UniFirst Corp (UNF) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the UniFirst Corporation third-quarter earnings call.

(Operator Instructions)

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

Please go ahead, sir.

Thank you, and welcome to the UniFirst Corporation conference call to review our third-quarter results for FY16 and to discuss our expectations going forward.

I'm Steven Sintros, UniFirst Chief Financial Officer.

Joining me is Ronald Croatti, UniFirst 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 the discussion of these risk factors in our most recent 10-K filing with the Securities and Exchange Commission.

Now I would like to turn the call over to Ron Croatti for his comments.

Thank you, Steve.

I'd like to welcome everyone joining us today to review UniFirst's third-quarter fiscal results from FY16.

I'll begin by providing you with a brief summary of our overall performance and I'll pass it back over to Steve who will be covering all of the details.

UniFirst revenue for the third-quarter FY16 set a new record in $367.8 million, an increase of 0.6% from the $365.6 million reported for the same quarter in 2015.

Net income for the quarter was $30.1 million, a 7.2% decline from $32.5 million net income reported the same period a year ago.

Our core laundry operations, which make up the bulk of UniFirst's total business at about 90%, reported a 1.1% increase in revenues, setting a new third-quarter revenue record and an 8.8% decrease in operating income when compared to last year's third quarter.

During the quarter our laundry continued to experience measurable weekly uniform wear losses and lost accounts in our energy-dependent markets.

And of particular significance, we also experienced increased losses with many of our business customers who support the energy industry.

In addition to the energy-related losses, UniFirst was challenged by a fiercely competitive playing field that affected new customer pricing and a continued weaker Canadian dollar exchange rate that impacted our bottom line.

Although there was some strengthening of the Canadian dollar during the quarter, the value was still below the same quarter a year ago.

But through it all, our professional sales and national account sales organization led to challenge for the segment's revenue growth by stepping up to post solid new sales results for the quarter.

Our specialty garment segment, which encompasses our specialized nuclear clean room service, reported a drop-off for the quarter in both revenue and operating income when compared to the same period in 2015.

However, year-to-date results for revenue and income remain up over last year.

Because of the cyclical nature of this business segment, the results were larger than we anticipated.

In our first aid and safety segment, this unit reported record revenues for the third quarter as well as solid growth in operating income.

So looking ahead to the fourth quarter and closing out UniFirst's FY16, we continue watching the energy sectors very closely and will make any required strategy adjustments [in quarter].

We do, however expect these industries to achieve greater levels of stability as we move forward, although the exact timing of this stability remains uncertain.

We also expect our thousands of employee team partners to once again answer the call to overcome the market adversities and the competitive marketplace by continuing to implement our back-to-basic business approach, concentrating on the key factors that are within our control to further aid our top and bottom lines.

These include satisfying our large customer base and increasing business referrals through unwavering service excellence, selling aggressively but in a consultative manner and through existing and new markets, and maintaining smart cost controls in all our operations and to support the bottom line, never sacrificing service levels or product quality to our customers.

By adhering to these basics we anticipate reporting another year of growth for UniFirst Corporation in 2016, with all three business units, positively contributing to these goals.

That said, we remain confident that the future of UniFirst is bright.

And we will continue delivering annual returns to our shareholders, our UniFirst family members throughout North America and Europe.

Now I'd like to turn the call back over to Steve, Chief Financial Officer, for the third quarter's financial details.

Thank you, Ron.

As Ron mentioned, revenues for the quarter were $367.8 million, up 0.6% from $365.6 million in the year-ago period.

Net income was $30.1 million or $1.49 per diluted share, down 7.2% from $32.5 million or $1.61 per diluted share in the third quarter of FY15.

Core laundry revenues in quarter were $331.2 million, up 1.1% from those reported in the prior year's third quarter.

Adjusting for the effects of acquisitions and a weaker Canadian dollar, revenues grew 1%.

Although it did strengthen during the quarter, the Canadian dollar negatively affected our core laundry operations growth by 0.3% compared to the third quarter of FY15.

As Ron mentioned, our growth during the quarter continued to be impacted by the loss of uniform wearers and customers in energy-dependent markets in the United States and Canada over the last 12 months.

These reductions of wearers have continued at similar levels to those experienced in recent quarters and to date have not yet begun to slowdown.

Although we were cautiously optimistic that the recent increase in oil prices may help to stabilize employee levels in our customer base, we have not yet seen this translate into our actual results.

In addition, new sales, although solid, continued to lag slightly behind last year's performance.

Our core laundry operating margin decreased to 12.9% from an operating margin of 14.3% a year ago.

Many of our costs relating to operating our processing facilities, as well as overall selling and administrative expenses and depreciation, were higher than the prior year which negatively impacted the margin due to the lack of top-line growth in this segment.

Bad debt expense was also higher during the quarter, primarily due to concerns around amounts owed by our customers in energy and energy-related industries that are experiencing financial difficulties.

These items were partially offset by lower energy expenses and legal costs during the quarter compared to a year ago.

Energy costs decreased during the quarter to 3.8% of revenues compared to 4.3% a year ago, due to lower fuel costs for our fleet of delivery vehicles as well as lower natural gas costs for our production facilities.

Revenues and operating income in the quarter for our specialty garment segment, which consists of nuclear decontamination and clean room operations, were down 6.9% and 11.7%, respectively, compared to a year ago.

As a reminder, the results from our specialty garment segment can vary significantly from quarter to quarter due to the seasonality and timing of reactor outages and related projects.

Through the first nine months of FY16 this segment has produced solid results, with revenues and operating income growing 6.4% and 53.3%, respectively.

We continue to expect this segment's results for the full year will approximate our original expectations, with revenues coming in about 4% higher than FY15 and the segment's operating margin coming in at approximately 10%.

Our first aid segment reported revenues of $12.5 million in the third quarter, up 4.6% from last year's third quarter.

Operating income for this segment also increased to $1.6 million compared to $1.4 million a year ago.

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

Cash and cash equivalents at the end of the quarter totaled $347.6 million, up from $276.6 million at the end of FY15.

Despite lower income levels, cash provided by operating activities year-to-date increased 1.7% due to lower cash outflows for working capital needs compared to last year.

Year-to-date we utilized $72.1 million on capital expenditures.

We continue to invest in new facility additions, expansions and automation that will help us meet our long term strategic objectives.

This quarter we opened a new state-of-the-art facility in Baton Rouge, Louisiana and we expect to open another new laundry production facility in New Jersey by the end of the fiscal year.

These facilities are good examples of the investments that UniFirst continues to make, not only in future growth but also in our ability to provide high-quality service to our customers.

We continue to expect capital expenditures for FY16 to be approximately $100 million.

During the quarter we also closed on an acquisition of a one-plant industrial laundry operation in Chattanooga, Tennessee.

We are excited about bringing this business into the UniFirst family and the opportunities that it will provide for us in that part of the country.

As always, we will continue to look for good acquisition targets, as they remain an integral part of our overall growth strategy.

Of our cash on hand at quarter end, $55.2 million has been accumulated by our foreign subsidiaries and is intended for future investments outside the United States.

During the quarter we renewed our existing line of credit to help insure that we maintain our financial flexibility to fund potential acquisitions or other capital allocation options.

As we have expressed previously, with top-line growth a challenge, we continue to vigilantly focus on cost controls.

And as a result, we are optimistic about our ability to continue generating significant free cash flows and ultimately delivering value to our shareholders.

As always, we would like to take this opportunity to update you on our outlook for the remainder of our fiscal year.

We currently expect that FY16 revenues will be between $1.460 billion and $1.470 billion, and that our full-year diluted earnings per share will be between $5.45 and $5.65.

As I mentioned earlier, we continue to experience wearer reductions at higher than normal levels which continues to be a headwind with respect to our top-line performance.

Despite this ongoing challenge, the acquisition that we closed, as well as the slight strengthening of the Canadian dollar, both during the current quarter, has allowed us to increase our low and high end of our previously communicated range.

As you may also have noted, during the quarter on April 21 the Company entered a new long-term employment agreement with Ron Croatti, UniFirst President and Chief Executive Officer, that insures he will remain in his current position for the next four years.

The agreement provides Ron with the ability to earn up to 140,000 shares of restricted common stock.

Shares are earned based on the achievement of performance criteria for FY16, FY17 and FY18.

Once earned, the shares will vest 50% on each of the third and fourth anniversaries of the grants.

Under the accounting rules, compensation expense related to this grant is only recognized if it is deemed to be probable that the required performance criteria will be satisfied.

As a result, the Company will assess over the performance period the probability that these criteria will be met and adjust the life-to-date compensation expense recognized accordingly.

It is expected that stock compensation expense related to these grants recognized in the fourth quarter of FY16 will be approximately 0.7 million or $0.02 per diluted share.

Stock compensation expense recognized in FY17 and beyond will depend on the Company's assessment of the likelihood that these performance targets will be achieved.

Based on the Company's current assessment, stock compensation expense recognized in FY17 would be approximately $2.9 million or $0.09 per diluted share.

Actual compensation expense for FY17 could rise as high as $5.1 million or $0.15 per diluted share if it was determined during the year that it was probable that the highest level of performance criteria for all periods would be achieved.

In addition to higher stock compensation expense, looking ahead to FY17, we expect our results to be impacted by increasing labor costs, primarily the result of increasing minimum wages in many parts of the country, as well as the recent update to the Fair Labor Standards Act which has expanded the pool of employees who are eligible to receive overtime pay.

In addition, FY17 will likely bear additional costs associated with the continued effort to complete our CRM systems project.

We expect to have more detailed projections regarding the impact of these items on our FY17 results as part of our year-end earnings call in October.

This completes our prepared remarks and we'd now be happy to answer any questions that you may have.

Joe Box, KeyBanc Capital Markets.

Hey, good morning, guys.

Good morning.

Want to dig into the margins here a little bit.

Using the mid point of the guidance range, off my rough math here it seems to imply about a 10% total op margin in 4Q.

Are there any one-time costs that could be expected to tick up in 4Q?

Because the 10%-ish type number seems to imply accelerating margin degredation.

I wouldn't say there's necessarily any one-time costs, Joe.

I think there's a few things that have us cautious over the fourth quarter results.

Energy costs have started to come back up a little bit, as you may have noticed, tied to the oil being increased.

There is some depreciation related to the new facilities that I mentioned that will start to kick in as well.

We talked about some of the impact from Ron's grants.

Merchandise costs, although they've started to moderate with some recent national account wins, there is some merchandise costs that we'll be experiencing over the next year related to some large new account installs that will impact the numbers as well.

That, combined the uncertainty on the trajectory of the revenues, probably has us a little cautious on the fourth quarter.

Okay.

Can you put a little bit of color around the new facility openings and what that might mean from a cost standpoint?

So we can bake it into the model.

I probably don't want to get into that level of specifics, but it's two new facilities.

Whenever we build a laundry facility, it's $10 million to $15 million.

That's including equipment and so on.

There will be some additional depreciation.

I don't want to get into that level of detail.

We'll talk about it a little more at year-end as it relates to next year.

I really wanted to mention some specifics there just so you had an idea of some of the things that were going on.

But these are things that are not atypical to our capital expenditures.

Understood.

To dig into the top line here a little bit, we're obviously starting to lap some of the wearer losses that we've seen within the energy business.

Can you talk to your expectations for either organic growth or contraction within the energy component?

And then differentiate that relative to what you're seeing among the rest of your customers.

Sure, I think at this point -- and we reflected this in our comments -- we continued to see reductions at much higher than normal levels.

The levels were consistent with that of the last four or five quarters.

That's a signal to us that we're not yet at the bottom of this cycle as it relates to the energy.

I think anecdotally, we're starting to hear from some of our customers and some of our locations, that the impact is coming now less from the direct energy companies and a little bit more from the support industries, as well as some of the even further downstream, hospitality and other support companies in markets that are being impacted.

So I think we're certainly further along in the cycle, as you would expect but we have not seen the flattening in our numbers yet.

As a result, we aren't really seeing the impact of the annualization of those losses because they have continued.

The first quarter or two that we flatten out in adds reductions then we'll start the bounce-back of the organic growth.

For the fourth quarter I think I have projected slightly better than the third-quarter organic growth for the core laundries.

Okay, that's helpful on that front.

And then, Ron, you alluded to earlier more competitive bids.

I know you've mentioned this in the past, I just want to ask if you look at your organic growth, was price a positive factor on organic growth or was it a negative factor?

I think that it was a slight positive.

Okay.

So was it just new account wins or signing up no programmers where you're seeing more aggressive bids?

If you could just flesh that out, that would be helpful.

I think we had a few no programmers come in.

Yes, I think it's a function, Joe, of we continue to get annual increases from our customers.

The environment for new accounts is really not that different than we've been operating in.

And as Ron said before, the competition from large accounts does tend to be price sensitive and continues as such.

Got it.

I'll leave it at that, thank you, guys.

Thank you.

Andrew Wittmann, Robert W. Baird.

Thanks.

I think the last couple of quarters guys have commented on what you think the business is doing outside of those energy geographies.

I was wondering if you could give us an update on that so we can compare the broader businesses and the broader industry.

I think outside the energy geographies, growth is certainly better but not spectacular.

We're probably 3% or 4% outside those geographies.

What's difficult is some of the geographies still have support industries that feed into the energy sector and I think that's the part that's been a little deeper than probably anticipated.

But when you look at our overall sales numbers, although slightly behind last year, they are still fairly strong and it indicates that even without selling a heck of a lot into the energy industry or some of the supporting markets, we're still selling a good amount of new business.

I think that keeps us positive here and I think we will hit the bottom of the cycle here.

I think we're fairly confident about the business outside of energy but I would characterize it as solid not spectacular.

Got it.

Thank you.

Thank you for some of the detail that you're giving on something that's clearly uncertain, like the stock compensation.

But to set expectations relative to 2016, you guys talked about 700,000 or $0.02 in the fourth quarter.

How much of that would be -- what was the compare in 4Q 2015 so we understand the delta?

Or was the $0.02 the delta, not the absolute?

The $0.02 was -- it's practically the same thing.

There really wasn't much left in prior year's fourth quarter.

Got it.

So is that the same thing for all of FY16?

Or was there not a lot of stock comp in 2016?

Because I don't believe that would be the case.

What would be the $2.9 million in 2017, how much of that would be incremental?

In 2017?

Yes.

That's a good question.

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

For the full year, it certainly would be up by probably $1 million, $1.5 million.

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

Okay, that's at least a starting point.

Other changes in the marketplace here, is this in terms of the pricing environment, Ron, are you seeing it just in certain geographies?

Or is it more broadly becoming a factor in the industry where new business pricing is getting more competitive for you?

I think it's pretty broad.

We're particularly seeing it on the national account level.

That's all around.

But like anything else, in some of the local markets, it depends on the strength of the local management.

Okay.

I think those are all my questions.

Thank you very much.

Thank you.

Judah Sokel, JPMorgan.

Hey, it's Andrew.

Could you talk about client retention year over year?

And to the extent that there's been a change, is that because energy clients have gone out of business?

Or is there anything else to note when talking about client retention year over year?

I'll start it and Steve will clean it.

I think it's the energy clients continue to shrink up.

And then I think that's evident by the amount of emphasis we put on the bad debts that were up.

But we've also seen it in the supporting industries, Andrew, and that has continued.

And then like I said earlier, we've seen an increase in the national account activities by some of the competition and pricing is a factor.

Right.

But on those national accounts, you mentioned you're taking some on, you might have lost some.

Do you feel like on national accounts you're maintaining share?

Or do you feel like you might be losing share on national accounts?

I think we have gained some share.

Okay, thank you.

(Operator Instructions)

Chris McGinnis, Sidoti & Company.

Good morning, thanks for taking the questions.

Good morning, Chris.

Can you talk about the sales force, whether you're investing or whether you're redeploying like the assets away from energy?

Can you talk a little bit about your strategy in the current environment?

Thank you.

Chris, it is Ron.

We have not basically cut our sales force at all.

We may have deployed some of the assets to some other markets that we normally would have put in the energy market but there's been minimal shifting.

So we keep a major focus on the street sales force and the national account level.

We have not cut one nickel in payroll or heads in the sales force.

And are you continuing to invest or are you just keeping it level at this point?

Thank you.

Every year we will continue to add some positions based on what we think we can achieve growth in the market.

You noticed our SG&A costs are up.

Some of that is from continuing to invest in sales infrastructure.

That's not always just reps but additional management and other support, training and other things to motivate and make sure the sales force is well trained, all designed around improving rep retention and rep productivity.

Great.

Thanks very much for taking my questions.

Thank you.

Kevin Steinke, Barrington Research.

Good morning.

You talked about a number of expense items being higher than the prior year but does that include healthcare costs?

I know you called that out last quarter but did you see a normalization on the health care side in the quarter after the unusually large claims last quarter?

Yes, last quarter was interesting for two reasons.

One, we certainly had much higher than normal large claims.

And from a year-over-year perspective, the second quarter of FY15 was our lowest quarter, so we had a real tough comparison.

I would say that the large claims moderated a little bit in the third quarter.

Claims were still reasonably high but last year's third quarter, which is sort of a good news-bad news, was also high.

The year-over-year impact was not nearly as dramatic as the second quarter, which is why I didn't specifically call it out.

It might have been up a tenth or so.

But it was more or less flattish from a percentage of revenue than the year before.

Okay, that's helpful.

And could you clarify, too, on the CRM roll-out?

Are you still expecting the timing second half of FY17?

Or are you just going to wait until next quarter to give more detail on that?

Probably punt until next quarter on that one.

And to be honest, we're making good progress with our testing but we're not at the point right now where we really want to peg a deployment date.

We will have more visibility in our fall call.

Okay.

And lastly, you noted the expectation of increasing labor costs in FY17 again, I assume we're going to get more detail on that next quarter.

But any high-level thoughts on how significant or the magnitude of that, how cognizant we should be of that as we think about modeling out next year?

Yes, we're not prepared to put actual numbers to it but we have a number of positions within the Company, since as you know, we manage a large workforce of relatively low-wage workers.

And with those workers, there's a number of supervisory-level positions that have historically been salary positions but now with the new rules will be overtime positions.

We think we can work through that but we do think that it is going to have some increase in costs around with some of the minimum wage increases.

Again, I don't really want to peg -- I mean we're not talking about a percent on the margin here, or some smaller portion of a percent.

Look, these kind of cost increases we do look to our customers and try to work with them on annual price increases.

So until we work through some of that, we're not really ready yet to peg a true impact.

Okay, that's very helpful, though.

Thanks for taking my questions.

You're welcome.

Andrew Wittmann, Robert W. Baird.

Great, thanks.

Not my normal follow-up this time.

Given all the cost headwinds with labor, CRM, stock comp, some of the new depreciation, I think it's probably appropriate to talk about what some of the offsets that you're looking at are on the margin side in the face of pretty soft top-line here this year and even part of last year.

What are you guys working on specifically that gives us some confidence that some of these real meaningful cost headwinds will be mitigated into a challenging revenue environment?

Well, I think you're right; I think that it is a challenging revenue environment.

And until we know when that starts to turn and we start to show some growth, there's going to be certainly uncertainty as to where the margin might land for next year.

I think the one thing I'll say about some of those costs with respect to CRM, particularly the depreciation of it or stock compensation expense, is that they are all non-cash expenses.

Most of the CRM dollars have been spent to this point.

But your point on the margin is a good one.

We will continue to push new sales with our customers.

I think from a merchandise perspective, even though I did mention some large inputs with some of these national accounts, the overall merchandise is starting to come in line with respect to our revenue, which is normal.

We talked the last couple quarters about there being is some lag about the uniforms coming out of service that are continuing to amortize.

But we're starting to get through that.

And so if growth does remain slow, it is not inconceivable that we could have a merchandise benefit as we move forward, which is part of the normal cyclical nature of our business when things slow down.

So that could be an area that there's some offset.

In terms of costs, we continue to uncover the stones and see where we can become more efficient.

A lot of our capital projects are designed around maximizing efficiency in the plants and minimizing labor.

So some of these labor impacts can be minimized as well.

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

I think we keep focusing on technology in the plants.

Obviously it's a cost benefit to us to do that.

It's very difficult for us when we have 100 people in the plant and 14 are out in one day, so we want to continually work to reduce the level of people we have in the processing facilities.

Have you, or could you, conceivably look at the number of routes that you're running, particularly in the more revenue-challenged areas?

Or the number of shifts or partial shifts at the plant?

Are those things on the table or are they needed at all operationally?

That seems like where some of the bigger dollars could rest.

I think if you look and divide our routes into our revenue, you'll see we run probably some of the larger routes in the industry.

We're always looking at route structure, there's no question about that one.

In the plants it really comes down to what we can do to become more efficient, whether it's automation, tighter work standards.

We're also not above looking at the non-laundry functions in the corporate level and all of that.

We got some efficiencies we can pick up here and there.

I think it's pretty much like Steve said, we're looking at every stone.

Okay, thanks a lot, guys.

Thank you.

(Operator Instructions)

We appear to have no further questions on the phone line.

Very good, Carlos.

We appreciate everyone joining us today to review UniFirst's third quarter and financial performance.

We'd like to also invite you to attend our next webcast in October where we're reporting on our fourth-quarter and year-end results for FY16 as well as our expectations for 2017.

Thank you and have a great day and a great holiday.

Ladies and gentlemen, that concludes today's call.

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