UniFirst Corp (UNF) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the first-quarter earnings conference call. (Operator Instructions). I would now like 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 first-quarter results for fiscal 2015 and to discuss our expectations going forward. I'm 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 risk factors. I refer you to our discussion of our 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. I'd like to welcome everyone joining us for our review of UniFirst's first-quarter financial results for fiscal year 2015. Steve will cover all the details in a moment, but first I'll provide a brief summary.

UniFirst had a solid performance in the first quarter of fiscal 2015 with revenue climbing 6.8% over the first quarter of 2014 and $370.4 million, a new quarterly record revenue for the quarter. Net income for the quarter was also a new UniFirst record at $37.4 million. This represents an 8.6% increase over the net income reported for the same period a year ago.

Organic growth from our Core Laundry Operations, which account for about 90% of UniFirst's total business, was the catalyst for the Company's positive quarterly results. Contributing factors for the Core Laundry's growth included a quarterly record for new account sales, a positive impact on pricing and a slight gain made in our uniform wearer adds over reduction metrics. These and other operational elements combine to result in a new quarterly revenue and operating income record for our laundries, improving by 7.6% and 8.6% respectively when compared to last year.

Meanwhile, our Specialty Garments segment, which includes specialized nuclear, clean room and ancillary services, reported decreases for the quarter in both revenue and operating income when compared to the same period in 2014.

Finally, our First Aid and Safety segment reported strong financial results for the first quarter, setting a new quarterly record for revenues and increasing operating income from 2014 first quarter.

Overall, we are pleased with the first-quarter results for 2015 and proud of our thousands of UniFirst team partners who continue to develop new and creative ways to improve our service, sales and operational professionalism. As we look ahead to the remainder of 2015, we expect our Core Laundry Operations to continue driving the Company's growth to maintain the positive momentum achieved through the fiscal 2014 and during the quarter of 2015.

As always, to support organic growth, we'll look to our field and national account sales team to continue to improve upon their selling skills, productivity as a result of our ongoing investments in these training and prospecting technologies and their sales incentive programs. We firmly believe such investments provide the measurable return for UniFirst and our shareholders.

For this same reason, we continue investing in our service and route teams to encourage improvements in all areas related to consistently delivering the highest quality products and service to our thousands of business customers big and small, no matter where they are located in North America. As I alluded to in a past webcast, by ensuring all of our customer needs are met week in and week out, we know our customer satisfaction levels will continue to climb, customer retention will benefit, ancillary services sales will grow, new account referrals will increase and our top and bottom line will make solid gains.

Yet even with our internal processes and procedures firmly in place and advancing as intended, we also expect to be challenged by strong competitive sales as we have in the past and by ongoing needs -- this will result in ongoing needs for rigorous cost controls and the operational side of escalating operational expenses. For example, we still expect healthcare expenses for our 12,000 team partners to continue to climb most notably today as a result of the changes associated with the Affordable Care Act.

And with uncertain future oil and energy costs, we remain cautious. When lower energy costs are typically good for consumers and the economy as a whole, a decrease in oil prices of late could have a negative effect on UniFirst's oilfield uniform market that had been very profitable for us in recent years. So we will be watching this situation very closely in the months and periods to come. Conditions like these challenge all our operations and continue performing as effectively as possible boosting productivity wherever possible. Consequently, maximizing resources will be primarily focused for all our managers throughout the [ERV].

In spite of the situation and uncertain trajectories for both the national economy and employment in 2015, we believe our managers in all UniFirst business segments will again succeed by continuing to effectively execute our short and long-term business strategies as laid out in our (inaudible) 2020 business plan. By continuing to follow this corporate plan while we're keeping our customers focused on everything we do, UniFirst will continue to grow and provide quality returns for our shareholders.

We're optimistic that fiscal year 2015 will be another year of solid growth for UniFirst and hope to be able to report a new financial milestone for our Company in the quarter ahead. And with that said, I'll turn it back over to our Chief Financial Officer, Steve Sintros, for more details on the quarter.

Thanks, Ron. First-quarter revenues were $370.4 million, up 6.8% from $346.7 million a year ago. Net income for the quarter was $37.4 million, or $1.85 per diluted share, up 8.6% from $34.5 million, or $1.71 per diluted share reported in the first quarter of last year. Revenues in the Core Laundry Operations for the first quarter were $335.8 million, up 7.6% from those reported in the prior year's first quarter. Excluding the negative impact of the weaker Canadian dollar, as well as the positive contribution from acquisitions, the Core Laundry Operations revenues grew 7.8%.

Revenues for the quarter were driven by several factors, including strong new account sales not only for the quarter, but for the last 12 months. Current quarter revenue growth also benefited from price increases, as well as higher levels of merchandise recovery charges. Wearer additions versus reductions were positive in the quarter and slightly improved from the same quarter a year ago. Positive additions versus reductions is common in our first fiscal quarter and should not be viewed as a consistent trend at this point.

Core Laundry operating income during the quarter increased 8.6% and operating margins increased slightly to 16.9% from 16.8% a year ago. The margin during the quarter benefited from strong revenue growth, which drove cost of revenues, including payroll, energy and merchandise amortization, lower as a percentage of revenues. Energy costs for the Core Laundry Operations were 4.6% during the quarter compared to 4.8% in the first quarter of 2014. These benefits were partially offset by higher legal costs relating to the ongoing litigation surrounding The New England Compounding Center matter, as well as higher costs related to the update of our IT systems compared to a year ago.

Revenues for the Specialty Garments segment for the first quarter, which consists of nuclear decontamination and clean room operations, were $22.5 million, down 8% from $24.4 million in the first quarter of 2014. This segment's income from operations for the quarter was $2.3 million compared to income from operations of $2.8 million a year ago. Less project-based revenues from this segment's US and Canadian nuclear business was responsible for these shortfalls compared to the prior year.

The First Aid segment revenues increased 17.4% to $12 million in the quarter compared to $10.3 million a year ago. Income from our operations for this segment increased to $1.4 million from $0.5 million in 2014. This quarter's results benefited from the continued growth of this segment's van operations, as well as several large orders in its wholesale business.

UniFirst continues to maintain a solid balance sheet and financial position. Cash provided by operating activities during the first quarter was $52.8 million, down from $68.6 million a year ago. The decline in cash flows from operations is primarily due to increases in working capital items such as accounts receivable and inventories, as well as the timing of certain vendor payments compared to a year ago.

Capital expenditures during the quarter were $17.5 million. We continue to invest in our Unity 20/20 CRM systems project and capitalized $3.3 million related to this project during the quarter. We also continue to invest in plant updates and expansions in automation that will allow us to achieve our long-term strategic objectives. We continue to expect capital expenditures in fiscal 2015 to be between $90 million and $100 million.

During the quarter, we also expended $10.8 million on acquisitions, which primarily related to a purchase of a one plant operation in Indiana. We continue to look for additional acquisition targets as acquisitions remain an integral part of our overall growth strategy.

Cash and cash equivalents at the end of the quarter totaled $213 million, up from $191.8 million at the end of fiscal 2014. Of our cash on hand at year-end, $62.5 million has been accumulated by our foreign subsidiaries and is intended for future investments outside the United States. The Company also continues to have significant capacity under its existing bank line of credit to fund potential acquisitions or other capital allocation options.

As always, we like to provide you with an update regarding our outlook for the remainder of our fiscal year. At this time, we continue to expect that revenues for fiscal 2015 will be between $1.45 billion and $1.47 billion and full-year diluted earnings per share will be between $5.75 and $6. Although our first-quarter results were positive, there are several factors which keep us cautious when looking ahead over the remainder of the year.

First and foremost is the recent decline in oil prices. We have discussed over the last several years how a significant factor in our strong revenue and profit growth has been increased economic activity in the energy-producing regions of the country in the United States, as well as Canada, as well as the corresponding increase in demand for flame-resistant garments. We believe that if oil prices remain depressed for an extended period of time, our operating results will be negatively impacted due to our significant presence in these markets.

We acknowledge that the Company's results will also benefit from lower-priced oil primarily in the form of lower gasoline costs for our fleet of delivery vehicles. However, we believe at the current prices the negative impact on the potential economic slowdowns in these oil-producing markets would outweigh the benefit of lower energy costs. Due to the significant uncertainty around when and how much this trend may affect our results, we have not built into our guidance any specific impact from oil-related employment declines; however, it is a factor in our cautious outlook.

Another albeit smaller item impacting our outlook is the continuing weakening of the Canadian dollars. At the current exchange rates, our full-year revenues would be impacted by approximately $2.2 million to $3 million compared to the projected revenues using the exchange rates assumed when we provided guidance in October. In addition, we continue to monitor other expense items such as healthcare costs and merchandise amortization that we caution may pressure margins during fiscal 2015. Although these items did not have a significant impact on Q1, we continue to expect margin pressure associated with these items as the year progresses.

In summary, we were pleased with the results of our first quarter, but we remain cautious given some of the macroeconomic and other factors that may impact us as the year moves along. We will continue to update you on these items in the quarters ahead.

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

(Operator Instructions). Andrew Wittmann, Baird.

Hi, guys. Thanks for taking my question. I think the question that most of us are going to be focused on this morning is regarding your comments on the energy segment and how that's been a big driver of your business in the last few years and what it could mean in the future. But just to get our arms around this a little bit, just looking back at a presentation you guys gave in 2013, you mentioned that energy exposure was about 7% of your customer base. In fact, I think that was energy as well as agriculture the way you broke it out then. Just given the growth rates, is that 7% or less exposure to energy still about the right level of customer concentration or has that changed significantly?

That number is probably getting closer to 10%, Andrew and again, you're right. It is oil and gas; it's not just oil. That accumulation does include some other SIC codes, but it's really primarily oil and gas drilling and exploration and at this point, we don't really have a further breakdown of that to say what's oil and gas. Our estimation is it's more oil than gas and that's really where our main concern lies right now.

I was just wondering if there's any geographic basin given that you've got things like the Eagle Ford. I think you guys have mentioned that Texas has been a strong area for you. Is it North Dakota, is it in the Marcellus in Pennsylvania, Ohio? Each play it's turning out is having different economics that are becoming a factor and I think it would be helpful for us to understand where the locus of your concentration might be just to see what the impact could be.

This is Ron, Andrew. We are the strongest player in the Texas market and specifically the west Texas market. That's where we're seeing it, but it goes way beyond oil. I mean there is the support industries that support it, the trucking companies that bring in the water. So all that is starting to be effective. We talked to our manager about an hour ago and the smaller -- the drilling has stopped and with the drilling stopped, that affects the guys hauling in the pipe and the water and so forth. So we're starting to see that slowdown. Now how long the slowdown is -- your guess is as good as mine. But it appears that the oil -- it's the supporting industries that support it.

Got it. That makes sense. So it sounds like you think they will be coming, but you haven't seen the stops yet. As we look here partially through second quarter, are you seeing the stops in some of these markets or is it something that you think you'll see?

Well, yes, in the first quarter, you're correct, Andrew, we really did not see them. With the holidays, I think some of the staffing changes in these companies it's been delayed and that's why Ron mentioned we were talking to some of our managers as recently as today and they are certainly coming. Ron mentioned the drillers. You have the drillers and you have the pumping stations and the drilling of the new sites has effectively stopped and we know we have a couple of customers that focus specifically on drilling and they are putting in for reductions as we speak. So some of this is certainly coming as we move into the new year here. We have not seen very much of it yet, but based on our discussions we believe it's coming.

And just to add to what Ron said, you hit it on the head. I know you mentioned North Dakota. I just wanted to clarify we are not in North Dakota at all. Our exposure, although there is some Pennsylvania and we do have a significant presence in Edmonton where there is some oil exposure, it's primarily the Texas, Oklahoma, New Mexico surrounding states. And Ron also hit it on the head that it's not just that 7% to 10% oil and gas customers; it's really how will the economies in the downstream businesses get impacted by this slowdown. That's where we have reason for caution.

That all makes sense. Just a couple on guidance and I'll leave some for others as well. But we can look at the implied growth guidance, as well as the margin guidance. I guess I wanted to dig into the margin guidance a little bit more. By our calculations, implicit in your -- and for the remainder of the year -- at the high end of your guidance level, it's about 12.6% margins, which is down almost -- at the midpoint, it is down 100 basis points. At the high end, it's down a little bit less than that. Despite what should be fairly sizable gains from the decline in those energy prices, I would imagine at least 50, 75 basis points. So I guess what else are you seeing in the business besides you mentioned healthcare that could swing it to that extent?

I think to answer that question, Andrew, you mentioned the energy prices. Part of what I think we were trying to say is if we had just built in the benefit we were going to see from energy prices, that would've had a positive impact on our guidance. I think one quarter into the year with the uncertainty around what's going on with energy and down in those markets, we felt the prudent thing to do was leave the guidance the same and take a wait-and-see approach, see how these reductions are going to impact us and so on.

In the very short term, for example, next quarter, we may see more of a positive impact from the energy than we will from the negative impact of reductions. But until we get a little bit more visibility on the net impact of the two, we decided to take a wait-and-see approach.

Okay. I'll probably come back in, but I don't want to take too much of your time here. So thanks, guys. I will come back in later.

John Healy, Northcoast Research.

Thank you. Steve, I wanted to ask a little bit more about the oil and gas exposure. I know you talked about it in percentage of your customers, but could you help us conceptualize how the flame-resistant garments might differ than your traditional uniforms, maybe roughly in terms of I would say revenue per wear or how long those garments need to be amortized? Is there a difference in terms of how changes in wearers with those garments how it would impact the cost structure relative to what we have typically seen with the more traditional wearers?

Well, I guess part of the way to answer that, John, is that clearly the cost of those garments are far more expensive and the revenue per week we get from those customers in some cases is double or three times what we do for a standard cotton garment. Part of the growth over the last few years in revenues and profits has been not only the boom in oil and gas exploration, but also the transition based on some regulations that pushed a lot of employers to put their employees in these flame-resistant garments where five, six years ago our oil business was not in flame-resistant garments. So that has been part of the benefit. Now again those reductions per man will come at a heavier revenue decline because of the weekly revenue we're getting on those garments. So I think hopefully that helps to answer some of your questions.

That is. Thank you. I wanted to ask just competitively speaking, I think in your prepared remarks you indicated that you're seeing some price increases in the business. Is there a way to think about the magnitude of those increases? Is it kind of the normal annual amount, is it a little bit better than that and what you're seeing on the competitive front compared to what you've seen in prior periods?

I think it's probably a little bit stronger than in past years. I think we've seen that across the board that pricing has come up a little bit, but that being said, with the lower energy prices, part of our caution around the benefit we're going to get from lower energy prices is what that might do to the pricing environment. We haven't seen much yet, but we've always done a good job over the years as energy prices have gone up working with our customers to share in those increases and we expect some of that on the way down as well.

Got you. And just one final question. At this time last year, we were all getting hammered with some tough weather. Has weather had any sort of benefit to you guys to start the second quarter or is it neutral? How would you describe the impact of weather so far on the business?

I'd say so far it's been neutral. You're right, last year at this time, we probably had some more negative impact. How the rest of the winter plays out remains to be seen, but it has not been as problematic so far this year.

Got you. Thank you, guys.

Sean Egan, KeyBanc Capital Markets.

Hey, good morning, guys. I am on for Joe Box. I had a quick question for you on some of the robust growth you've seen in the Core Laundry organic growth side regarding new accounts. Are those new account additions more a function of non-programmers, are they more a function of defectors from competitors? I mean what do you attribute that new account growth to?

I think it's basically been the same that we've been saying all along. It's just about a 55/45 split. About 55% is coming from people who have a current program and about 45% is coming from no programmers and that 45% may be also people that had a program, been out of the uniform program for two or three years and decided to come back in. But that's basically where we're getting it.

Okay, great, thanks. And then staying on the top line, you mentioned several large orders in the wholesale side for the First Aid segment and I'm wondering because that's several large orders should we anticipate this growth to taper off and what are your expectations for that segment going forward?

Yes, I think in our original guidance we probably had sort of more mid-single digit growth built in for the year and that's probably more what you'll see over the remainder of the year absent some additional blips from some larger orders. So I think the first quarter was a little bit of an anomaly; not that we don't expect them to continue to do well, but not at that level.

Okay, great. Thank you. That's all for me.

Kevin Steinke, Barrington Research.

Good morning. Just following up a little bit on one of the previous questions, 7.8% organic growth in Core Laundry was a nice number and you touched on the new account sales. Your expectation going into the year was 5.2% at the midpoint. I know it's still early in the year, but is there anything right now that might be tracking ahead of your expectations in terms of the component of growth that led to that good performance in the first quarter?

I'm not sure there's anything in particular, Kevin. I think that you mentioned the new account sales and you mentioned the solid pricing. Last year, we had a good retention year as well and that got us off to a good start. Obviously, our guidance assumes some paring back of that organic growth, which we expect to see as we annualize some pretty good periods. So no, I don't think there's anything in particular that's changed. And then again, as I mentioned, I think the guidance has the caution built in, no specific amounts, but from some of these reductions we know are coming in the energy sector.

Okay, thanks. And then if you look outside the energy markets, what's your overall read on the rest of the economy and how labor markets are developing outside of energy?

Kevin, this is Ron. Outside of the energy market, we're still seeing a positive effect. We are seeing service industries, the dealerships and so forth adding people. So not to any great significance, but as we said earlier our adds over, metrics were plus for the quarter and it was really not driven by the oil industry. So we are seeing industry following the employment pattern.

Okay, thank you. And could you break out the drag from the Canadian dollar on the quarter and also acquisition contribution to revenue growth?

Sure. The Canadian amount was a negative 6/10 and it was 4/10 positive from acquisitions.

Okay, great. And then lastly, any change in your outlook for the Specialty Garments segment for the rest of the year or still tracking with what you said last quarter?

Yes, it's more or less tracking with what we said last quarter. Even though they were down in the first quarter, that was expected in their budget. They, from year to year, have different strong quarters whether it be the fall or the spring and the way things are falling this year, we still expect them to be on their trajectory for what we said in the fall.

Okay, well, thank you for taking my questions.

Chris McGinnis, Sidoti.

Good morning, thanks for taking my questions. Steve, could you just walk through just the increase in SG&A a little bit? Is that just due to the reset of payroll?

No, Chris. The reset of payroll is more coming in this quarter coming up. Some of that was some increased selling costs, but as we mentioned in the release, we had some legal costs that were higher related to some situations we are dealing with, as well as some costs related to some IT projects we have going on that were expensed during the quarter. So those were two unusual items I guess causing the increase. Other than that, it was just some increased selling costs with the rampup of some of our salesforce and sales costs, but nothing else too out of the ordinary.

So that increase should come down throughout the year I guess?

Some of these projects, they are continuing on the IT side. It remains to be seen whether there will be other costs we have to expense through versus capitalize. So I wouldn't necessarily count on that, but on the legal side, again, depending on the timing of when these issues resolve themselves and some of these situations with our insurers, those may pare back, but we're not quite sure when.

All right, great. Thank you.

Andrew Wittmann, Baird.

Hi, guys. You mentioned price a few times in your remarks and I think that's been supported by your other public competitors. I know this is a hard question to answer, but I guess, Ron, has the trajectory of price quarter-over-quarter continued to improve?

Yes, I think what we've seen is the pricing market, particularly in the street business, tighten up and it's benefited all of us and I think most of the companies have done a better job on the so-called extra charges. We've seen those increase. Where we see the pricing still highly competitive is in the national account arena.

Yes, okay, that's helpful. And then just getting into capital deployment I guess, when you look at the M&A environment, Ron, you did this one that you mentioned last conference call, are you feeling any desire to look at industries outside of the uniform business? Maybe they are adjacent to investment capital there, just recognizing it's been many years since something of any size has been available. What are you thinking about strategically to do something different and the likelihood of something like that happening in the next year or so?

I don't know in the next year or so, but we certainly look at other businesses other than the laundry business that would make sense and give us the kind of a return on that investment. We do consider that really.

Okay. And then just in terms of the balance sheet, any change there? Have you considered doing like a tender for your shares or how important is share liquidity to you? Thoughts on that I think would be helpful for clients and investors.

I don't really think we want to change anything. I think we've been pretty happy with the 20 million shares out there and we will spend that money basically with the right opportunity coming along. It's nice to have a war chest I guess is the answer to you.

Okay. I think that's all I have. Thank you for your interest.

There seems to be no further questions at this time. (Operator Instructions).

Well, I'd like to thank everyone for joining us this morning to review UniFirst's first-quarter results for fiscal 2015. We look forward to speaking with you again in the spring when we will be reporting our second-quarter and six-month numbers. Have a great day and we wish you all a happy and healthy new year.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.