009.

Core Laundry operating income declined to $26 million in the fourth quarter of 2010 from $27.5 million in the same quarter last year.

The operating margin also fell to 11.4% from 12.6% in the fourth quarter of fiscal 2009.

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

Total energy costs for our Core Laundry operations as a percentage of revenues increased to 5.6% during the quarter from 4.8% in the fourth quarter of fiscal 2009.

In addition, we continue to experience increased merchandise costs.

As we have discussed in prior calls, we received a substantial benefit over the last two years from the utilization of garments received back from workers who had been laid off.

However over the last six months, we've seen a significant increase in garments that we were placing in service to support both our existing customer base as well as to support higher new sales compared to 2009.

Payroll costs were also slightly higher than the same quarter in fiscal 2009 which was primarily the result of January 1 salary increases.

These higher costs were partially offset by lower bad debt expense during the quarter compared to the same period a year ago.

Core Laundry selling and administrative expenses for the quarter were slightly lower as a percentage of revenues compared to the fourth quarter of fiscal 2009 which was primarily the result of lower expense associated with legal and environmental contingencies as well as other selling and administrative expense.

That impact was partially offset by higher stock compensation expense in conjunction with restricted stock grants to our CEO in April of this year.

During the current quarter, we recognized approximately $1.2 million of non-cash stock compensation related to these grants.

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

The Company's Specialty Garment segment increased its revenues $3.4 million or 20% compared to the fourth quarter of 2009.

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

As a result of this increase in revenues, operating income for this segment increased to $2 million from $0.9 million in the fourth quarter of 2009.

This segment ended the year with a record $13.9 million in operating profits, up 88.7% from fiscal 2009.

As we discussed in our prior earnings call, a portion of this year's revenue and profits related to certain projects that are not likely to reoccur in fiscal 2011.

We do not typically provide guidance by operating segment but due to the strong results in the current year, we would like to provide some directional guidance for this segment.

We are currently forecasting this segment's revenues to be down approximately 10% in fiscal 2011 and the operating income to be down approximately 20%.

We do want to remind you that this segment is often subject to external factors that make its results more difficult to forecast.

Factors such as the timing and length of reactor outages as well as the funding for projects by both government and private sources can significantly impact this segment's revenues and overall results.

Fourth-quarter revenues for our First Aid segment increased to $7.9 million, up 10.5% compared to the same quarter a year ago.

Income from operations for this segment was flat at $0.7 million for both fourth-quarter periods.

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

The van operations within this segment which install first aid cabinets -- install and service first aid cabinets continue to be pressured by a difficult economy where customers are still hesitant to add back expenses.

On a consolidated basis, net interest expense for both the current and fourth quarter of fiscal 2009 were $1.7 million.

Due to the strengthening of the euro and the pound against the US dollar, we also recognized a $0.5 million currency gain during the fourth quarter compared to a $0.1 million gain in the same quarter a year ago.

In addition, the Company's effective income tax rate for the quarter was lower than the prior year as a result of reductions in tax contingency reserves.

The effective income tax rate for the quarter was 37.1% compared to 38.3% for the fourth quarter of 2009.

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

The end of fiscal 2010, the Company had $121.3 million of cash and cash equivalents on hand compared to $60.2 million at the end of fiscal 2009.

Total debt outstanding remained constant at approximately $181 million and total debt as a percentage of capital decreased to 20.4% from 22.5% at year end.

Accounts receivable increased by $7.5 million or 7.6% from the end of fiscal 2009.

This increase is primarily due to increases in our Core Laundry revenues including the impact of the stronger Canadian dollar.

Merchandise and service increased $13.6 million or 18.6% since the end of fiscal 2009.

As we discussed, we continue to see a rise in new garment additions needed to support our customer base and we expect this trend will continue during fiscal 2011.

In addition, we wanted to bring your attention to certain amounts that have been reclassified on our balance sheet.

Due to the June 2011 maturity of certain private placement notes payable, we were required to classify $75 million of our debt as short-term as of year-end.

In addition, we've also classified $30.3 million as long-term accrued liabilities.

This amount relates to certain portions of our pension and environmental obligations.

It was determined by the Company that long-term classification was more appropriate for these liabilities as they are not likely to be settled in the upcoming year.

Prior year amounts have also been re-classified for comparison purposes.

As always, further disclosure of these items is available in our filings with the SEC.

For the full year fiscal 2010, we generated significant cash flows from operations totaling $134 million, down from $159.2 million in fiscal 2009.

This decrease is primarily related to the increase in merchandising service levels in fiscal 2010.

Conversely this was a source of cash in fiscal 2009 as demand for new merchandise fell dramatically.

Capital expenditures were $50 million for fiscal 2010 and we expect they will be between 50 and $60 million during fiscal 2011.

During the year, free cash flows were primarily used to increase the Company's cash balances by $61.1 million as well as to fund $20.9 million in acquisitions.

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

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.

At this time, we would like to share with our outlook for the upcoming fiscal year.

We currently project that our revenues for fiscal 2011 will be between $1,040,000,000 and $1,055,000,000.

We also project that our income per diluted common share for fiscal 2011 will be between $3.15 and $3.45.

I want to take a few moments now and discuss several of the assumptions that are embedded in these projections.

Our revenue guidance assumes Core Laundry revenues increasing 2.5% at the low end of our range and 4% at the high end of our range.

We discussed during fiscal 2009 and fiscal 2010 that the utilization of garments received back from our customers reduced our merchandise costs significantly as a percentage of revenues.

Our earnings guidance assumes that the impact of higher merchandise costs will reduce the Core Laundry's operating margin by approximately 1.5% during fiscal 2011.

Although many variables make projecting such an impact inherently difficult, we are confident we will continue to see margins pressured by higher merchandise additions.

In addition, the Company anticipates recognizing approximately $4.7 million of stock compensation expense in fiscal 2011 related to the restricted stock granted to our CEO.

In addition to the higher stock compensation expense, these grants will also have an impact of reducing our diluted earnings per share by approximately $0.04 compared to fiscal 2010 due to the additional dilutive effect of these shares being outstanding for the full year.

Our guidance also takes into account the projected decrease I discussed earlier in revenues and profits of our Specialty Garments segment from the record highs that this segment experienced in fiscal 2010.

Finally, our guidance assumes an effective tax rate of a more normalized 39% in fiscal 2011, up from the 37.8% in fiscal 2010.

We're very proud that the Company set new records for revenues and net income while continuing to deal with a very challenging economic and employment environment.

As expected, our operating margins are beginning to normalize from the highs over the last two years while we continue to be confident in the overall direction of the Company and our financial position and stability.

We believe are well positioned to capitalize on future growth opportunities as the economy improves, which in turn will help us work towards achieving sustainable margin improvement.

We look forward to speaking with you all again in January to discuss the results of our first quarter and that completes our prepared remarks.

Operator, we will now take any questions.

(Operator Instructions) Andrew Steinerman, JPMorgan.

Good morning, gentlemen.

Steven, could you just go through the changes in gross margin year over year besides for merchandise amortization in the just-reported fourth-quarter as well as drivers to the gross margin in the fiscal year '11 guidance besides for merchandise amortization?

Let me hit your question and you can tell me if you think I answered it, Andrew.

For the fourth quarter, the margins were down about 1.2% for the Core Laundry.

The bulk of that was energy.

It was about 0.8.

Merchandise was about 0.5 points as well, and some of that -- those two were the largest drivers and those two were offset somewhat by lower bad debt expense during the quarter.

And that made up the bulk of the margin decline during the fourth quarter.

Our SG&A was fairly constant.

There were a couple of offsetting items, but none that had a major impact during the quarter.

With respect to next year as embedded in the guidance, the primary item that we're contemplating decreasing the margin is the merchandise.

At this point, we are not necessarily projecting a significant change in the energy which is always a wildcard.

There are a few other items that over the last couple of years have been somewhat of a headwind including healthcare that continues to rise significantly.

But other than that, there's not many other significant drivers that we have factored in to decline that margin.

Now that being said, I did mention the stock compensation expense related to the grant.

That's $4.7 million which in and of itself is a few tenths of a headwind compared to 2010.

Right, and to just wrap it up, shouldn't there be operating margin leverage with the return to growth besides for merchandise amortization?

(multiple speakers) amortization aside, shouldn't the 2.5 to 4% Core Laundry growth lead to operating margin expansion?

I think when you look at our other costs, primarily being payroll is our biggest other driver, our payroll cost will probably go up in that same neighborhood.

We may get some small operating leverage from that growth on some of our other areas, but not that significant.

When you look at I guess the higher end of our range, that implies over an 11% operating margin.

So if you take off the 1.5% of merchandise I'm talking about from this year's 12.6%, that puts you just about at 11% given the fact that the restricted stock expense is a few points headwind.

There is some other embedded margin improvement in those numbers.

John Healy, Northcoast Research.

Ron, a question for you on pricing.

A lot has been talked about over the last two years of pricing competition in the marketplace.

And I wanted to get your thoughts on where you think pricing goes maybe over the next three or four years.

Is this still an industry where we can see positive net pricing on an annual basis?

And do you believe that the contracts that you have repriced over the last two years can get the pricing where contracts are that haven't rolled off?

And curious to get your thoughts on how that works over the next couple of years.

John, as you well know, all of our contracts have a price increase clause and it's CPI.

And we basically have been getting the price increases wherever we can for our rental agreements.

But the pressure for new business from all the competition out there has eroded some of the pricing in the existing marketplace when you go to renew an account.

So for us, it came out a little positive for the year when we measure what we put in and what we lost on pricing.

I think pricing will return to a more normalcy as we move along.

If things just flatten out or pick up a little bit, we'll see the highly competitive pressure come off.

Seems to be more on the larger accounts than the smaller accounts.

But I would expect that over the long term, it will come back to its normal run rate.

Okay, that's helpful.

And, Steve, question about the balance sheet.

With the debt that is coming due this year, what are your thoughts there?

Will you replace most of that?

Will you look for a new line of credit?

Will you work down that debt?

Curious to see what your thoughts are there?

Yes, I think it's something we're looking and working with our bank group on now.

We will likely replace the line of credit that we have that's also expiring.

I didn't talk about that.

We don't have anything outstanding on our line right now, but that expires within the next year as well.

We will likely renew that but we need to look at the levels of borrowing that we want to allow for under that line.

And the $75 million that's due in June, the rates right now are very attractive in that market.

And so depending upon what we see as potential opportunities over the next couple years, we will weigh all that and take it into account.

But it is a good time to lock in some long-term money.

Okay, and then just last question for clarification, Steve.

You talk about the $4.7 million in stock option expense this year.

Am I right in thinking you saw about half of that already in fiscal '10, so only half of that is incremental step up over this year that we just completed?

Or am I not thinking about that correctly?

No, that's correct.

We recognized actually $2 million over about the last five months of fiscal 2010.

[Justin Hawk], Robert W.

Baird.

Good morning, guys.

I just had a quick question on the revenue guidance for that assumption of the 2.5 to 4% organic growth rate.

Just curious, how much of that is kind of built in from your base price increases, the CPI plus increases on your existing accounts?

Roughly about 1%.

Okay, so 1.5 to 3% would be from new business sales then?

That's correct.

And as Ron mentioned before, that price number of 1% takes into account what we anticipate having to give back in other competitive pricing situations on renewals as we did this year.

Okay, got it.

So your base price may be higher than that but some of the give-back would push it down to the 1% on a net basis.

That's probably fair.

Okay.

Second question is just in the Specialty Garment business, I know you've talked about Sellafield in the past is an area that has been ramping up.

I'm just curious if outside of the caveats that you provided on the directional guidance if we should assume that that business has kind of reached a level where maybe on a base level, the Specialty Garment business is a little bit higher just from that Sellafield contribution?

I think what you are asking is the margin going to be higher than the Core Laundry is on an ongoing basis.

I was actually more just talking about on the topline, if that is going to remove some of the lumpiness and make it a little bit elevated versus historical levels just from that contribution.

I think we are missing the gist of your question, Justin.

Can you try one more time?

Sure, just asking if -- really the core question is on Sellafield, if that is becoming a more meaningful part of your Specialty Garment business or is that not driving the number at this point?

When you say Sellafield, we're not catching what you're meaning.

What is the that?

Aren't you doing the nuclear replacements at the Sellafield account in the UK?

We do British nuclear fuels.

I can't tell you exactly which site it is.

Got it.

I was misinformed then.

Thank you.

(Operator Instructions) Chris McGinnis, Sidoti & Co.

Can you maybe just talk about the acquisition environment a little bit?

You know, how it's looking, any closer to maybe that opening up a little bit?

Chris, we wish it would.

You know, I would say the acquisition pipeline is not as robust as I would like.

It's still an issue of owners basically still have large valuations in their mind.

So the reality hasn't set in, you talk to them.

The only leverage we have got is the tax leverage.

Now's the time because of the cheaper tax.

But it basically comes down to they still get the high valuations and if they do sell, where they put the money to get a return equal to what they're pulling out.

And as far as some of the larger ones, you know, none of the larger ones are ready to go at this point in time.

I mean, just like selling a Street account, we're all out there talking to the same people.

It's got to make good sense.

That's the only thing I can say.

All right, and then I guess just on the [ed stop] and the organic growth there, could you just talk about maybe what drove that?

I know it's -- the new wins was a portion of that.

I guess what makes you different that you're grabbing that?

Can you talk maybe I guess how you're competing?

Is it on the price?

What's driving that?

Well, what we try to do is when we're out there soliciting the accounts, we are trying to find any service deficiencies and certainly get the key individual involved in that service deficiency, get him emotionally involved.

And if we can get him emotionally involved and he's got these service deficiencies and we can present and we have a better alternative, we can move the account.

When you're just competing on price, once you compete on price, you're always going to compete on price of an account.

So you write an account on price, he's good for one contract.

You write an account for deficiency of service, he is generally going to stay with you long term.

Because we do give good service and we pride ourselves with it.

So we're really looking for customers with pain.

John Healy, Northcoast Research.

Thanks.

Ron, I was hoping you could maybe try to give a little qualitative comment regarding the environment out there and maybe if there were any markets or regions of the country where you're seeing more improvement or any regions of the country where you're seeing things go a little bit lackluster out there?

I think the -- John, the area that we see moving a little better is really the Texas market.

It has to do with the oil and the gas fields and gas I guess more than anything.

But that's a very positive for us.

We're still in the Florida market, still down.

It's a housing issue down there.

The West Coast, it really hasn't changed much with California (inaudible) bankruptcy and it's a crazy market.

So I would say our most promising area is the Southwest, Texas and New Mexico areas.

Great, and then a question, Steve.

I might've missed it, but did you talk about how much energy was as a percentage of overall Company sales this quarter?

Sure, let me (multiple speakers) pull that number out for you, John.

I had it as of the Core Laundry -- for the Core Laundry it was 5.5% for the quarter compared to 4.8% last year.

And that was for the quarter?

That's for the quarter, yes.

Perfect, thank you, guys.

Thank you.

Mr.

Sintros, at this time, there are no further questions.

I will now turn the conference back over to you.

We would like to thank all of you again for your continued interest in our Company.

We're happy to report favorable year-end results and especially pleased to do so when taking into account the challenging economic environment in which our team partners performed.

We look forward to talking to you again in January when we will be reporting on our first-quarter performance for fiscal 2011.

Again, thank you for your time.

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.