UniFirst Corp (UNF) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the first quarter earnings conference call.

For this presentation, all participants are 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 Mr.

Steven Sintros, Chief Financial Officer.

Please go right ahead, sir.

Thank you, and welcome to the UniFirst Corporation conference call to review our first-quarter results for fiscal 2012 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 and 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.

Thanks, Steve.

I would like to welcome everyone joining us for the fiscal financial review of UniFirst's first quarter of fiscal 2012.

Steve will cover all the details in a moment, but let me first provide a recap.

UniFirst's revenues for the first quarter of fiscal 2012 set a new record at $313 million, a 14.6% increase over the $273.1 million reported for the same period in 2011.

The major upside contributor came from better-than-expected revenue growth from our core laundry operations and our First Aid & Safety division, with each setting new record revenues for the quarter.

Net income for the quarter was also a new UniFirst high at $25.8 million, an 8.6% increase over the $23.8 million reported a year ago.

All three business segments, our core laundries, our Specialty Garment unit and our First Aid group, set new quarterly income records despite continued challenges with merchandise and energy costs.

Our core laundry operations, which make up the majority of UniFirst's business, improved quarterly revenues by 14.1% and operating income by 1.7% over 2011, while also increasing quarterly new sales year-over-year.

These record-setting results demonstrate the ongoing resilience and dedicated customer focus of our thousands of team partners, who continue to perform at high levels within a difficult economic business climate.

Our Specialty Garments segment, which includes nuclear clean-room operations, reported a 17.3% first-quarter revenue improvement over the same period in 2011, as well as an impressive 63% climb in operating income when compared to last year.

Similarly, our First Aid segment, led by the private-label pill-packaging division, reported revenues and operating increases for the quarter of 22.1% and 10.8%, respectively, when compared to the same quarter last year.

Overall, we are pleased with the results of the first quarter of 2012 and remain cautiously optimistic about the balance of the year.

And we know that to realize our short- and long-term goals, all our team partners throughout North America and in Europe and all our business segments must remain vigilant in their servicing commitments to our customers, while also seeking continuous improvement in everything they do.

And based on their track record of success, we have full confidence that each of our partners will do just that through 2012.

Our service teams will continue to elevate responsiveness to every single customer, no matter what size the account, and along with management, they will strive to quickly and consistently identify and rectify any lapse in our service levels.

That is, after all, what our business is all about, and it defines our path to achieving universal recognition as the best service provider in our industry.

Our sales organization, with continued sharpening of their skills, can increase their productivity and fuel our organic growth.

And in support, we will continue investing in and benefiting from our industry-leading, ever-evolving sales training programs, prospecting technologies.

In so doing, we will continue to make ROI gains in these areas.

Our production and line personnel will continue to seek out new ways to improve efficiencies in all our operations and will consistently follow the procedural guidelines outlined in our ISO 9001 2008 quality programs to better service our customers to enhance our bottom line.

And our location managers will continue executing UniFirst's long-term strategic business plan, [Vista 2020], and using it as a guide to develop and implement their annual look at local market business plans and to ensure all our 200-plus facilities are making progress against the defined benchmarks.

Our regional vice presidents are held personally accountable for each of their locations achieving the defined critical objectives.

It is no surprise that our industry, our competitors and the needs of our customers have changed considerably in response to the recession that began in 2008.

No longer do we hear the notion that industrial laundries are recession-proof, as we all saw firsthand the unsettling and widespread domino effect of a spiraling economy.

At UniFirst, we made significant operational change to counter the negative economy earlier than most.

These were tough adjustments, but they ultimately enabled us to achieve Company growth through the recession and through fiscal 2012 despite a fragile economic landscape.

Our customer-focused, fiscal conservative philosophies remain at the core of our business success today, and is what encourages me to convey my guarded but positive guidance for short- and long-term outlook.

And with that, I'll turn it back over to Chief Financial Officer, Steve Sintros, for more details on the first quarter.

Thanks, Ron.

Consolidated revenues for the quarter were $313 million, a 14.6% increase from $273.1 million for the same period in the prior year.

First-quarter net income was $25.8 million, or $1.30 per diluted common share, compared to net income for the first quarter of fiscal 2011 of $23.8 million, or $1.20 per diluted common share.

Core laundry revenues grew 14.1% overall, and 12.1% organically.

The calculation of organic growth excludes the impact of acquisitions, which contributed 1.9%, and the stronger Canadian dollar, which contributed 0.1%.

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

In addition, certain annual price adjustments also contributed to the revenue growth during the quarter.

Wearer additions versus reductions were positive during the first quarter compared to slightly negative during the fourth quarter of fiscal 2011.

Although some of the rebound in wearers is seasonal, the current quarter's results as it relates to net wearer adds represents an improvement from a year ago.

Our revenue continues to benefit from higher charges for lost and damaged merchandise, as well as higher garment makeup and emblem charges compared to a year ago as well.

As anticipated, the core laundry operating margin was lower than the prior year, declining to 12.8% from 14.4% in 2011.

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

As we have discussed, the increased merchandise costs are the result of the strong local and national account sales as well as the 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.

Total energy costs for our core laundry operation as a percentage of revenues increased during the quarter to 5.5% of revenues from 5.3% in the first quarter of fiscal 2011.

Higher gasoline costs for our fleet of delivery vehicles was partially offset by lower natural gas costs.

Overall distribution center costs, including freight costs, also continued to be higher as a percentage of revenues compared to 2011 due to an increase in the number of units being shipped to our plants nationwide as well as higher fuel costs.

Comparisons to the prior-year were also impacted by a benefit of $0.8 million recorded in the first quarter of fiscal 2011 related to the effect of discount rate fluctuations on the value of our environmental liabilities.

During the current quarter, we recorded a charge of $1.1 million related to the effect of discount rate fluctuations on our environmental liabilities.

This charge, however, was offset by environmental insurance recoveries totaling $1.1 million, also recorded during the first quarter of fiscal 2012.

These higher costs were partially offset by lower production, selling and administrative payroll and payroll-related costs as a percentage of revenues.

In addition, other miscellaneous selling and administrative costs, as well as depreciation, were lower as a percentage of revenues.

The Specialty Garments segment, which consists of nuclear decontamination and clean room operations, posted revenues of $30.3 million, up 17.3% compared to the first quarter of 2011.

This increase was primarily the result of increased North American project-related revenues during the quarter, as well as the strong performance by the segment's European and clean room operations.

As a result, income from operations for this segment increased to $6.6 million in the first quarter of fiscal 2012 from $4 million in the first quarter of fiscal 2011.

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 and other projects, as well as a mix of products and services we provide to our customers.

First Aid segment revenues increased 22.1% to $10.5 million in the quarter compared to $8.6 million in the same quarter a year ago.

Income from operations for this segment was $0.8 million, up from $0.7 million in 2011.

The growth in revenues and profits was primarily driven by this segment's specialty pill-packaging operation.

Earnings comparisons for the quarter were positively impacted by a decrease in net interest expense of $1.7 million compared to the first quarter of fiscal 2011.

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 during June 2011.

Conversely, the Company recognized foreign exchange losses of $0.6 million in the quarter versus gains of $0.2 million for the same quarter a year ago.

In addition, the effective income tax rate for the quarter was 38.3% compared to 37% in the first quarter of 2011.

The increasing tax rate was the result of the reversal of a tax contingency reserve in the first quarter of 2011 related to the resolution of certain state tax audits.

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

At the end of the first quarter, the Company had $54.1 million of cash and cash equivalents on hand, up from $48.8 million at the end of fiscal 2011.

As of the quarter end, total debt was $111.7 million, and total debt as a percentage of capital was 12%, both down from $120.3 million and 13.1%, respectively, at the end of fiscal 2011.

During the first quarter, we generated cash flows from operations of $30.7 million, up 12.8% from $22 million in the same quarter a year ago.

The increase was primarily due to higher net income as well slightly lower working capital cash outflows.

We continue to expect working capital cash outflows to be lower over the remainder of the year compared to fiscal 2011, particularly as it relates to inventory and merchandise and service.

Capital expenditures for the first quarter of fiscal 2012 were $14 million.

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

Although we did not complete any acquisitions during the first quarter, we continue to evaluate targets based on our long-term strategic objectives, as well as the appropriateness of their valuations.

Due to the strength of our first quarter, we are raising our full-year guidance.

We currently project that our revenues for fiscal 2012 will be between $1.220 billion and $1.235 billion.

We also project that our income per diluted common share for fiscal 2012 will be between $3.85 and $4.05.

The increase in projected revenues from our core laundry operations is a result of stronger-than-expected new sales and wearer levels in the first quarter, as well as an improved pricing environment.

We continue to expect that the full-year operating margin for our core laundry operation will be approximately 10%.

Based on the strong first-quarter results in our Specialty Garments segment, our full-year estimates now include results from this segment that approximate last year's record results.

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

(Operator Instructions) Andrew Wittmann, Robert W.

Baird & Company.

Good morning, guys.

Thanks for all the detail.

Steve, just to pick up on that last point you made, you said Specialty Garment, now you are expecting flat versus last year.

Previously, you were saying minus 8%.

Did you make that all up in the first quarter or has the balance of the year outlook for that business also improved?

You know, Andrew, some of the improvement in the first quarter over last year's first quarter was anticipated.

Their first and third quarters are typically their largest quarters, but from year to year, that can flip between the first and third quarter.

So I think the short answer to your question is that most of that was made up in the first quarter, but there may be some upside remaining over the next couple quarters.

Great.

That makes sense.

And then on the sales force, clearly these are very good levels of organic growth rates.

Just wanted to know if -- Ron, I know you've talked a lot about your training programs and your systems to find new customers.

Has anything changed here in the last several quarters or investments maybe in new people or what have you that might be driving that -- incentive compensation?

Just can you talk about really the sales force and why they've been so productive in your view?

I think it comes down to our whole selling process, the system, the training, the automation we use in the system.

Our headcount basically from year to year is only up about 25 heads.

So it is really the productivity, with the guys doing a better job prospecting, and good phone skills.

We really focus on phone skills.

And 25 heads on a base of how many -- can you just remind us on that (multiple speakers)?

Well, I ain't going to tell you that number.

Okay.

What about new products?

Are they selling anything new today that maybe they weren't selling a year ago?

Or are you contemplating selling any new products today that maybe weren't being sold a year ago?

As I mentioned before, we are the highest percent garment company; we are 65% garment.

We like garments.

And we basically stick to our knitting -- garments, mats, shop towels and dust control.

Okay.

And then I guess maybe my last question, obviously looking at the balance sheet -- and I think I ask this every quarter -- but we've moved into a positive net debt position here, the lowest we've seen it really I think ever.

Clearly, the Board has decided not to return any of that capital, at least at this point.

Should we read into that and think maybe M&A is looking like a little bit more viable option today than maybe it was a quarter or two ago?

Yes, I would say possibly yes.

And are the sizes of the deals maybe also increasing as well as their likelihood, or is the size of the deal still relatively unchanged and maybe smaller?

You know, anything that makes good business sense to us that will improve our revenue line and improve our profit margin, we will certainly look at.

And it has to be priced right.

Yes, I'm not sure there's any particular change in the dynamic over the last quarter or so.

Okay, but have your leverage levels that you think are appropriate for the business changed at all?

Are we seeing a reflection of what you think are the appropriate leverage levels different today than maybe they were?

No, not really.

Okay.

All right.

I'll leave it there.

Thank you very much.

John Healy, Northcoast Research.

Good morning, guys, and congrats on another great quarter.

I wanted to ask a little bit about your commentary on the pricing environment improving.

I know the industry for a number of years kind of struggled with pricing.

Are you of the view that maybe we're maybe at the early innings of sort of a pricing recovery and maybe a return to a scenario where pricing is a more normalized component of the organic growth for the next few years?

I just wanted to qualitatively get your comments about what is happening in the market right now and maybe what should we expect from the industry over the next couple of years.

I will start, John, and then Ron can add if he has anything.

I think we've acknowledged that during the recession, pricing became increasingly competitive as the competition for new business was even more competitive than it typically is.

I think coming out of the recession and the business climate improving a little bit, combined with the fact that some of the input costs, fuel and fabric costs, increasing over the last six, nine months, has really pushed the whole industry pricing up a little bit and forcing us to be a little bit more -- working with our customers to address some of those situations.

So I think that has really been what is going on.

I don't want to paint the picture that it is still not very competitive out there, but I think that we have all seen a little bit of improvement based on the environment.

I don't know if you want to add to that, Ron.

No, I totally agree with that.

I think the whole industry, with the cotton and the increase in poly costs, basically moved up their pricing, and it has helped us all really.

That's good to hear.

And a question for you, Steve, on the balance sheet a little bit.

When I look at the rental merchandise and service line, it looks like it was up about 5.5%, 6% versus the prior quarter.

I was just trying to understand where you think that line item needs to go to to kind of reflect what you would say a more fresh or a more useful life of garments, once you kind of get that investment.

Where does that line item need to go to relative to the $1.2 billion rental business you are running today?

I think if you have been tracking it from quarter to quarter, you will notice that a couple quarters ago, we had some really dramatic increases in that asset value on the balance sheet.

The increase in the current quarter from the fourth quarter is not as significant.

Some of my comments with respect to the cash flows for the remainder of the year are kind of leading you to believe that that increase from quarter to quarter over the remainder of the year should be continuing to decrease.

So I think we are starting to plateau to get to a point where that asset -- it probably has a little bit more to go up, but we are starting to get to a point of equilibrium, if you want to call it that, for the size of the top line that we have.

Okay, helpful.

And then just last question, when you guys were talking about the balance sheet, I was wondering if you could remind us kind of where you think you would be comfortable with in terms of leverage on the balance sheet.

If you were to look at an M&A environment, how much leverage are you willing to take on?

I think for the right situation, we would be willing to go north of 2.5 times.

We've been up around that level at times for acquisitions, and I think we would be willing to go there again.

I think at this point it is just a matter of evaluating the right opportunities, whether it be acquisitions or share buybacks as such, and that is what we are in the process of working through on a regular basis.

Great.

Thanks, guys.

Nate Brochmann, William Blair.

Good morning, gentlemen.

Great quarter.

Hey, wanted to talk just a little bit -- if you could, elaborate a little bit on what you are hearing from your end customers.

I mean, it obviously, from your introductory commentary and just your results, sounds like there is a marginal air of improvement in their tone and their outlook.

And I was just wondering if you could elaborate on that.

And also a little bit in terms of kind of what the outlook is for business from existing versus new customers as you kind of now look throughout the year and get another data point behind you.

I think, Nate, I will take the first crack.

Most of our customers are still cautious.

They are willing to spend a little more.

We try to improve the breadth of our service with each customer by adding bathroom services or so forth, and we've found that a little more acceptable over the last six months.

So there is a little more tendency to spend a little more, but they are still very cautious.

I think the new customer on the street, again, you are always looking for customers or prospects that may have some service deficiencies and present a better solution than they currently have.

And price, everybody still wants to save money, but it is not to the degree of 20% or anything like that anymore.

It's tightened up.

Okay, very helpful.

Thanks.

And then also, when we talk about the productivity and you talked a little bit earlier, Ron, about the training programs and how you've been able to drive that.

How sustainable do you think that is to continue to drive that before you really got to kind of boost the hiring to support your current levels plus future business?

Hopefully, we can continue to do that.

Every week, we look at what we are doing on the training and the motivating and the compensation system to the selling force.

And we probably adjust something about once a month to keep the momentum going and the incentives going for these fellas.

So I think it is sustainable a little more.

And we're bringing up our headcount slightly every year, commensurate with our growth, really.

Cool.

Thank you very much.

I appreciate it.

Chris McGinnis, Sidoti & Company.

Good morning, guys.

Just a couple questions.

I guess first, looking at the national sales and how are those trending and are those above maybe what you're seeing on the regional side?

I think the national accounts are still very competitive, more so than the street business.

That is basically what we are seeing on that side.

You are still making solid headways into that market or into that customer base?

Yes, we are.

Yes, I think the success on the top line and the growth has really come from both the national and the local.

I'm not sure one more than the other, other than to say that over the last few years, we've been more successful in the national arena than we had previously.

So it is becoming an increasing component of our success.

All right.

And I guess just the rate of non-programmers entering the base on that growth rate -- is that still maybe around that 50% level that are coming in that were no-programmers before this?

Roughly.

I think it is probably a little bit more 60/40, 40% no programmers.

All right.

And then just looking at the SG&A as a percent of sales, it is one of the lowest you've had in a long time.

Is that sustainable, or is there a point where you have to kind of increase that level of spend just throughout the year?

Just your thought on the year as it progresses.

As the year progresses, it may come up a little bit.

I think looking out a little bit further, it may come up a little bit.

But we are hopeful that the merchandise, as we've been talking about, will start to moderate as well to offset some of that.

But I think we are pretty comfortable with the levels where they are in the short-term.

Great.

All right.

Thank you very much.

Michael Kim, Imperial Capital.

Good morning, guys.

Just to expand on the strength in core laundry, are you starting to see maybe some incremental improvement in net hiring?

Are the 10-man accounts going to maybe adding another guy to becoming an 11-man account?

What is the sentiment that you see for the balance of the year?

I think we are seeing in pockets of the country there is some improvements.

As I said in my comments, our first quarter is typically our best quarter with respect to net adds, just with respect to some seasonal adds.

But I think we are seeing some small improvements in additions to headcount.

Like I mentioned as well, our fourth quarter was slightly negative in adds/reductions on the wearers' side, so we are looking for a couple quarters in a row before we declare some real momentum.

And were there any particular verticals or areas that you saw some particular strengths?

It continues to be in the energy side, protective apparel, in those parts of the country.

And those have continued to be strong really for the last four or five quarters.

Okay.

And then turning to the guidance, just given maybe the better outlook for Specialty Garments, what is your sense for the organic growth outlook for the core laundry business?

Is it still in that sort of 7% to 9% range, maybe at the higher end of the range now?

Yes, I think the range moved probably about 1% on both ends.

Okay, great.

Thank you very much.

(Operator Instructions) Kevin Steinke, Barrington Research.

Good morning.

Just wanted to follow up on the earlier pricing question.

I know you started to negotiate with your customers on price in the fourth quarter last year, and I believe continued that this quarter.

Just how far along are you in that process of price negotiation?

Do you still see more to come for this year?

I think we mentioned last quarter or the quarter before, we try to have those conversations with our customers once a year on the anniversary date of their contract.

And as we mentioned, that started in the fourth quarter for many of our accounts and went into the first quarter.

That process is more or less complete for this annual cycle.

But that being said, over the course of a year, what tends to happen is you always have accounts that are up for renewal, might have competitive threats in those accounts.

And so you continue to have those discussions with accounts.

But as it relates to the particular annual process that we go through, that is more or less complete.

Okay.

And getting back to the wearer levels, even though you talked about some pockets of improvement, you are not declaring victory.

So I guess your updated guidance, does that still not assume -- or does that still assume not much improvement in wearer levels?

Yes, that's correct.

It really doesn't include very much improvement.

Okay, good.

Thanks for the update.

Dale Dutile, The Boston Company.

Good morning.

Just wondering on your comment about cotton prices, if I'm not mistaken, the commodity has come in dramatically since six to nine months ago when you first started talking about this.

How does that flow through?

Does that help you at all, or how should we think about that?

Yes, it will help us as we go forward.

I think, as we've talked about our merchandise costs increasing over the course of last year and into this year, we made a point of saying that some of that concern was fabric-related, but more of it was unit based as we have been growing.

The increased cotton costs took a while to work their way through the supply chain, and now the decrease is starting to work its way through the chain.

So the further we get through this year, we'll be starting to buy cotton at those lower prices again.

And since our model is one where we amortize our merchandise costs over, say, a 15-month useful life, it is really a delayed impact of the increase and the decrease.

So as we move through the later part of the year, it will begin to help us.

Okay.

Just on the margins, I know you seasonally see the strongest margins in the first quarter on the core laundry business.

Could you just remind us where are the issues that kind of -- I know that the tick-up is related to pricing, I assume, sequentially in the first quarter, but based on your guidance, margins will be down.

And I know that is seasonally normal.

But kind of what are the issues that bring the margins down in the latter three quarters of the year?

The biggest drop tends to be from the first to the second quarter, and there are a number of things in the second quarter that drive that margin decline.

The second quarter, there is some annual sick-pay payouts that we do with our employees that hit during that quarter that are not spread through the year.

But also, we do annual merit increase raises to our employees January 1.

So there is a bump in payrolls.

As well as kind of the reset of payroll taxes and unemployment taxes that happens on January 1 of the calendar year.

So I think you hit it on the head.

The first quarter is helped by the pricing prior to our increases in payroll that come from rate increases and those type of things that hit in the second quarter.

So those are the larger items.

Okay.

And on the merit increases, did you have those in '09 and 2010?

Yes, I think -- and I don't have -- yes, those would be there each year.

Although one of those years -- I believe it was fiscal 2009 -- we were in a salary freeze during the recession.

Okay.

I think the difficult part to look at the margins going back that far is what was going on with the merchandise.

Back then, the merchandise was falling, and it has been rising since then.

So you have that dynamic flowing through.

Okay.

Last question I had was on tax rate -- 38%.

Is that our best guess for the year?

I think that is a pretty normalized rate, yes.

Thank you.

(Operator Instructions) Andrew Steinerman, JPMorgan.

Hi, gentlemen.

You made the comment that merchandise amortization headwind will be dissipating.

Could you give us some timing on that?

And specifically, when I look at gross margin, how much of the gross margin decrease year-over-year was attributed to just merchandise amortization?

In the current quarter, Andrew, it was about 2.5%, so most of it.

Some offsetting factors in there.

But it was in that about 2.5% range.

At the beginning of the year, I had said that for the full year, we'd continue to have higher merchandise amortization as a percentage of revenues each quarter.

And we still continue to believe that.

But toward the end of the year, that amount is going to be going down from that 2.5% amount that I gave you.

I probably don't want to say too much more than that because there is a lot of things that could change, but as we move into next fiscal year, we will be starting to flatten.

Right.

So you think still by fourth quarter of this year merchandise amortization will be a headwind, but just much less than it was in the first quarter.

That's correct.

If you look at the guidance for the remainder of the year, saying we are going to get to 10% margin, and kind of look at the next three quarters' margin, it is a little more flattish with last year compared to the decline we had in the first quarter.

So that assumes that some of that headwind is starting to dissipate.

Right, and is that much different than what you thought a few months ago?

As it relates to the merchandise, I would say not really.

Okay, fair enough.

Thank you so much.

Thank you.

Mr.

Sintros, there are no further questions at this time.

I will turn the call back to you.

Very good.

We would like to thank you all again for your interest in our Company and look forward to speaking with you in a few months, and we will be in -- the reporting UniFirst's second quarter and the six-month financial results for fiscal 2012.

Thank you, and have a great day and happy new year.

Thank you, and ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation and ask you to disconnect your lines.

Have a good day, everyone.