UniFirst Corp (UNF) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the UniFirst Corporation conference call.

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

Afterwards, we will conduct a question and answer session.

(Operator instructions)

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

Please go ahead, sir.

Thank you and welcome to the UniFirst Corporation conference call to review our fourth-quarter and full-year results for fiscal year 2013 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 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 legal and environmental matters.

I refer you to our discussion of these risk factors in our most recent 10-K and 10-Q filings 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 review of UniFirst's fourth-quarter and full-year results for fiscal 2013.

Our numbers were released earlier today, and I am pleased to report that they showed another year of record financial results for our Company.

We continue to grow our operations; gain market share; reached in existing and new geographic areas; exploited more vertical market opportunities; added products to our core service offering; and built upon the ongoing strength of our organization.

It should be noted upfront that fiscal year 2013 had 53 weeks of operations compared to last year's traditional 52 weeks.

So the impact of our financial results is about 2% on reported Company growth.

Steve will go over the fourth-quarter and full-year numbers in detail, as well as our guidance for fiscal 2014, and here's a rundown of our fiscal 2013 performance.

Our fiscal 2013 UniFirst revenues were a new record, $1,356,000,000 or a 7.9% increase from the 2012 $1,256,000,000.

Net income also climbed to a new high of $116.7 million, up 22.8% from last year's $95 million.

I would like to thank our entire management team and our thousands of team partners throughout North America and Europe for their continued dedication to UniFirst, their unwavering commitment to our customers when fully understanding and acknowledge that in the end it is our people that allow UniFirst to grow.

And that allows us to continue to lead our industry in customer service and product quality.

Our Core Laundry Operations, which make up about 90% of UniFirst's overall business, reported a 9.2% year-over-year revenue increase to $1,214,000,000 in 2013, setting a new revenue record for this segment.

Excluding the extra week of operations, the core laundries grew at 7.2% for the year.

The revenue improvement was primarily a result of solid new account sales, both by our professional field and national account reps, continued growth in flame resistant and high visibility safety markets, sustained improvement in collections of ancillary charges, positive customer pricing and a slight improvement in customer retention.

Operating income for our laundries also set a new fiscal year record, increased by 28% to $170.7 million in 2013 when compared to 2012.

The improvement was largely a reflection of strong revenue growth for the year, coupled with improved productivity and cost controls from our field operations, as well as moderating merchandise amortization.

Meanwhile, our Specialty Garment business, which provides workwear, safety products, related services to the nuclear and cleanroom industry, reported a dip in revenues and operating income when compared to fiscal 2012, dropping off 5.9% and 20.7%, respectively.

As many of you know, the nature of this niche business is very cyclical, most notably on the nuclear side.

So fluctuations such as these are not uncommon.

As such, we expect this segment to begin showing more positive performance trending as the result of the nuclear division benefiting from scheduled reactor projects in the years to come, and cleanroom division continues to gain market share in the specialized ultraclean industries it serves.

But for fiscal 2014, we expect another down year for the Specialty Garments segment.

Steve will elaborate more with more details.

Like our core laundry business, our first aid operations, made up of route-based first aid services, pharmaceutical pill packaging, wholesale operations, reported record-setting revenues and operating results.

For 2013 first aid revenues increased 7.9%, while operating income improved 14.6% over 2012.

We expect this segment to continue performing well in 2014, capitalizing on the expanded industrial distribution partnerships, its wider product and service offering, its growing route-based first aid supply business, and its pharmaceutical packaging and wholesale operations that continue to grow by providing private-label OTC medications to increase number of retail chain stores and specialty distributors.

So, as we look ahead to UniFirst Corporation's expected performance for the coming year, we are optimistic about the outlook and expect another year of solid growth in 2014, although not quite to the level achieved over the past two years.

That is because of several factors.

For example, the economy is forecast to remain lackluster at best, and employment growth is expected to remain slow.

As I mentioned in the past, until we start seeing national employment gains consistently in the neighborhood of 300,000 jobs per month, we don't expect to benefit from any dramatic improvements in our traditional uniform rental opportunities.

We also continue to be challenged by strong competition and price pressures on the new sales side and by leveling off in the increased demand of the flame-resistant apparel as these safety garments tend to be priced higher than their traditional uniforms and can have a measurable effect on topline.

And as much, we will be required to maintain maximum efficiencies in the delivery of all our top-notch customer services, and we will need to continue upholding our strict cost controls on the operations side.

Nevertheless, we believe the indicators in our historic track record still favor a positive performance in the coming year.

We will continue to succeed as we have done in recent years and effectively executing our corporate-wide Vision 2020 strategic growth plan, as well as the individual business plans at each of our local operations to develop and follow in line with our corporate costs.

These important plan documents are financial targets and the strategies needed to achieve them.

Our master plan also reflects our determined commitment to achieve both service excellence and quality new sales as the key driver to organic growth.

And as always, we consider any business acquisitions that meet the criteria consistent with our goals.

As for the long-term goals service area, we continue with the development of Unity 20/20 project is now overhauling the Company's entire CRM and service systems.

Although not expected to be completed in 2014, the Unity 20/20 initiative will ultimately provide UniFirst with a competitive edge by maximizing overall operational efficiencies companywide and providing an array of new servicing options for our customers.

And to help maintain our leadership position in products and service quality, we continue to focus on our ISO 9001 2008 certification programs for individual service operations as an integral component of continuous improvement and quality assurance plans.

We are looking forward to many challenges that lie ahead and help to report new financial milestones for our Company in fiscal year 2014.

And for the same time, we expect to continue producing both short- and long-term returns for our shareholders.

And with that, let me turn it back over to our Chief Financial Officer, Steve Sintros, for more details on the outlook ahead.

Revenues for the fourth quarter with $352.9 million, up 13% from $312.4 million a year ago.

Net income was $30.6 million or $1.52 per diluted share compared to $22.5 million or $1.13 per diluted share reported in the fourth quarter of fiscal 2012.

As a reminder, as Ron mentioned, the fourth quarter, as well as the full fiscal year, included an extra week of operations compared to fiscal 2012 as fiscal 2013 was a 53-week year for the Company.

The extra week in fiscal 2013 accounted for revenue growth of approximately 8.1% and 2% compared to the fourth quarter and full year of fiscal 2012, respectively.

Full-year revenues were $1.356 billion, up 7.9% from $1.256 billion in fiscal 2012.

Net income per diluted share for the full year was $5.81 compared to $4.76 in the same period a year ago.

Full-year results in fiscal 2012 included the positive effect of a settlement related to environmental litigation, which resulted in a $6.7 million pretax gain in the third quarter of 2012.

The gain was recorded as a reduction of selling and administrative expenses.

Diluted earnings per share for fiscal 2012 adjusted to eliminate the effect of the gain were $4.55.

Fiscal 2013 diluted earnings per share increased 27.7% compared to the adjusted earnings from a year ago.

Fourth-quarter revenues in our Core Laundry Operations were $320.4 million, up 13.8% from those reported in the prior year's fourth quarter.

Excluding the impact of the extra week of operations, acquisitions and a slightly weaker Canadian dollar, revenues grew 5.3%.

Acquisitions accounted for growth during the quarter of 0.6%, primarily related to the acquisition of a two-plant operation in South Carolina that we completed during the quarter.

The Company's revenues continued to benefit from solid new account sales.

In addition, certain annual price adjustments, as well as higher collections of merchandise recovery charges, also contributed to the revenue growth during the quarter.

Wearer additions versus reductions were negative in the fourth quarter and remain negative year to date.

We continue to see relative weakness in the economy and the industries that traditionally employ uniformed workers.

Employers remain hesitant to take on additional costs, including adding to headcounts.

We believe the uncertainty around the adoption of the Affordable Care Act continues to contribute to employers' hesitancy to add full-time workers.

Core laundry operating margin for the quarter was 14.2% compared to 12.3% a year ago.

The increase in the quarterly operating margin was primarily the result of lower merchandise amortization, plant labor and bad debt expense as a percentage of revenues compared to the prior year.

These positive comparisons were partially offset by higher healthcare claims and other payroll-related costs as a percentage of revenues.

The results of operations for our core laundry business for both the fourth quarter of fiscal 2013 and 2012 benefited from reductions in reserves for worker's compensation and other insurance-related liabilities of approximately $2.3 million and $1.9 million, respectively, due to changes in third-party actuarial estimates.

Energy costs for both the fourth quarter of fiscal 2013 and 2012 were 5.2%.

Our operating results continue to benefit from improvements in some of our underperforming laundry plants.

These gains, as well as strong execution in our plan operations, as well as in the collection of merchandise recovery charges, have helped our overall margins throughout fiscal 2013.

Revenues from our Specialty Garments segment, which consists of nuclear decontamination and cleanroom operations, were $19.9 million in the quarter, up slightly from $19.7 million in the same quarter of fiscal 2012.

This segment had income from operations for the quarter of $1 million compared to a loss from operations of $0.7 million in the same quarter a year ago.

The improvement in profitability was primarily the result of several nonrecurring expense items in the fourth quarter of fiscal 2012.

For the full year, this segment's revenues and operating income were down 5.9% and 21.7%, respectively.

This decline is primarily due to the completion of two major projects in the latter part of 2012.

This segment's European operations also suffered from the shutdown of several nuclear power reactors in Germany.

In addition, a number of outages scheduled for this year have been delayed or not materialized at the levels expected.

First aid segment revenues increased 14.2% to $12.5 million in the quarter compared to $11 million in the same quarter a year ago.

Revenues benefited from an extra week of operations, which accounted for growth of approximately 8% during the quarter.

Income from operations for this segment decreased to $1.1 million in the quarter from $1.4 million in 2012.

The decrease in operating income was primarily due to an inventory adjustment reported during the fourth quarter of 2013.

For the full year, first aid revenues were up 7.9%, and operating income was up 14.6%.

The effective income tax rate for the fourth quarter of fiscal 2013 and 2012 was 36.5%.

We expect our full-year fiscal 2014 effective income tax rate to be approximately 38.25%.

UniFirst continues to maintain a solid balance sheet and financial position.

Cash and cash equivalents at the end of the quarter totaled $197.5 million, up from $120.1 million at the end of fiscal 2012.

Of this amount, $61.4 million has been accumulated by our foreign subsidiaries and is intended for future investments outside the United States.

Cash provided by operating activities for fiscal 2013 was $211.6 million, up 30.8% compared to $161.7 million for fiscal 2012.

The improved cash flows were primarily the result of higher earnings, as well as lower cash flows related to merchandise and service investments.

In addition, the Company's cash position also benefited from a change in tax regulations impacting the timing of deductions allowable for certain merchandise and service.

During September 2013, the Company utilized existing cash on hand to pay down $100 million in private placement notes that came due.

The Company continues to have significant capacity under its existing bank line of credit to continue funding acquisition activity or other capital allocation options as necessary.

Capital expenditures for fiscal 2013 were $103.5 million.

The higher capital expenditure level is partially the result of costs related to our Unity 20/20 CRM systems project.

Year-to-date we have capitalized $20.8 million related to this project.

In addition, this year's expenditures to date included the purchase of a building for a new laundry plant in the first quarter, as well as costs related to two plant reconstruction projects.

We continue to invest in plant updates, expansions and automation that will allow us to achieve our long-term strategic objectives.

We expect capital expenditures in fiscal 2014 to be between $90 million and $100 million as we will continue to spend additional capital on our Unity 20/20 technology initiatives.

During the fiscal year, the Company expended $30.7 million on acquisitions of businesses, primarily in our Core Laundry Operations.

The majority of the amount expended related to one acquisition in South Carolina.

This acquisition added two laundry plants to our already strong presence in the Carolinas.

We are excited to bring on another strong operator into the UniFirst family and for the synergies we feel will be created with our existing operations.

We also continue to look for additional acquisition targets as acquisitions remain an integral part of our overall growth strategy.

At this time, we would like to provide our initial outlook regarding our operating results for fiscal 2014, which began on September 1. We expect that revenues for fiscal 2014 will be between $1.372 billion and $1.385 billion, and full-year diluted earnings per share will be between $5.60 and $5.85.

As a reminder, fiscal 2014 will be a 52-week-year for the Company compared to fiscal 2013, which was a 53-week year.

The negative comparison of one less week of operations will have the impact of reducing our year-over-year operations by approximately 2%.

Excluding the impact of the workweek differential, acquisitions, foreign-exchange rate fluctuations, as well as the customer buyout we recognized in our second quarter, we project organic growth for our Core Laundry Operations to be approximately 4% in 2013.

The midpoint of our earnings projections assumes an operating margin for our Core Laundry Operations a few tenths below the full-year fiscal 2013 level of 14.1%.

We also wanted to highlight that we anticipate revenues and profits from our Specialty Garments segment to be down approximately 9% and 15%, respectively, compared to fiscal 2013 as a result of less power reactor outage activity and other projects compared to fiscal 2013.

Looking further ahead, early indications are that the second half of fiscal 2015 and beyond will bring substantial new revenues for this segment as large new power reactor projects are scheduled with existing customers.

As always, we will continue to update you throughout the year on our expectations for this segment's results, which we have discussed in the past can be difficult to forecast.

We also would like to take this opportunity to update you on two items that will have an impact on UniFirst over the next couple of years.

The first is the project of our Unity 20/20 CRM systems initiative.

We currently don't anticipate beginning deployment of this new system to our locations until fiscal 2015.

The increased expense to our operations in fiscal 2015 will be primarily the result of depreciation of our investment in the new system that we currently estimate will be between $5 million and $6 million once fully deployed.

We also expect to incur certain nonrecurring costs associated with the training and deployment effort associated with our new system.

It is unclear at this point how much these costs will be incurred during fiscal 2014 versus fiscal 2015 and, as a result, we have not included an estimate of these costs in our current guidance.

We are very excited about the impact of this new system and what it will have on our overall customer service levels, as well as the efficiency of our operations.

We will continue to keep you updated on the timing and progress of this initiative in the upcoming quarters.

The second item is to provide you an update on the status of the Affordable Care Act as it relates to UniFirst.

Currently the Company has attained a waiver that will allow its existing healthcare coverage to remain intact through August 2014.

As a result, we do not expect any significant financial impact from the act on our fiscal 2014 results.

The Company feels strongly about providing affordable health care for our employees and intends to continue its long practice of doing so.

As we move throughout the year, we will continue to update investors on the potential financial impact the full adoption of the Affordable Care Act may have on our future years.

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

(Operator Instructions) Justin Hauke, Robert W. Baird.

I guess I had a question on the topline guidance, the revenue guidance for 2014, you are talking about 4% organic growth, and it looks like you did an acquisition that adds maybe another 2% on top of that.

You've got the workweek adjustment that takes away 2%.

But I guess I'm surprised by the guidance is only up 1% to 2% when it would seem like it should be a little higher with the organic growth that you are expecting.

I think the one flaw into your numbers there is that the acquisition will be about 1% on next year's growth.

About 1%?

Yes.

That's the biggest difference, I think, in the numbers you gave.

Overall, at the mid to higher end of our range, the core laundries growth will be about 5% total, which without the acquisition would be about 4%.

We also have a little bit of a headwind from the Canadian exchange rate built in there as well.

Okay, okay.

That's helpful.

And then on the CRM investments -- and I appreciate you giving those numbers on it -- can you just -- I want to make sure that I understood them correctly.

It sounds like the margin drag from the increased D&A in 2014 is $5 million to $6 million, or is that the drag once it goes live in 2015?

I just wanted to clarify that first.

No, that's the latter.

So what we basically said was that in 2014, we will continue the development and testing of the system.

But when we start deploying it in hopefully early 2015, that's when the depreciation of the investment will start.

That deployment will occur throughout 2015.

It is not going to be a single-date deployment.

So that $5 million to $6 million is the projected full-year depreciation number, once its fully deployed.

So, that being said, it probably won't have that full impact on 2015, either, but we were just trying to signal the level of the investment and the depreciation once fully deployed.

So, as we get closer and we have a better idea of the timing, we can narrow that and provide some additional color.

Got it.

And then I guess my last one here for now is I guess I'm a little surprised on the decision to use cash to pay off the debt rather than refinancing it.

It sounds like that's the decision you made in September.

Any updated thoughts on the balance sheets and what you are thinking about in terms of the firm's overall capitalization and the capacity that you have here?

Yes.

I think, just to start on the paydown, as I mentioned, we still have significant borrowing capacity under our line of credit.

So I think we still have the ability to make moves from a capital allocation perspective as necessary, and we obviously continue to generate a significant amount of cash, despite higher capital expenditure levels than normal.

So I think we still feel we have that flexibility, and the fact we paid it off in September doesn't keep us from making moves as we move forward.

John Healy, Northcoast Research.

Wanted to see if you guys could give us a little bit of an update in terms of how the trends in terms of 1Q have gone.

Any thoughts in terms of how September and maybe the first couple weeks of October have trended relative to when you ended the fiscal year?

John, this is Ron.

We have really not seen any significant change, as we said in our webcast.

Our ads versus reductions and awareness is still slightly negative for the first month.

So we are not seeing the jobs, and we are actually seeing the energy sector down in the Texas area actually slowing down.

Interesting.

We are forecasting basically that we are going to be slightly negative all year long.

And I wanted to ask -- I know the fire and the protective garments have been a nice benefit to you and the industry for maybe the last two years or so.

It sounds like you are a little bit cautious on that opportunity maybe going forward.

And I was wondering if you could help us size how big of a business that has become for you and how much that has contributed to the growth rate and maybe what inning you think we are in, in terms of that opportunity?

Well, I think a couple different things, John.

As far as what we are seeing -- and Ron mentioned we are seeing some slowdown in that.

We are still growing higher than our average from that product line.

But two years ago, the growth in that product line was 30%, 40%.

Now, I know that doesn't mean that much to you without knowing exactly how big that is, and I don't have that number in front of me, to be honest with you.

But it's more of a slowdown to the annual year-over-year impact than it is that it's shutting down.

It's still a strong part of the business in that part of the country, in particular.

The other thing that you have to keep in mind -- it's not only new account growth, but there were several accounts over the last few years that converted from standard garments to flame-resistant garments, which are at a higher price.

And so we were able to reap the benefits in our growth from that.

But I don't think it's wrong to say that our overall growth was helped 2 or 3 points from flame-resistant garments when we were growing 10%, 11% during 2011 and 2012.

That's incredibly helpful.

And I just wanted to ask a little bit of a philosophical question here.

When I look at your Company and your margins are record highs and you guys have outperformed the industry in terms of growth, I know your balance sheet is completely clean.

And it sounds like you guys are signaling that you'd like to make acquisitions if you can find good businesses at reasonable price.

And when I think about this industry, I mean we haven't seen -- I know M&A has picked up a little bit in the last couple of quarters.

But we are still not seeing a lot of activity there.

So if we go through 2014 without a big pickup in terms of the M&A scenario, how do you see deploying your cash flow?

I mean how do you think about that?

This is Ron.

Number one, we believe that the acquisitions are out there.

We are talking to them.

It's just you've got to convince them that now is the right time, but short of using the funds for acquisitions and reinvesting in the business, we would certainly look at stock buyback, probably.

Okay.

Great.

Thank you, guys.

Chris McGinnis, Sidoti & Company.

Can you just talk maybe a little bit more in depth on the -- you talked about the pricing under your contracts being a little bit more competitive.

Is that a pickup from last quarter, or is it just the continuation we've seen just over the last year, I think?

I think, Chris, we have seen a little more competitive pricing in the national account arena than we did over the last three years.

That's all I really can tell you.

It seemed to pick up.

Discrete business seems to be pretty consistent.

On a national account arena, it has gotten a little more competitive.

If you don't mind me asking, is that from the larger competitors, or is it smaller competitors?

Really, the national accounts were really -- when we bid on those accounts, it's really with one of our handful of large competitors.

So it's really from the large competitor side that we are seeing some pricing on the national accounts that is becoming increasingly competitive.

Kevin Steinke, Barrington Research.

Steve, on your last conference call, third-quarter call, you talked about your outlook being impacted by higher than expected investments and new merchandise and service and that you were going to monitor that closely.

Just wondering what sort of trends you are seeing there and if that is also related to the competitive front.

I think that that can be and has been related to the competitive front from some perspective.

I will say, during the fourth quarter, it moderated a little bit compared to what I was seeing toward the second half of the third quarter.

It's still an area of variability for our guidance in any year as far as how much investment we are going to need to make in merchandise.

I think we've said in the past that a large percentage of our merchandise investments were existing accounts I think a lot of people equated to new accounts, which it certainly is a factor.

But you are right.

The competitive environment does impact our merchandise investments from time to time, and it's something we are continuing to watch.

So maybe a little bit better result in the fourth quarter that maybe I was indicating in the third, but something we are closely watching as the year starts here.

Okay.

Well, thanks for answering my question.

Justin Hauke, Robert W. Baird.

Just one more quick one.

Ron, you talked a little bit about new product lines in your prepared remarks.

Just curious if there was anything you could elaborate there in terms of what's new and what your thinking is on that side?

Yes, it's in the Facility Services area.

Primarily we are in the chemical distribution, and we found that our customers have a need for such a product.

So we are very positive about that, and we are trying to roll it out region by region.

And I guess how much of your business is carrying chemicals now?

Maybe a percentage of routes?

I can't give you that number.

It's relatively early.

We've put together the program, and we are starting to roll it out.

We've had some large customers that adopt the program.

But that number is a relatively low number right now as far as the penetration of that product.

(Operator instructions).

There are no further questions over the phone lines at this time.

All right.

Well, we would like to thank you all for the interest in UniFirst and reiterate that we are pleased with our fiscal 2013 financial results and that we are cautiously optimistic for the outlook for fiscal 2014, and we look forward to talking to you again in January when we are reporting our first quarter for fiscal 2014.

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.