UniFirst Corp (UNF) 2011 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.

(Operator Instructions).

As a reminder, this conference is being recorded today, Wednesday, March 30, 2011.

I would now like to turn the conference over to Steven Sintros, Chief Financial Officer for UniFirst Corporation.

Please go ahead, sir.

Thank you, and welcome to the UniFirst Corporation conference call to review our second quarter results for fiscal 2011, 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 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, the 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 10-K filing with the Securities and Exchange Commission.

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

Thank you, Steve.

I'd like to welcome all of you who are joining us for the review of our second quarter fiscal 2011.

Steve will cover the financial details in a moment.

Let me first provide a recap.

UniFirst revenues for the second quarter of fiscal 2011 set a new record at $278.6 million, a 9.9% increase over the $253.6 million reported for the same period a year ago.

Six months, year-to-date revenues were also an all-time high, totaling $551.7 million, an 8.2% increase from the comparable period in 2010.

UniFirst net income for the second quarter grew slightly year-over-year, totaling $16.3 million, as compared to $16.2 million from a year ago.

Net income for the first six months of the fiscal year also set a new record, reporting $40.0 million at mid-year mark, which also represents a slight increase over the first half of last year.

Major contributors to the Company's top line growth in the second quarter was continued positive performance of our Core Laundry business.

Our laundry showed record high revenues, with an 8.6% increase over the same period in 2010.

But as anticipated, income from laundry operations dipped from last year, primarily due to normalization of merchandise cost to more historic levels.

Steve will expand upon this in a few minutes.

Our Core Laundry results for the quarter were complemented by a strong growth, from both our Specialty Garment and First Aid business.

Our nuclear cleanroom operations, which we refer to as Specialty Garment segment, showed a 21% quarterly revenue gain over the same period in 2010, continuing to capitalize on their leading market positions serving the US nuclear industry, and effective growth strategies in Canada and Europe.

Our First Aid segment reported a 19.8% revenue increase, when compared year-to-year second quarter.

This record-setting effort was led by the unit's private label pill packaging division, and customer stabilization with our business to business manned service group.

Like most companies, UniFirst was significantly impacted by the recession-related losses, and considerable market adversities between 2008 and 2010.

Through it all, our team partners consistently rose above the challenges, which allows us to sustain continuous growth during some of the toughest economic times our Company has witnessed throughout our 75 year history.

In 2011, despite the many hurdles that remain, our team partners are continuing with extraordinary performance level.

Most notably, our sales and service organizations are consistently improving upon their results.

Our professional field and national accounts sales team continue to demonstrate positive ROI, posted by our ongoing investment in their training and education, and by maximizing the use of our advanced prospecting technologies.

More than ever, our reps are effectively communicating the overall value UniFirst delivers to its business customers.

And as a result, sales efficiencies have been steadily increasing, along with weekly sales averages.

Our service teams have also continued to ramp up overall performance in 2011, solidifying their client relationships to improve customer retention, and consistently adding more ancillary products into existing accounts to improve our add over reduction maintenance, which remains just slightly negative.

Our consultative approach to exceeding customer expectations, effectively positioning UniFirst as an economical, single source solution for both work apparel and facility services, and to help our customers as well as our bottom line.

So, with signs of stabilization within our customer base, as well as some recent positive market indicators, we're hopeful the worse of the recessionary conditions are behind us.

But we know there is no time to let our guard down, because the current economic environment continues to be a challenging one.

Unemployment remains high, job creation remains slow, and spending remains cautious.

We have been experiencing increases in some of our core costs of doing business.

For example, energy and healthcare expenditures have steadily trending upward, and merchandise expenses, and as I mentioned, has been on the rise, primarily related to garment costs associated with our organic sales growth, and worldwide market conditions dramatically impacting commodity prices.

We're anticipating further cost challenges for the balance of the year into fiscal 2012.

Therefore, we'll be continuing to manage our operations and expenditures prudently.

Our corporate mandate will remain firmly in place, as we cautiously move forward.

Our team partners will remain committed to service excellence, to retain our customers, and to help margins.

Our operations will remain dedicated to sales productivity, to increase market share and our top line.

And our managers will remain unwavering with their cost controls, to keep the lid on non-essential spending, and minimize overall expenditures.

So all through complex market conditions remain, and worldwide economic forecasts are not as promising as we'd like, we're confident that our strategies are sound, our business units are suitably positioned to sustain positive momentum, in both the short and long term.

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

And now, to fill you in on the financial details, I'll turn it back over to Steve.

Thanks, Ron.

Consolidated revenues for the second quarter, as Ron mentioned, were $278.6 million, up 9.9% compared to $253.6 million for the same period in the prior year.

Second quarter net income was $16.3 million or $0.82 per diluted common share, compared to net income for the second quarter of fiscal 2010 of $16.2 million, or $0.83 per diluted common share.

Earnings per diluted common share for the current quarter were negatively impacted by approximately $0.02 per share, due to the dilutive effect of the restricted stock issued to our CEO in April 2010.

The Company's Core Laundry revenues were $246.9 million in the second quarter, up 8.6% from those reported in the same period a year ago.

After excluding the positive effect of acquisitions, which contributed 1.5%, as well as the stronger Canadian dollar which contributed 0.4%, the Company's Core Laundry revenues increased 6.7% organically.

Our year-over-year growth was a result of improvements in our key growth metrics.

New sales for the second quarter showed considerable improvement compared to a year ago, due to higher sales rep productivity.

In addition, our measure of the change in wears at our existing accounts, which we call additions versus reductions, significantly improved compared to the same quarter last year.

Similar to our first fiscal quarter, higher makeup, emblem and lost and damaged charges, also contributed to the overall growth.

These charges had declined in the past two years, as there was less turnover of wears in our existing customer base.

Customer retention came in at a similar level during the quarter, as compared to a year ago.

The Core Laundry operating margin fell to 9.3% in the quarter, from 11.8% in the second quarter of fiscal 2010.

As anticipated, the margin decline primarily relates to higher merchandise amortization as a percentage of revenues.

This increase is being driven by several factors.

The largest factor is the normalization of merchandise levels needed to support our existing wearer base.

As we have discussed in prior calls, during 2009 and early fiscal 2010, our results benefited significantly from the utilization of used garments received back from our customers, who had reduced their workforces.

Over the last few quarters, we've had to put significantly more new garments into service to meet the day-to-day needs of our existing wearer base.

Higher new account sales, including some larger national accounts, have also required a large upfront investment in merchandise.

In addition, certain OSHA regulations have mandated that many of our customers provide their employees with flame resistant garments.

This recent regulation, combined with a spike in oil prices, which has positively impacted the wearer levels at certain customers particularly in Texas, has caused us to place significantly more of these higher cost specialized garments into service.

Over the years we've always discussed how periods of higher growth tend to require a heavier upfront investment in merchandise.

The impact we are seeing now is consistent with this historical trend, and is not unexpected coming off a period of such low merchandise costs as we experienced during the recent recession.

In addition to higher merchandise amortization, a number of other items also contributed to the margin decline.

During the current quarter we recognized approximately $1.2 million of non-cash share-based compensation expense related to the restricted stock grants to our CEO in April 2010.

The quarter was also impacted by many states significantly increasing unemployment taxes to support extended unemployment benefits.

Total energy costs for our Core Laundry operations as a percentage of revenues also increased slightly during the quarter to 6% of revenues, from 5.9% in the second quarter of fiscal 2010.

Higher fuel costs for our fleet of delivery vehicles were largely offset by lower natural gas costs.

These higher costs were partially offset by a $0.5 million accounting benefit related to the effect of discount rate fluctuations on our value of our environmental liabilities.

The Specialty Garments segment which consists of nuclear decontamination and cleanroom operations posted revenues of $23.5 million, up 21% compared to the second quarter of 2010.

As a result, operating income for this segment increased to $3.7 million in the second quarter of fiscal 2011, from $2.1 million in the second quarter of last year.

The strong performance of this segment was primarily the result of increased revenues and profits associated with ancillary services and Canadian reactor projects, in addition to improved results from its cleanroom operations.

Revenues for our First Aid segment increased 19.8% to $8.2 million in the second quarter of 2011, compared to $6.9 million in the same quarter a year ago.

As a result, income from operations for this segment also increased to $0.9 million in the quarter, from $0.2 million last year.

The increase in revenues and profits were the result of better performance from this segment's wholesale distribution and pill packaging operations.

This segment's van operations which have been hit hard over the last two years as a result of higher unemployment, also showed some much needed stabilization during the quarter.

The results for the quarter were also affected by foreign exchange gains of $0.2 million, compared to losses of $0.8 million in the same quarter a year ago.

The effective income tax rate for the quarter was 38.2%, compared to 39.1% for the second quarter of fiscal 2010.

The decrease in rate was primarily due to the impact of lower federal and provincial income tax rates in Canada.

We now expect our full-year tax rate to be approximately 37.5%.

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

At the end of the second quarter, the Company had a $107.5 million of cash and cash equivalents on hand.

Total debt outstanding remained relatively constant at approximately $181 million, and total debt as a percentage of capital decreased to 19.2% from 20.4% at our August fiscal 2010 year-end.

Accounts receivable increased by $19 million, or 18% from year-end.

This increase is due primarily to the increase in Core Laundry and Specialty Garment revenues, as well as a slight deterioration in the overall age of our receivables.

Inventories increased $10.8 million or 22.8%, and merchandise and service increased $11.9 million or 13.7% since the end of fiscal 2010.

As I discussed earlier, the increase in merchandise and service, relates to higher levels of new garments being placed in service to support both our new account sales, as well as our existing customer base.

As a result, a higher level of new inventory is being manufactured and held to support this increased demand for new garments.

For the first six months of fiscal 2011, we generated cash flows from operations of $32.6 million, down from $65.1 million in the first six months of fiscal 2010.

The decline was primarily due to the increases in receivables, inventory, and merchandise and service that I just discussed.

In addition, as of the end of February, the Company was in a pre-paid position with respect to its income tax obligations due to the timing of certain estimated payments.

We expect this to normalize over the next two quarters.

Capital expenditures for the first six months of fiscal 2010 were $31.2 million, and we now expect they will be between $55 million and $60 million for the full-year.

During the first half of the year, we also expended $16.3 million on several small acquisitions in our Core Laundry operations.

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

In addition to our cash on hand, we currently have significant borrowing capacity and low overall leverage.

Based on our financial strength, we are well-positioned to take advantage of strategic opportunities as they arise.

Based on our results through six months, we now project that our revenues for fiscal 2011 will be between $1.85 billion and $1.1 billion.

We also project that our income per diluted common share for fiscal 2010 will be between $3.50 and $3.70.

At the high end, this guidance assumes a Core Laundry's full-year operating margin of slightly lower than the original target of 11%.

The primary factor driving the margin difference from our original estimates are upward revisions to our full-year energy costs, which are based on the current cost of fuel and natural gas.

We look forward to speaking with you all again in late June to discuss the results of our third quarter, and to update you on our thoughts for the remainder of the fiscal year and beyond.

That completes our prepared remarks.

And operator, we are now ready for any questions the audience may have.

Thank you.

(Operator Instructions).

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

Please proceed.

Hi, there.

I wanted to talk to you about fuel surcharges, perhaps.

Given that energy prices are on the rise for everyone, do you feel like the industry is in a position to talk to the end users about fuel surcharges?

Andrew, this is Ron.

At this point, we have not adjusted, what we would call our fuel energy environmental charge.

We're kind of watching what goes on.

We know our competition has.

We're kind of watching it, before we go out and hit our customers, and we want to make sure we're doing the right thing.

Right, could you articulate a little bit more, like how long do you feel like you want to wait before doing that?

Probably another quarter.

Okay.

Thanks so much, Ron.

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

Please proceed.

Hi, good morning.

Good morning.

I guess looking at just the year-over-year decline, whether you want to just look at the Core Laundry or just on a consolidated basis, could you just walk through, if you can the impact from each of the things you referenced, the inventory, the CEO package, and then the fuel?

Can you just walk through, as a percentage of how that contributed to the margin compression?

Sure.

When we're looking -- and these numbers would be just for the Core Laundry.

Yes, right.

The biggest piece obviously, is the merchandise, and that impacted the Core Laundry's margins by 1.8%.

The CEO comp is about a 0.5%.

Energy was only about 0.1%.

And the other piece that was, I think 0.3% or 0.4%, is the unemployment taxes that I referenced.

So that -- those items really made up the lion's share, if not all of the decline.

In general, based on the revenue growth, we did a good job in other areas, controlling payroll and other costs, some of which were slightly down as a percentage of revenues.

All right.

And just I guess based on today's -- you referenced you're about 6% now.

Based on today's fuel prices, or where they're at, or where you expect them, how much of that change is a percent of sales?

For the remainder of the year, the impact is probably 0.3% or 0.4%, depending on where the energy really sits.

I think that's about what I calculated at today's prices, and is built into the guidance.

Great, all right.

Thank you.

And that -- and some of that's dependent on what we can work out with our customers, as we move forward as well.

All right.

Is there any impact, can you talk maybe a little bit about cotton?

Obviously a competitor a couple weeks ago talked about it.

Do you see any pressure there going forward?

Well, this is Ron.

If you looked at our inventories, they're up.

That's basically because we were bringing in stuff at a lesser cost.

So at this point, we really haven't seen the increase that is forecasted.

We anticipate it, and once we are more confident in where it will be, we will do our adjusting to our customers.

But at this point, we haven't really seen it.

The major suppliers in the industry are all talking about it, but nobody is like Red Kap and Wrangler and those guys haven't really put through their pricing yet.

And I'll add to that.

Even when it does happen, we start seeing the impact in our inventories, it takes time for that to get out into service and be amortized.

So it gives us a little runway to see where things are headed in it, and we'll react accordingly.

Could that also wear on the margin itself?

Or would that have a -- if it increases pretty significantly, would that have another negative on the operating -- ?

I think at this point it's probably difficult to say.

But what I will say, is that if it does increase, and we are successful in sharing some of those costs with our customers -- let's just assume even if it was on a one for one basis, that would in and of itself hurt the margins.

All right.

And then just last question, acquisitions, I guess just where -- how you kind of feel the industry -- where it's at right now, what do you think the prospects are?

Has it picked up?

Do you think it's picking up, or could you just expand maybe a little more on that?

This is Ron again.

I think we've seen more companies in the pipeline.

We still have a valuation issue with many of the sellers.

But we've seen it pick up a little bit, that's probably the best thing I can tell you.

Thank you very much.

(Operator Instructions).

Our next question comes from the line of Nate Brochmann with William Blair & Company.

Please proceed.

Good morning, gentlemen.

Good morning.

Hi, just wanted to talk around a little bit more -- if you could expand a little bit more on your earlier comments about the environment, in terms of some of the headwinds seeming to dissipate, in terms of what you're hearing from your end customers?

Can you just explain a little bit more in terms of -- I know you won't give the exact like add stop metric, but just kind of what you're seeing at the end users?

And also you talked about your new sales improving a little bit in terms of gaining some more traction.

Could you just talk about the high range there, and why they're willing to invest in the programs at this point?

I think what we found is that, basically let's say it's an eight man account or a ten man account, that the basic account now, if he loses a fellow, he's replacing a fellow, so we're not seeing the shrinkage in the accounts.

There is turnover in the accounts, but they seem to be almost neutral.

The -- no programmer or really the people we target that are purchasers, or what you would call a direct sales program, they are spending money to revitalize their current direct sale program.

And that's giving us an opportunity to approach these people, as they're thinking about refreshing their program, to convince them we have a better alternative, whether it's a value lease or rental program.

So we're seeing a little bit of uptick in that direction.

People are still very cautious.

If you go to a Company that has no uniform program whatsoever, they are very cautious on taking on new expenditures.

But they also realize that competition is going to be heating up, and how they present their Company is important in that image.

So again, we're back to selling image and identity, or what we call the [impact's] impact.

That's basically what we're seeing in the marketplace.

We are seeing a little more competitive activities.

We are seeing pricing from the competitors in most instances, coming up a little bit.

That's the current environment, really.

I would say that that's probably another encouraging sign, though, is you're seeing that pricing pressure kind of ease a little bit.

Is that more on the new account wins, that it's not quite as competitive, or is it on the renewals too?

I think we've seen it in both places.

Obviously if you're not doing the job, whatever price you're quoting, your competition comes in there, and you're not doing the job, you're going to lose the account.

So I guess we're seeing it in both avenues, I guess is probably the best answer.

Great.

Hey, thanks a lot.

Our next question comes from the line of Justin Hauke with Robert W.

Baird.

Please proceed.

Good morning, guys.

Thanks for taking my call.

Just had a quick question.

I think last quarter you said, that about half of your organic growth was coming from new business, as opposed to improvement in the add stops.

And just wondering if you could kind of update us on that, just to kind of get a better sense of how much of a macro tailwind I guess, you could be seeing as the employment market continues to improve going forward?

Yes, Justin, this is Steve.

I don't have that breakout for you this quarter.

What I will say, is that probably a little bit more this quarter is coming from the new sales.

Adds, reductions, as Ron mentioned, are somewhat stable at this point, which is better than last year when they were still negative to a larger extent.

And so I'd say more of it's coming from the new sales, than the add stops, probably compared to last quarter.

Great.

No, that's helpful.

And then, the only other question I had, on the margin front -- the state unemployment insurance, I know that that's kind of front-end loaded.

I guess is there any color you can kind of give us, in terms of sequentially how that plays out over the course of the year?

I mean, is 2Q still very heavy on that, and it kind of rolls off in 3Q, or how should we think about that?

It really does run off pretty quick, because it's based on the first small piece of salaries.

And so I don't expect next quarter we'll be talking about it as a headwind.

Great.

Thank you very much.

I'm showing no further questions at this time.

Pardon me.

I am showing a follow-up from the line of Chris McGinnis with Sidoti & Company.

Please proceed.

Hi.

Sorry, one more question.

Sure.

Just on the specialty business, I think at the beginning of the year or at the end of last year we talked -- or you guys talked about it being down year-over-year.

Does the strong performance so far, mitigate I guess the back half, that was so strong last year, are you still thinking that, that's going to be as, I guess down as severe as you originally anticipated?

No, that's a good question.

I would say no at this point.

I think the strong first half does mitigate that.

And our -- and even though our estimates for them over the second half of the year are probably a little lower than the prior year, it does more or less offset at this point.

All right.

Give you a little light on some of that.

It's very hard to predict, and I think Japan's a good example.

They get into these power reactors, and they forecast it's going to be a six or eight week outage, and they buy crack pipes or something, and these things go on and on.

And -- a lot of this revenue is coming down out of Canada, and that's basically what it is.

So our boys forecast it as X, and they have some issues and it goes to Y.

Right, all right.

Thank you very much.

I really appreciate the time today.

Thank you.

Sorry.

And with that, we would like to thank you all again for the interest in our Company.

We look forward to speaking with you in a few months.

We will be reporting on UniFirst's third quarter 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.