UniFirst Corp (UNF) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Unifirst Corporation fourth-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)

It is now my pleasure to turn the conference over to Steven 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 2011 and to discuss our expectations going forward.

I am Steven Sintros, Unifirst's Chief Financial Officer.

Joining me today 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, the continued availability of credit and the performance of 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 I will turn the call over to Ron Croatti for his comments.

Thank you, Steve, and welcome to our review of Unifirst's fourth-quarter and full-year results for fiscal 2011.

2011, as we know it, was the third consecutive year of worldwide economic volatility.

Nevertheless, I am happy to report that Unifirst achieved outstanding double-digit revenue growth for the year and reached a financial milestone on our long-term quest towards being a $2 billion company.

As shown in our numbers released earlier this morning, the milestone was exceeding the $1.1 billion mark in annual revenues, which established another record year for Unifirst.

In 2011 we also reached another important milestone as we celebrated our company's 75th anniversary while continuing to set the pace in the industry for overall product and service quality.

All fitting accomplishments for Unifirst's diamond anniversary.

Despite the many market challenges that existed throughout the year, Unifirst strengthened its position in existing and emerging markets, improving customer service and satisfaction levels, benefited from expanded sales and service training programs, and enhanced execution and accountability with our field managers.

These, along with other factors, combined to produce the quarterly and annual growth for all of Unifirst's business units.

Steve will be going into the financial results in detail, but let me provide a summary.

For the full year, revenues were a record $1.134 billion, a 10.5% increase from the fiscal 2010 $1.026 billion, and net income was $76.5 million, up slightly from last year's $76.4 million.

These results came in ahead of our original expectations and guidance that we provided at the start of fiscal 2011, but most of the Company's top-line improvement derived from organic growth.

Acquisitions accounted for just 1.4%.

All Unifirst businesses areas achieved quality results in fiscal 2011 and continue to be energized by the upside potential in each of their respective markets.

For the year Core Laundry Operations, which make up the majority of Unifirst's business, saw a 9.8% revenue increase to $997 million, which was another new record for the segment.

Operating income for our laundries decreased 7.5% in 2011 from last year.

This anticipated dip, which was discussed throughout the year, was largely attributed to higher merchandise costs associated with outstanding new sales growth.

The Core Laundry business showed steady organic growth throughout the year, sparking our cautious optimism as way begin 2012.

Our service team coast to coast maintained a high customer service and satisfaction level, solidifying our customer base.

Additionally, our professional sales reps set a record for new sales in 2011 while boosting their weekly average.

National account organization also increased new sales for the year and did an excellent job gaining contract renewals with our larger-scale customers.

Meanwhile, our Specialty Garment business, which provides products and services to nuclear clean room industries, also set new records in performance for 2011, improving upon last year's record revenue operating income by 17.4% and 10.1%, respectively.

These improvements were the result of continued returns from our leading position in the US nuclear market, major reactor and rebuild projects in Canada, new decommissioned activities -- initiatives in Europe, and expanding markets in the clean room area.

The Specialty division also offered a broader range of services in 2011 than ever before.

We contribute to its improved financial performance, once focused exclusively on specialized garment cleaning and decontamination.

The segment enhances revenue stream through such value-added services as decontamination, cleaning and monitoring of nuclear-related respirators, metal decontamination, as well as direct purchase sales from our successful mobile safety stores.

And for the clean room customers, new sanitization services were introduced to more complete workplace disinfection in the ultra clean environment.

Like our Core Laundries and Special Garment units, our First Aid operations reported record revenues in 2011, increasing 12.5% over 2010.

This segment also set a new operating income record for the year surpassing 2010 results by 45.3%.

These gains were led by the unit's pill packaging unit which capitalize on the growing demand of over-the-counter private-label products as alternatives to name brand drugs.

The wholesale distribution also contributed growth while the B-to-B first aid supply business showed positive momentum throughout the year after stabilizing from its recessionary slump.

As part of our resolute commitment to improve -- continuous improvement to maintain our leadership position in product and service quality, our ISO9001 2008 certification programs continue moving forward in 2011, as we certified several additional Unifirst service facilities during the year.

Today we are proud that all our Specialty Garment manufacturing facilities, our central distribution center, and nearly half of our industrial laundries are ISO certified.

With more plant certification scheduled for 2012, our goal is to have 100% of our service sites certified in the coming years.

That is because ISO certification in these centers will not only differentiate ourselves from competition, but will also ensure our people are consistently following prescribed protocols and procedures in the most effective and productive manner.

Looking ahead, we are cautiously confident about our business opportunities and growth potential for fiscal 2012, but we know there is a continuous uncertainty ahead with respect to economic and employment recoveries which could have an impact on our performance.

The consensus opinion among private and government analysts largely point toward continued, but very slow, economic growth for the coming year.

Weak domestic demand for goods and service is expected to keep consumer price inflation in check, and job growth projections, which are critical to the uniform rental business, are expected to pick up only slightly, if at all, with overall unemployment rates remaining relatively high.

Therefore, in light of projected economic conditions, continued high energy prices, pressure on merchandise, and other costs, and a strong competition in the marketplace, we are carefully monitoring all economic variables throughout 2012 and making operational adjustments during the year required to maximize our revenue and our profits while always protecting Unifirst's long-term financial interest.

I have great confidence that it's our people who will ultimately deliver our Company's continued success by consistently focusing on quality and continuous improvement, and by doing business with our golden rule -- consistently servicing our customers as they wish to be serviced and treating their peers as they wish to be treated.

By doing so, Unifirst will continue to grow and produce long-term returns for our shareholders.

In the meantime, we stand prepared for the challenges that lie ahead and look forward to reporting to you on Unifirst's progress in 2012.

Now let me turn it over to Chief Financial Officer Steve Sintros for more detailed 2011 numbers.

Thanks, Ron.

Consolidated revenues for the fourth quarter were $290.9 million, up 14.1% from $255 million for the same period in the prior year.

Fourth-quarter net income was $18 million or $0.90 per diluted common share, compared to net income for the fourth quarter of fiscal 2010 of $17.3 million or $0.87 per diluted common share.

Core Laundry revenues were $259.3 million in the fourth quarter, up 14.3% from those reported in the same period a year ago.

After excluding the positive effect of acquisitions which contributed 2.2% and a stronger Canadian dollar which contributed 0.7%, the Company's core laundry revenues increased 11.4%.

The Company's revenues continued to benefit from improved sales rep productivity.

New sales were up over 15% for both the fourth quarter and full year periods compared to fiscal 2010.

Wearer additions versus reductions were marginally negative in the fourth quarter compared to the first nine months of the fiscal year when they were slightly positive.

In general, we continue to see relatively stable wearer levels without significant momentum being built in either a positive or negative direction.

Also impacting our revenues during the quarter were certain annual price adjustments as we continue to work with our customers to address the challenges of higher fabric and fuel costs.

Higher lost and damage charges as well as higher garment makeup and emblem charges also contributed to the overall growth in the fourth quarter.

Customer retention levels during the quarter and year-to-date periods were similar to the prior year.

As anticipated, the Core Laundry operating margin was lower than the prior year, declining to 9.9% in the quarter from 11.4% in 2010.

The margin decline primarily relates to higher merchandise amortization as a percentage of revenues.

The increased merchandise costs are the result of strong local and national account sales, as well as a depleted used inventory stock at our operating plants.

The increased merchandise cost is also the result of strong growth in our flame resistant and high visibility product lines.

This growth is a result of increased oil and natural gas exploration as well as tighter regulations that have caused uniform wearers in a number of industries to convert to these more protective garments.

In addition to a higher number of new garments being placed in service to support our customer base, we have also begun to feel the impact of higher fabric prices in our overall merchandise costs.

Higher energy costs also contributed to the margin decline.

Total energy costs for our core laundry operations as a percentage of revenues increased during the quarter to 6% of revenues from 5.5% in the fourth quarter of fiscal 2010.

This increase is the result of higher gasoline costs to fuel our fleet of delivery vehicles.

All other energy costs were flat or slightly lower as a percentage of revenues compared to the prior year.

Overall distribution center costs, including freight costs, also continued to be higher as a percentage of revenues compared to fiscal 2010, due to an increase in the number of units being shipped to our plants nationwide as well as higher fuel costs.

These higher costs were partially offset by lower payroll and depreciation costs as a percentage of revenues.

In addition, the Company incurred lower expense in the fourth quarter related to legal and environmental contingencies than it did a year ago.

The Specialty Garment segment, which consists of nuclear decontamination and clean room operations, posted revenues of $23.4 million, up 17% compared to the fourth quarter of 2010, primarily the result of higher direct sales to customers.

Income from operations for this segment decreased slightly to $1.9 million in the fourth quarter from $2 million in the fourth quarter of fiscal 2010.

The decline in operating income was the result of higher operating costs in the quarter.

As we have discussed previously, this segment's revenues and profits can fluctuate from quarter to quarter based on the seasonal timing of power reactor outage activity, as well as the mix of products and services that they provide to their customers during any given quarter.

First Aid segment revenues increased 2.2% to $8.1 million in the quarter, compared to $7.9 million in the same quarter a year ago.

Income from operations for this segment was $0.4 million, down from $0.7 million in 2010.

The decrease in profits was due to higher delivery and selling costs compared to the fourth quarter of fiscal 2010.

Earnings comparisons for the quarter were positively impacted by a decrease in net interest expense of $1.6 million from the fourth quarter of fiscal 2010.

The decrease in interest expense is due to the expiration of an interest rate swap, as well as the payment of $75 million in private placement notes that came due on June 14, 2011.

Conversely, the Company recognized foreign exchange gains of $0.1 million in the quarter versus gains of $0.5 million for the same quarter a year ago.

The effective income tax rate for the quarter was 35.8% compared to 37.1% in the fourth quarter of fiscal 2010.

Decrease in tax rate compared to fiscal 2010 was due to a lower Canadian income tax rate in fiscal 2011 as well as an increase in federal tax hiring credits.

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

At the end of the fourth quarter, the Company had $48.8 million of cash and cash equivalents on hand.

Of the cash and cash equivalents on hand $43.5 million is held in Canada intended for future investments outside the United States.

As of year-end, total debt was $120.3 million and total debt as a percentage of capital was 13.1%, both down from $181.5 million and 20.4%, respectively, at the end of fiscal 2010.

The decrease in total debt outstanding is due to the repayment of the $75 million of private placement notes.

During 2011 we generated cash flows from operations of $86.2 million, down from $134 million in fiscal 2010.

The decline was primarily due to increased working capital requirements.

Accounts receivable has increased by $23.1 million or 22% from the end of fiscal 2010.

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

Inventories have increased $28.8 million and merchandise and service increased to $39.9 million 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 our new account sales as well as our existing wearer base.

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

We do not expect as high of a cash outflow related to working capital in fiscal 2012.

As a result, we expect operating cash flow in fiscal 2012 to rebound closer to the level achieved in fiscal 2010.

Capital expenditures for fiscal 2011 were $63.8 million.

We also expended $32.6 million on several small acquisitions in our Core Laundry Operations.

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

We expect capital expenditures in fiscal 2012 to be approximately $60 million.

We currently project that our revenues for fiscal 2012 will be between $1.195 billion and $1.22 billion.

We also project than our income per diluted common share for fiscal 2012 will be between $3.65 and $3.95.

At the midpoint of these projections, Core Laundry revenue growth is approximately 8% and does not include the impact of any potential acquisitions.

Core Laundry operating margin is assumed to be approximately 10%.

Further decline in operating margin in this segment is again expected primarily due to higher merchandise amortization, including the impact of higher fabric prices.

The full impact of higher merchandise is expected to be partially offset by other costs declining as a percentage of revenues.

We are also currently projecting that our revenues and profits from our Specialty Garment segment will be down approximately 8% in fiscal 2012, although predicting this segment's results can be challenging.

Factors such as the timing and length of reactor outages and other projects, as well as the funding for projects by both government and private sources, can significantly impact this segment's revenue and profits.

Our guidance also assumes interest expense at levels similar to the fourth quarter of fiscal 2011.

Lastly, we are projecting an effective income tax rate of approximately 38%.

This completes our prepared remarks and we would now be happy to answer any questions that you might have.

(Operator Instructions) Andrew Steinerman, JPMorgan.

When looking into the first quarter, the November quarter, usually margins go up pretty substantially if you look at the history, and particularly I am talking about margins in the Core Laundry.

By my estimates the median has gone up 250 basis points, sequentially, November versus an August quarter.

Do you think that you will have normal margin lift in the first quarter versus the just reported fourth quarter?

And how does the comments about seasonal pricing that you just alluded to factor into that?

Andrew, I think you can anticipate a similar increase.

It may be a little less than in prior years due to the fact that we started addressing some of our annual price increases a little bit earlier this year, due to some of the increases in fabric and fuel costs.

So some of that margin benefit came at the tail end of the fourth quarter, but you should still see a similar benefit sequentially to the first quarter.

Okay, perfect.

Last question, when you look at the guidance for revenue growth in fiscal year 2012 it assumes that a deceleration from current level.

Is that conservatism just given kind of uncertainty around the economy?

Is there other factors, such as year-over-year comparisons, that -- the revenue growth guidance in 2012 is kind of 5% to 8%?

Yes, just to highlight what I said again in the webcast about our nuclear Specialty Garments division, we are forecasting that down about 8%.

So when you pull that out the Core Laundry Operation's range is about 7% to 9%, albeit that still is decelerating from where we are right now.

The primary reason I would say is year-over-year comparisons.

I think you will see as we move into the year the growth early in the year will be more comparable to this quarter or the last quarter, and then toward the tail end of the year, based on our current projections, it will tail of just based on tougher comparisons.

Some of that also assumes pretty stagnant wearer levels as well.

Like I said, we are still experiencing flattish wearer levels, so right now we are not projecting any additional bump from significant wearer adds.

Perfect.

Thanks for the comments.

Andy Whitman, Robert W.

Baird & Co.

Good morning, guys.

I just wanted to -- I guess just to be clear here, when you said you were looking for 8% core uniform or Core Laundry growth was that inclusive of the effect of acquisitions that were done in 2011 or is that kind of like an organic core laundry growth number that you were sharing?

That is inclusive of acquisitions we have done during the year.

So if you want to strip that out it's about 1%, maybe a little less.

1% of the 8% is from the acquisition, so really still historically a pretty good level of organic growth is what you are forecasting.

7%, I would say, historically is attractive.

Correct, at the midpoint it's still over 7%.

Okay, great.

Thanks for clarifying that.

Then I guess, just looking at cash flow statement looks like a bit of an uptick in M&A.

M&A, obviously, can be lumpy.

But is there a better environment today maybe to do some M&A, uncertainty that might be causing some generational issues for some of the people that you are looking at buying or is there anything changed that might make M&A better today than it was even six, nine months ago?

We haven't really seen any significant difference in that arena.

We are out there talking to the people, same as our competition, and they are still -- they still have higher expectations than I think is necessary.

Okay.

Just maybe, Ron, as it relates to the balance sheet, now with the $75 billion of notes taken out and cash flows expected to be better this year because of working capital needs, how do you think about the depths of the credit markets today and perhaps tapping some of those?

And maybe redeploying some of that capital towards your own share?

I think the balance sheet is really starting to get to a point where it could probably handle a bit more leverage than where you are today, especially with other recent execution.

Just kind of wanted to hear philosophically how you feel about maybe taking advantage of the low interest rates and plowing it back into some of your own shares.

We are constantly looking at that and I would not rule anything out.

Okay, that is fair.

I will leave it there for now.

Thank you very much, both of you.

(Operator Instructions) Chris McGinnis, Sidoti & Co.

Good morning.

Just a question on the organic growth, is there any industry that is driving that specifically or is it kind of a broad base?

I think, Chris, it's pretty much a broad base.

I think, as I mentioned earlier, we did get into some emerging markets.

We are a little more successful than we used to be in the medical market, but it's really broad based.

And I guess just since [following the] quarter obviously there is a lot of worry about the economic outlook.

Have your salesmen seen anything change dramatically or has that kind of stayed at the same level of opportunity that is out there?

I think what we see is our existing customer base, if it's a 10-man account and somebody leaves they replace the 10th man but they are certainly not putting anybody on.

So we get one week we may be plus and whereas the next week we may get a minus week.

So we are really seeing no growth in the wearer base.

And what about, I guess when you look at your portfolio or I guess your pipeline, how many are new wearers coming in without a current program that are new to --?

Chris, we are about 70/30, about 70% coming from customers from our competition that are a little dissatisfied with their service and we have convinced them that we have a better alternative.

Great.

Thank you very much.

Dale Dutile, The Boston Company.

Good morning.

Could you elaborate a bit on your comments on pricing?

Sounds like you are passing on some of the higher costs you talked about, but could you give us a little more color on where you are in passing through higher costs?

Sure.

Annually we look at our contracts and we have talked about in prior years how most of our annual price increases have been focused in our first quarter.

We made comments earlier in the year as cotton prices and other fabric prices as well as fuel prices were going up that we were cautious going back to our customers too often for price increases.

So we have kind of stuck to our annual cycle and at the tail end of our fourth quarter went out and worked with our customers to see what we could pass along.

With our customer base, a lot of small customers, it really does become a negotiation with the customer.

And so I think we have been fairly successful in doing that and our strong service levels have helped that.

So I think we have been able to do a pretty good job mitigating some of that impact.

And with cotton prices moderating a little bit we are somewhat optimistic it won't be a significant headwind, at least as it relates to the fabric prices next year.

So would you say you have -- including fuel, which is higher, and fabric have you been able to pass on -- I don't know, maybe it's too simplistic to look at it this way -- but kind of half or three-quarters of your anticipated cost increase for 2012?

I am not sure we have that kind of a calculation that I would be able to give you, but I think you are thinking of it in the right way.

I think we have done a pretty good job passing a good chunk of it along, but that being said, albeit we have had these efforts, our energy prices were still higher as a percentage of revenue.

So I don't think we have been able to pass it all along.

Okay.

And then on the merchandise costs, have you broken out what percent of your cost of goods are merchandise versus all the other stuff that you spend money on?

I am just trying to get a sense for the relative size of that.

We haven't specifically done that, but I think in general we have used the benchmark it's approximately a third of our cost of revenues.

Of cost of revenues, including D&A or not, because you break out D&A from --?

Excluding that.

So that cost of revenues on you see on the income statement, maybe about a third of that.

And where is merchandise amortization in your cash flow statement?

The D&A --

It's net with the purchases, so when you go to the -- when you see rental merchandise and service the amortization is net of the adds.

Great.

And I am sorry, I just have a couple others.

The average length of that that you amortize over, I mean is it all over the place or is there a good average?

The average is about 18 months.

Our standard goods are 15 months, but we have some more protective garments that are longer.

Okay.

And then the last thing, I apologize for running on.

But on the environmental costs you said there was a benefit; will you break that out for us in the quarter?

The exact amount was probably -- well, let's see here, let me pull up my detail.

As a percentage of revenues it was probably a benefit of three- or four-tenths.

30 or 40 basis points in the quarter?

Yes.

So on an annual basis you had a high environmental cost in 2009; it was down a lot in 2010.

What was it for the year in 2011?

I don't have that number in front of me.

There have been adjustments we have made throughout the year that we have spoken to with respect to some of our environmental sites.

There have also been some fluctuations as the liability we have for our environmental contingencies gets discounted, so as the interest rate changes we take pickups or hits related to that fluctuation.

I don't have that number in front of me, but I will say in our 10-K filing it's all broken out and you should be able to isolate it.

Okay, thank you.

[Dave Brinkman], William Blair & Co.

Good morning, guys.

I am just filling in for Nate.

The recent -- obviously looking at this chart I have of the price of cotton, it has fallen off since probably peaking around February/March timeframe.

When would you guys see that kind of headwind turn into a tailwind for you guys in terms of cotton prices, if they were to stay lower at this level?

I think the prices today are still higher than a year and a half ago, the more historical levels.

Like you said, they peaked in February and we started buying fabric at those higher prices toward the second half of our year.

So we are still putting garments in service right now that on base have higher base cotton prices embedded in them.

As we move through the fall and get into maybe the early spring, we will -- through our supply chain those lower costs will start to become a factor.

I am not sure they are going to become a tailwind anytime during the year based on our amortization cycle, because as the garments go in they amortize over 15 months.

So I think it's not really till the tail end of next year that maybe we will start seeing some benefit.

But I think what we are trying to focus on with the merchandise is that we are putting a higher number of units in service based on the strong growth and some of these other factors, and that is really the more important metric than the price of the fabric, as you mentioned, since it has moderated.

So we are more focused on when that will start to flatten out.

Got you, got you.

Then just one housekeeping thing; the organic growth rate on First Aid, what was that in the quarter?

The growth rate was fully organic.

Okay.

Thanks for taking my question.

(Operator Instructions) Kevin Steinke, Barrington Research Associates.

Good morning.

I was curious about trends in salesforce productivity, if that continued to improve and how much more room you see for improvement going forward.

Obviously, for the last three years we have picked up on the salesforce productivity, basically as the result of the intense training and the automation we have put in place for the salesforce.

We still see some opportunities there.

We would like to get our turnover down.

I think that is probably the biggest opportunity we have to get that productivity up, and we will continue to focus on that basic element.

Okay, good.

And you also highlighted again the headwind from putting more flame resistant garments into service.

Just wondering if -- going into fiscal 2012, how far along in the cycle are you in terms of upgrading and do you see that becoming a lessening headwind going forward?

Yes, I think we still expect, as we mentioned, it to be a headwind during the year, but I think probably somewhat of a decreasing one as the year goes along.

So as we get to the tail end of fiscal 2012 we are hopeful that those costs will start to flatten.

Okay, great.

Thank you.

That is all I had.

Gentlemen, there are no further questions at this time.

I will turn the conference back over to you.

We would like to thank all of you for your interest in Unifirst and reiterate that we are very pleased with our financial performance for 2011.

I also would like to again give credit where credit is due, to our thousands of team partners who continue to rally behind the Company to overcome the many challenges faced throughout 2011.

We look forward to talking to you next time and we will be reporting on our first quarter for fiscal 2012.

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 all lines.

Thank you and have a good day.