UniFirst Corp (UNF) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the UniFirst Corporation first-quarter earnings 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 2017 and to discuss our expectations going forward.

I am Steven Sintros, UniFirst's 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 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 will 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 first-quarter financial results for fiscal year 2017.

Steve will cover all the details in a few minutes, but first I will provide a brief summary.

UniFirst revenues set a new record for the first quarter of fiscal 2017 coming in at $386.1 million, an increase of 3.4% from the $373.4 million reported for the first quarter of 2016.

Net income for the quarter was $28.2 million, a 21.4% decline from the net income from the same period a year ago.

Both the revenue gain and the net income decrease were anticipated.

We were affected by multiple factors, including the impact of our recent Arrow Uniform acquisition, the cyclical nature of our nuclear industry business, and the continued challenges resulting from the heavy energy sector losses and shrinkage over the last two years.

Our core laundry operations, which account for 90% of UniFirst total business, reported a 5% improvement and a new record for the first quarter in revenues.

The growth was derived primarily from new revenues associated with the Arrow Uniform acquisition.

We are encouraged by the positive impact of year-over-year quarterly improvements in our add versus reduction metrics and our overall customer retention.

However, core laundry also reported a 17.6% decrease in operating income when compared to last year's first quarter, primarily a result of ongoing increases in core operational expenses and a slower than desired organic growth rate.

And similar to the quarterly gains made in revenue, the income decline was also impacted by the Arrow Uniform acquisition.

As we discussed on our last webcast, it will take some time to fully integrate Arrow into the UniFirst operations and systems.

And until we are further along in this process, Arrow's operating results combined with the intangible amortization and other purchase accounting will affect our bottom line.

Meanwhile, in our specialty garments segment, which includes specialized nuclear, cleanroom laundry, and ancillary business services, reported a decrease in the quarter in both revenues and operating income when compared to the same period in 2016.

As I mentioned earlier, these results were expected based on the cyclical nature of this portion of our niche business.

That said, we still expect the segment to report full year-over-year improvements for fiscal 2017 in both revenue and income.

Finally, our first aid and safety segment reported modest gains in revenue and a slight dip in operating income when compared to last year's first-quarter results.

So, as we look ahead to the coming quarters in 2017, we expect all our operations from coast to coast and all our thousands of team partners throughout North America and abroad to step up their efforts as they always do when it comes to expects servicing of our customers ultimately contributing to UniFirst Corporation achieving solid results in the fiscal year.

We know it won't be easy as projections for the economy and national employment continue to predict slow growth at best for the coming year, which will affect our ability to make targeted improvements in the organic growth.

So we will be relying on our field and initial account sales teams to continue improving upon the productivity and consulting selling skills to boost the bottom line.

We will also be relying on our service team to consistently deliver the highest quality products and value-added services in the industry to help improve customer retention, business referrals, ancillary product sales within existing accounts.

We continue with the Arrow integration to produce further financial gains, recognizing the synergies between our two companies to help minimize associated expenditures.

And as always, we will be considering any smart business acquisitions if they are consistent with our long-term growth goals as those we feel produce the appropriate ROI for UniFirst and its shareholders.

And with that said, I will turn it back over to Chief Financial Officer Steve Sintros for more of UniFirst's first-quarter results for 2017 and our expectations for the rest of the year.

Thanks Ron.

As Ron mentioned, revenues for the quarter were $386.1 million, up 3.4% from $373.4 million a year ago.

Net income was $28.2 million, or $1.38 per diluted share, down 21.4% from $35.9 million, or $1.78 per diluted share, in the first quarter of 2016.

As Ron mentioned, the results of the first quarter include the impact of the Company's acquisition of Arrow, which was completed in September of 2016.

Core laundry revenues were $351.8 million, up 5% from those reported in the prior year's first quarter.

Adjusting for the effect of acquisitions, primarily Arrow, core laundry revenues grew 0.6%.

Our organic growth rate continues to be affected by significant weekly -- the significant weekly uniform wearer losses we experienced in oil and energy markets throughout fiscal 2016.

Historically, our garment additions versus reductions metric, which measures the net impact in our existing accounts, has been the strongest in our first fiscal quarter, often showing positive wearer increases.

In fiscal 2016's first quarter, this metric was sharply negative due to the ongoing struggles in the energy sector as well as the industries that directly support them.

We are happy to report that net wearer additions during the quarter were slightly positive for the first time since the first quarter of fiscal 2015.

We are cautiously optimistic that this trend will allow us to begin improving our organic growth rate as we move through fiscal 2017.

In addition, lost account levels were improved through the first quarter compared to a year ago.

However, new sales lagged fiscal 2016's first-quarter totals.

This segment's operating income was $43.7 million in the quarter, a 17.6% decrease from the prior year.

This operating margin was 12.4%, down from 15.8% for the same period in fiscal 2016.

The margin decline was primarily the result of higher cost of revenues and selling and administrative costs combined with low organic growth.

In addition, the impact of the acquisition of Arrow, including the effect of non-cash purchase accounting charges, decreased the core laundry operating margin by approximately 1.1%.

The margin decline, as well as the areas of cost pressure, were mostly anticipated as we discussed during our year-end earnings call.

Some of the areas of margin pressure during the quarter were plant and service labor, partially the result of upward pressure of minimum-wage increases as well as higher selling and administrative payroll and other costs, and partially the result of headcount additions and other costs to support our CRM systems project and other technology initiatives.

Merchandise expense as a percentage of revenues was also higher during the quarter primarily due to the launch of a direct sale program for a national customer.

As anticipated, we also incurred higher non-cash expenses related to stock compensation expense due to the restricted stock grant to our CEO in April as well as higher depreciation expense from ongoing investments.

Further pressure on the margin was experienced through many other increases in miscellaneous operating expenses such as workers compensation, repair and maintenance, and other plant supplies.

These higher costs were partially offset by lower costs associated with legal and environmental contingencies compared to the first quarter a year ago.

Revenues and operating income in the quarter for the specialty garments segment, which consists of nuclear decontamination and cleanroom operations, declined 16.5% and 73.1% respectively compared to a year ago.

This segment's results can vary significantly from period to period due to the seasonality and timing of reactor outages and projects.

The quarterly results for this segment largely met our expectations as it was anticipated that the reactor outages would be more concentrated in the spring compared to the prior year when the fall was the busiest outage season of the year.

We continue to expect that this segment's full-year results will meet or exceed its fiscal 2016 revenues and operating income.

Our first aid segment reported revenues of $11.9 million in the first quarter, up 2.9% from a year ago.

Operating income for this segment decreased slightly to $0.9 million compared to $1 million last year's first quarter.

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

Cash provided by operating activities for the quarter was $63.5 million, an increase of $5.9 million from the comparable period in the prior year when cash provided by operating activities was $57.6 million.

The increased cash provided by operating activities was primarily related to the settlement of environmental litigation the Company entered into in the fourth quarter of fiscal 2016 which resulted in a gain of $15.9 million booked in the fourth quarter.

During the first quarter, $12.5 million was received related to this settlement.

This positive impact on net cash by operating activities was partially offset by lower net income during the quarter.

Cash and cash equivalents at the end of the quarter totaled $286.1 million, down from $363.8 million at the end of fiscal 2016.

The declining cash primarily related to the $119.9 million expended on the acquisition of Arrow.

Excluding this cash outflow, cash balances would've increased $42.2 million.

Of our cash on hand at quarter end, $53.8 million has been accumulated by our foreign subsidiaries and is intended for future investments outside of the United States.

For the first quarter, capital expenditures totaled $18.2 million.

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

We expect capital expenditures for fiscal 2017 to be between $90 million and $100 million.

Other than the Arrow deal, we did not close any other significant acquisitions in the quarter, but business acquisitions have historically been an integral part of our growth strategy and we'll continue to seek out opportunities that make sense for us and meet our long-term business goals.

We continue to have significant cash on hand and borrowing capacity available under our line of credit for additional acquisitions or other capital allocation options.

At this time, we would like to provide an updated outlook with regards to our operating results for fiscal 2017.

We continue to expect that revenues for fiscal 2017 will be between $1.55 billion and $1.565 billion.

We now expect that full-year diluted earnings per share will be between $4.85 and $5.

Although the year is unfolding mostly as anticipated to this point, certain expense categories, including workers compensation claims and other operating expense categories, are trending higher.

As a result, we are modifying our full-year earnings expectations.

We experienced higher than normal claims during the quarter related to workers compensation and have also incurred large claims subsequent to the end of the quarter.

These claims, as well as the adverse trend in this area, has impacted our expense forecast for the remainder of the year.

As discussed on our year-end call, approximately $9 million to $10 million of the incremental costs in fiscal 2017 relate non-cash items such as depreciation, stock compensation, and intangibles amortization.

So, although our guidance calls for earnings to be quite a bit lower than fiscal 2016, the drop in projected cash flows is not as significant.

Many of the increasing expenses I have discussed previously are viewed by UniFirst as important investments in our people, systems, and infrastructure that will allow us to meet our long-term objectives.

In the short term, as we struggle with macroeconomic factors impacting our top line, we will feel the pinch in our margins.

We will continue to update investors on the status of these investments as we move forward, as we have committed to ensuring that they will provide long-term success for UniFirst and its shareholders.

Finally, I do want to remind investors that our guidance for fiscal 2017 does not include any depreciation related to our Unity 20/20 systems project as we do not expect we will begin deploying the system during the current fiscal year.

As we move closer to deployment, we will also likely begin to incur costs that do not qualify for capitalization under the accounting rules.

In addition, additional headcount may be needed to support the system during deployment.

We have not included any of these costs in our guidance for next year as it is unclear to the timing and the amount of these expenses.

We will continue to update shareholders on the impact of any such costs in the quarters ahead.

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

(Operator Instructions).

John Healy, Northcoast Research.

Ron and Steve, I wanted to ask just a little bit about the Arrow deal now that you are a few months into the acquisition.

Any major surprises as it relates to the thought process in terms of how the business fits?

Anything that bubbles up that makes you feel better or makes you feel maybe less optimistic about the acquisition?

John, this is Ron.

At this point, the first 90 days, we were basically trying to understand what the business was doing and how it was getting along.

There was nothing strategically that surprised us.

But now, this is the next time frame that we start to make some changes.

So, for the next nine months, we're going to be making some changes as far as moving business around and equipment around.

And the biggest thing we have to do is -- and that won't start immediately, it will start probably in six months -- is build a sales organization.

So, there were no significant surprises.

I guess that's the summary.

Okay, great.

And Ron, I wanted to ask, just now with the election behind us, have you seen any sort of -- or have you heard from sales force any sort of real meaningful mood change amongst the customer base?

Is there anything that makes you feel more optimistic about the growth outlook for the business over the next 12 to 18 months or anything that makes you feel less optimistic about it?

I think the general business attitude out there right now, including ourselves, is let's wait and see what this guy can do.

There's all kinds of rumors and stories out there, but nothing is happening.

Got you.

And lastly, I just want to ask Steve, I think you -- I thought you mentioned in the prepared remarks that, ex oil and gas, the SDOT metric went positive for the first time.

And I think you gave a quarter when that last was and I missed it when you were going over that.

I was just hoping you could repeat that.

Yes.

Just to clarify.

And this is actually including oil and gas, so really our complete adds reductions metric for wearers was slightly, and I do want to emphasize slightly, positive during the first quarter.

And the last time that happened was two years ago, the first quarter of fiscal 2015.

I mentioned that our first quarter is typically our best additions versus reductions quarter.

And historically, it's not abnormal for it to be positive.

Last year, it was sharply negative, which sort of underscored the continued impact that we were having with the oil and gas.

So, the message is that we are starting to get past that.

Anecdotally, we have talked to some of our managers in Texas in some of those key markets, and there has been some slight add-back of jobs in some of those areas.

Great.

Thank you guys.

(Operator Instructions).

Kevin Steinke, Barrington Research.

So, circling back on the Arrow acquisition, do you have a specific revenue number that they contributed in the quarter?

And also, was currency essentially neutral in the quarter?

Yes, I think we -- the number in the quarter you can sort of back into from what we said was the impact of acquisitions.

It really wasn't currency impact in the quarter, so the whole difference between total growth in organic was acquisitions, primarily Arrow.

The revenues were approximately $12.5 million, but this may be the last quarter that I give specific revenues related to Arrow, as it's going to become more and more difficult as we integrate the operations, to definitively pin down some of those revenues.

But for the current quarter, you were in that ballpark.

Okay, fair enough.

That's helpful.

Thank you.

And just following up a little bit more here on change in EPS guidance, you called out the workers comp claims specifically, but you also talked about other operating expenses trending higher.

Any other specific buckets of expenses that you would call out there?

You know, I think it was a little bit around the horn, Kevin.

We have talked about the areas we expected to be up in labor and some of these other things.

These were more repair and maintenance on vehicles and in some of the plants, some related to building projects we have going on where certain costs didn't qualify to be capitalized.

So it was really miscellaneous.

Some were related to increased recruiting costs related to our systems project where we had some headcount increases.

Some of these costs were anticipated.

Some came in a little higher than expected, particularly with some of the repair and maintenance.

We've had to utilize a little more temporary labor than we would like.

And as Ron has talked about, it's becoming increasingly difficult to make hires with respect to some of our plant personnel given the low unemployment right now.

So, it really is sort of in a number of different areas that are a little bit higher, each, which, again, in an environment where our organic growth isn't very strong, can hit the margin quickly.

Okay, that's helpful.

And then you mentioned there is some recruiting for CRM headcount and I guess that is separate from the actual deployment costs, which could potentially come later in the year.

So could you just kind of talk about the hiring that you're doing now in that area versus the potential costs of deployment that could happen and potentially ramp up later in the year?

Certainly, some of the higher costs we're experiencing now with respect to headcount and technology is to continue to get the system to completion, but also will help support the system during deployment.

So, there is some crossover there.

There may need to be a ramp up further with respect to not only technology but some operational resources as we go through deployment, and those are what have not been built in as they will likely be in the earlier part of next fiscal year.

But as we move toward the end of the project, there may be some costs we start to incur that can't be capitalized as part of the project or more in preparation of deployment.

We will call those out when they happen.

But you are right, some of these costs are starting to cross over to costs that will be there to support the deployment.

Okay, that's helpful.

And then you talked about, last quarter, one of the potential expense headwinds in fiscal 2017 being increased over time pay related to the Fair Labor Standards Act.

I think you said there was a relatively small potential headwind, but given that that rule has now been delayed, does that change anything in how you are going about running the Company, or have you kind of already made changes ahead of time in anticipation of that going into place?

Or just wondering how you are dealing with that delay in the rule.

There were some changes that we made related to the rule because the deferral happened so late that we went through and made, particularly some increases to certain positions so that they would continue to qualify for a salary -- for being salaried employees.

There were other positions that we did not convert to hourly when the FLSA was deferred, so there is a group of employees that we put on hold and we continue to do business as we currently have been.

So what I would say is that there is still some impact from the changes we've made.

There is certainly another group that we did not move to hourly based on the deferral of the rule.

And I think what that does is primarily take some risk out of our numbers that some of those positions might have incurred more overtime than we had expected.

So, at this point, I think that that is the benefit, is that there is probably less risk in some of the numbers based on that rule being deferred until such point that it does become enacted if that's what happens.

Okay.

That's very helpful.

And then just lastly, you mentioned new sales trends I think you said maybe a little softer than last year.

Anything meaningful to call out there, or is that just kind of a normal quarterly fluctuation?

I know you have been adding a little bit in the sales area, so just any overall comments on the trends there and expectations for the remainder of the year?

I think, Kevin, as you well know, there is a shortage of qualified people, Glassdoor and so forth.

You hear them all the time.

So most salespeople are pretty active on the Internet sites.

So we are getting hit with some of -- by some of these other companies on the tenured level.

So we're trying to keep the headcount where we want it, but it is a continual effort to keep our people tenured and trained in place.

So we are struggling in that direction.

I would say the force is down a little bit in tenure.

Okay, fair enough.

Well, thanks for that color.

That was helpful and I appreciate you taking the questions.

Joe Box, KeyBanc Capital Markets.

So, I just want to dig into the garment inventory.

Can you maybe talk to where you are sitting with excess energy garments?

Do you think that there is an opportunity to redeploy a lot of these garments or do you think you're going to have to actually replenish that inventory?

And then specifically, what are your plans with Arrow garments?

I guess I would've thought that the inventory contribution would have gone up a little bit more from the deal.

Are you guys looking to swap these out upfront, or is it just going to be a normal schedule on the garments?

So, to take the two pieces, with respect to the energy garments, we have been redeploying those garments over the last year.

Just to use an example, our largest energy dependent plant in West, Texas has a significant amount of used inventory come back, as you'd expect.

But energy business didn't go to zero.

So instead of having to buy new garments to replace over the last couple of years, he has been using whatever used inventory he can use, and he is starting to work through that.

So I think we have been getting some of the benefit of that, and I think we will continue to get some benefit, but depending on how quickly the business ramps back up, we will have to probably invest some more as we move along.

With respect to the Arrow inventory, I think it's more just business as usual there.

They were putting a normal amount of inventory into their customers, and we have brought that over upon the acquisition, and we will continue to supplement that in the normal course.

I think, so far, we haven't seen a significant need to put in more inventory to Arrow than expected.

Okay, that's helpful.

And I guess maybe just to tie it all together, can you give us a sense of how merchandise amortization could play out in aggregate over the next year?

What we have is that it is projected to be relatively flat as a percentage of revenues.

A lot of it does depend on the mix of new sales.

I made the comments at year-end and in prior quarters that our merchandise probably would have been down a little bit based on the benefit we were getting from lower influx of -- or influx of garments into the energy sector, but the mix of our sales was a little more slanted toward national accounts.

We had some big installs which had some heavy upfront merchandise investments.

So, I think it really depends on the mix of our sales through the remainder of the year, but, right now, we have it modeled relatively flattish.

Okay, I appreciate that.

And then lastly, Steve, I think you called out 110 basis points of non-cash headwind to core laundry margin.

Can you specifically give us the deal amortization component from Arrow?

So, the 1.1% I think you are referring to was the impact of Arrow during the quarter.

That was not all non-cash related.

About $1.4 million of that was intangibles amortization.

Now, I do want to clarify that our valuation of the intangibles is -- it was done on a preliminary basis for the quarter and we will continue to tweak that over the course of the next quarter.

So, I wouldn't use that run rate for the full year.

I think that was actually little heavy in the first quarter, but that was the intangible amortization piece.

There was also some other non-cash charges that we did take related to Arrow in the first quarter related to some transition on just the way we treat inventory and some other supplies.

That was probably another $0.5 million or so.

So there were some of those transitional charges that were taken related to Arrow that maybe impacted that were a little higher during the quarter.

Okay.

I guess, just directionally, should we think about it being closer to about $1 million in just amortization going forward?

Yes, that's probably about right.

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

Okay.

That is helpful.

That's it for me, guys.

Thank you.

Justin Hauke, Robert W. Baird.

I guess I just wanted to clarify a little bit on the workers comp expense and the impact to the guidance.

Was that due to the claims that you have incurred thus far, or is that kind of a structural change because now you're taking a higher reserve for that going forward so we should think about that as an ongoing margin hit?

It's a little bit of both, Justin.

The way we reserve for our workers comp is we make estimates based on the policy year of expected claims, and those continue to get tweaked.

And we actually have an actuary analysis done of that annually.

So, high claims in a quarter doesn't necessarily change our outlook for the year, but where we sit through four months, we felt the need to do that.

So some of that did hit particularly in the first quarter, but the larger piece of it was an adjustment to our expectations for the full year.

Okay.

So, in other words, that is a cost that you will continue to incur for the next several quarters as you accrue at that higher rate?

That's correct.

Okay.

And then I guess the second question I had -- and I apologize if I missed it, but I didn't hear it on the prepared remarks, but in the first aid business, what were some of the items that were impacting the margins there since the Arrow acquisition and some of the other items are all in the core laundry?

So just a little bit more color on the margin headwinds in the first aid segment.

I think there was just some small mix changes during the first quarter.

There's a few different pieces of that business with the van business and then some of the wholesale distribution work.

So I don't think there was anything significant.

I think it was just -- I think it was only down $100,000 from a year ago on slightly higher revenues, but I think the merchandise mix was just a little bit different during the quarter, nothing overly dramatic.

Okay, thank you very much.

That's all from me.

Thank you.

Mr. Sintros, there are no further questions at this time.

I will now turn the call back to you.

This is Ron.

We would like to thank everyone for joining us to review UniFirst's first-quarter results for fiscal year 2017.

We look forward to speaking to you, with you, again in the springtime, when we will be reporting on our second-quarter and year-to-date numbers.

Have a great day and a happy, 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 lines.

Have a great day.