UniFirst Corp (UNF) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the UniFirst Corporation's First Quarter Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded today, Wednesday, January 3, 2018.

I would now turn the conference over to Steven Sintros, President and Chief Executive Officer. Please go ahead, sir.

Thank you, and good morning. I'm Steven Sintros, UniFirst's President and Chief Executive Officer. I'd like to welcome you all to UniFirst Corporation's conference call to review our first quarter results for fiscal 2018 and to discuss our expectations going forward. (Operator Instructions)

Joining me today is Shane O'Connor, our newly hired Chief Financial Officer. Shane has rejoined UniFirst after leaving to take a Chief Financial Officer role at another company a little over a year ago. As this is just his second day back at UniFirst, he will be in more of an observer role today rather than a participant, but I wanted to introduce him and let everyone know we are thrilled to have him back at UniFirst.

Before I go any further, I'd 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 these risk factors in our most recent 10-Q and 10-K filings with the Securities and Exchange Commission.

And now, I'll provide an overview of our quarterly results. I'm pleased to report that our first quarter revenues set a new record for UniFirst of $415.8 million, up 7.7% from the same quarter in the prior year. All of our operating segments contributed to the strong growth. Net income for the quarter was $34.2 million or $1.67 per diluted share, up from $28.2 million of net income or $1.38 per diluted share reported for last year's first quarter.

During our first quarter, we adopted Accounting Standards Update 2016-9, Improvements to Employee Share-Based Payment Accounting. Under this ASU, excess tax benefits and deficiencies associated with employee share-based payments are no longer recognized as additional paid-in capital in the balance sheet, but instead recognized directly to income tax expense or benefit in the income statement in the reporting period in which they occur. Other financial statement items impacted include share-based compensation expense and the full -- and the computation of fully diluted shares outstanding. The net benefit in our first quarter to EPS from the adoption of this ASU was $0.07 a share consisting of a reduction of income tax expense of $0.08, partially offset by a $0.01 negative impact from an increase in the number of diluted shares outstanding. The full year outlook provided for the company in October did not include any such benefit from this change in accounting.

Our Core Laundry Operations, which make up approximately 90% of UniFirst's total business, reported revenues for the quarter at $373.8 million, up 6.2% from the revenues achieved during last year's first quarter. The impact of acquisitions on growth was estimated to be 1.3% and was primarily related to our acquisition of Arrow Uniform late in September of 2016. Adjusting for the estimated effect of acquisitions as well as the impact of a stronger Canadian dollar, our Core Laundry revenues grew 4.5%. During the quarter, we continued to benefit from solid new account sales as well as positive price adjustments and improved collections on merchandise recovery charges.

Core Laundry operating income was $46.4 million for the quarter, a 6.1% increase from the operating income in the prior year. Core Laundry operating margin was 12.4%, consistent with the operating margin in the first quarter of fiscal 2017. The operating margin comparison was positively impacted by lower merchandise costs as a percentage of revenues as well as lower stock compensation expense compared to the first quarter a year ago. These positive comparisons were offset by higher costs related to health care claims, service and administrative payroll and legal and environmental contingencies. Energy costs for our Core Laundry Operations also increased slightly to 4.1% of revenues in first quarter from 4% of revenues in the same quarter a year ago.

Revenues from our Specialty Garments segment, which delivers specialized nuclear decontamination and cleanroom products and services, increased 27.2% to $28.4 million in the first quarter and operating income was $4.5 million, an improvement over the $1.2 million reported in last year's first quarter. As we've mentioned in past quarters, this segment's results can vary significantly from period-to-period due to seasonality and the timing of nuclear reactor outages and projects that require our specialized services. The solid improvement in results compared to a year ago was driven primarily by increases in the number of reactor outages as well as other projects in this segment's U.S. and Canadian nuclear-related operations as well as gains from this segment's European operations.

Our First Aid segment reported revenues and income -- operating income of $13.6 million and $1.1 million, respectively, for the quarter compared to $11.9 million and $0.9 million for the same period in fiscal '17. These improvements were aided by the strong performance of this segment's wholesale distribution business and a business acquisition made in the third quarter of fiscal '17 that strengthens our market and service presence in the Atlanta, Georgia area.

Our first quarter profit comparison to the prior year also benefited from other income, which was $0.8 million higher than the same quarter a year ago, primarily the result of higher interest income and less foreign exchange losses.

UniFirst continues to maintain a solid balance sheet and financial position. Cash provided by operating activities year-to-date was $47.6 million, a decrease of $15.9 million from the comparable period in the prior year when cash provided by operating activities was $63.5 million. This decrease was primarily due to the $12.5 million in cash received in September 2016 related to a settlement of environmental litigation we entered into the fourth quarter of fiscal '16. In addition, increases in inventory levels during the quarter negatively impacted the comparison. These decreases were partially offset by higher net income during our first quarter compared to a year ago.

Cash, cash equivalents and short-term investments at the end of the first quarter of fiscal '18 totaled $374 million, up from the $349.8 million reported at the end of fiscal '17. Of our cash on hand at quarter-end, $56.6 million has been accumulated by our foreign subsidiaries and intended for future investments outside the United States.

For the first quarter, capital expenditures totaled $19 million as we continue to invest in future -- in our future with new facility additions, expansions, updates and automation systems that will help us meet our long-term strategic objectives. We continue to expect our capital expenditures for the full fiscal year to be approximately $100 million.

As always, I would like to take this opportunity to provide an update on our outlook for fiscal 2018. At this time, we expect that our fiscal 2018 revenues will be between $1.63 billion and $1.65 billion and full year diluted earnings per share will be between $5.10 and $5.30.

This outlook includes the $0.07 per share impact of the adoption of ASU 2016-9 in our first quarter. Our outlook does not include any further tax benefits related to the adoption of this ASU for the remainder of the year. It is likely that further exercises of stock awards during the remainder of our fiscal year will have the effect of driving our tax rate lower based on the newly adopted ASU. The company has not currently included any such estimates in its guidance as the timing of stock award exercises as well as the stock price at the time of exercise is difficult to forecast.

In addition, we expect our future results to substantially benefit from the recent U.S. tax reform. Our earnings per share guidance also does not currently reflect this benefit as we are still working through the details of the new rules and their impact on UniFirst. We would like to take this opportunity to provide you with our preliminary view on the impact of tax reform for the remainder of this fiscal year in an ongoing basis.

For the remainder of the fiscal 2018, our tax rate will be impacted by 3 primary aspects of the tax reform. First, we need to revalue our deferred tax liabilities to account for the lower federal tax rate. This will be a nonrecurring benefit to our tax rate during our second fiscal quarter. We will also need to book a reserve for the total tax on our foreign cash and earnings that will be paid out over time. We also expect this will be a nonrecurring charge to our provision for taxes during our second quarter. Finally, there will be a lower federal tax rate for the full fiscal year. In fiscal '18, this will be a blended rate due to the change occurring during our fiscal year. We expect that lower federal rate, along with the net benefit of these 2 nonrecurring items, may cause our second quarter rate to be negative.

I want to stress that these are preliminary numbers, but we expect that our full year fiscal tax rate for 2018 to be in the range of 22% to 24%. In particular, the final calculation of the revaluation of our net deferred tax liability as well as the total tax could impact this estimate. We also expect our effective tax rate for fiscal '19 and thereafter to generally be in the range of 26% to 28%.

We look forward to this additional influx of cash flow to the company, which will allow us to continue to invest in our team partners, infrastructure as well as acquisition and other potential capital allocation options. We would also anticipate that UniFirst stands to benefit from further investments from our customers and their businesses in growth and expansion.

This completes my prepared remarks. I would now be happy to answer any questions that you might have.

(Operator Instructions) Our first question from the line of Joe Box with KeyBanc Capital Markets.

So just looking at the guidance, I was hoping you can just help us bridge the gap on the new guide. Obviously, you guys put up a pretty solid EPS number, of which I understand $0.07 comes from tax, but still, operating income was up about $6 million year-over-year. Guidance only went up by $0.10 at the low end of the range, so it does seem to imply that operating income is going to be down year-over-year over the next several quarters. Is there anything onetime or any particular drivers that would potentially drive EPS down?

So a couple of things there, Joe. I think, one thing for sure is the timing of the expected profits from our Specialty Garments segment over the remainder of the year. Obviously, that segment had a very strong first quarter, I would say most of which was expected. Last year, their strongest quarter was their third quarter. And this year, the overall trend may flop between the first and third quarter a little bit, although we do expect this third quarter to be a little bit better than last year's first. So some of it, I think, for sure is the timing of the Specialty Garment profit and how it's going to unwind over the course of the year.

I will say that there is some truth to what you're saying is that over the course of the next 3 quarters, if you're just looking at our Core Laundry sort of operating results, there is some caution built into there about some rising payroll costs we've been experiencing given the low unemployment environment and higher minimum wage in a number of states that we continue to work through. So there is some, I think, cautiousness over the remaining 3 quarters on the Core Laundry side, but some of it is just the timing, I think, with some of our other segments and the spread of the income.

Okay. Maybe just to dig into that just a bit more. I guess, if we were to isolate it and just look at the Core Laundry, if you were to think about where that incremental operating margin should be for the back half of the year for the remaining 3 quarters, should we think about it being kind of flat to down year-over-year? Can we...

Yes. We have it down about 0.25 year-over-year for the last 3 quarters.

Okay. So up margins, down 0.25. Okay. And then, last quarter you had hinted at maybe exploring some additional capital allocation strategies. Any update on that front? I mean, ultimately, what needs to happen to get some sort of plan finalized?

It's something we continue to work through at the board level, Joe. Nothing new to report there yet. Certainly, the certainty now around tax reform and the benefit that, that will certainly provide us as we move forward will provide another piece of the puzzle in terms of, I think, what we'd be willing to do going forward. So I think that is something we continue to look at for sure and I wouldn't place any particular event as being what we're looking for as the impetus to start something, but we continue to look at it.

Our next question comes from the line of Justin Hauke with Robert W. Baird.

Maybe I've got 2 here. So one, I guess, I wanted to ask the other side of the guidance question. You addressed the margin side, but it's also implying that the revenue growth would decelerate fairly materially here in the next couple of quarters. And I know Arrow won't be contributing anymore, but even so, the organic growth would have to decelerate and be basically cut in half from where it is. So is there something that's driving that outlook? Or how should we think about the guidance there?

I think we guided at the beginning of the year that, that assumption was in there based on some more difficult comps from the second half of last year where our organic growth had started to come up some improvement in pricing, some improvement in collection of merchandise, recovery charges, some strong performance on the growth on the sales side. Sales continue to trend along. I think some of the other comps on the merchandise recovery charges and pricing, we think, are going to be tougher over the second half of the year and that was built into our original guide. At this point, we still have that assumption built in.

Okay. Great. And then, I guess, the second question is, well, I guess, on the CRM investment. Broadly, that still is up in the air in terms of what you're going to do. And, I guess, I was asking it more from the perspective of with the changes in the tax law and the way that you can accelerate the depreciation, does that accelerate your timing of what you want to do on that to be able to capitalize on it or any other investment changes that, that would make?

I guess, with respect to the CRM, I wouldn't say that the tax reform will change our strategy there. We continue to try to aggressively address our options in terms of moving forward to a system that can satisfy our needs in that area. So I don't think that tax reform is going to change how we will do that.

As far as how it might change how we make other investments, certainly some of the accelerated depreciation you get in tax reform does make it more attractive to continue to invest in your business in equipment and automation. I think we have been and will continue to be aggressive in making some of those investments. Probably tax reform aside, there are not, but as it relates to CRM specifically, I don't think it changes our strategy.

Our next question comes from the line of Andrew Steinerman with JP Morgan.

Steve, I wanted to talk about the new sales that was strong in the quarter and last quarter you say might have a tougher compare in the second half. Does this have to do with the Cintas G&K merger? When you look at the new sales that you achieved in the quarter, do you feel like a lot of that was greenfield? Or was it particularly anything dislodged either from G&K or AmeriPride as those mergers are going?

Sure. I think we've always kind of communicated that approximately 2/3 of our sales come from competition, the other 1/3 from no-programmers or conversions of direct sale customers. And that mix, I think, has not changed significantly, although I do think we are getting some additional bump from the consolidation in the industry and have had a little bit more success with some of those targets from the acquired companies.

I would say it's somewhat around the edges. It's not driving multiple percentage points of our growth based on just those tailwinds, but I think, incrementally, those opportunities have been somewhat more available. More so maybe on the G&K side than the AmeriPride side just yet. Their mix of their business is a little different, a little bit more linen-heavy, but I think both are helping somewhat.

Okay. Could I just ask one more?

Yes.

On the pricing realization that you were talking about, do you feel like that's specific to UniFirst? Or do you feel like that reflects what's going on in the industry?

I missed the first part of what you said, Andrew.

The net pricing being positive in the quarter, do you feel like it's specific to your company? Or do you feel like that's the backdrop of the industry?

I think it's a little bit of both, Andrew. I think it probably is somewhat the backdrop of the industry and I think some of it may also have to do with the fact that what I mentioned on the other side in terms of cost pressures and labor. I think you're going to see that continue and it will be on us and others to try to make sure that we're getting paid for those higher costs. And so I think that's something that's going to be with us for a while that we're going to have to work through. The consolidation of the industry may help that somewhat as well.

Our next question comes from the line of Kevin Steinke with Barrington Research.

So the revenue guidance did come up a bit here by $5 million on the top and the bottom end. So what would you attribute to that increase to?

I think, Kevin, all of our segments, when I look at sort of my original model, outperformed a little bit on the revenue side. On the Specialty Garments side, I think I mentioned they obviously had a very strong first quarter. They are running a little bit ahead of budget. So certainly some of that increase at the low and high end is attributable to their strong performance. And I think, on the Core Laundry side, we were a little bit ahead in the first quarter as well. We had a little bit better performance in some direct sales in our first quarter that is part of that revenue increase. Some of those are more onetime, but I think the combination of those few things all contributed to the shift of the revenue guidance.

Okay. And then, you did call out a little bit of caution on labor costs as we move throughout the year here and you highlighted that on your last call as well. So through one quarter, are you seeing labor costs kind of trend in line with what you originally expected or maybe if they trend a little bit higher and that's adding to maybe your caution?

Yes. I think that's part of it, Kevin. They have trended a little bit higher and that is adding to the caution over the balance of the year. And I think it all kind of weaves together with pricing and continuing to service our customers well and make sure we're well staffed. It's certainly more challenging. On the customer side, it's great that unemployment is low. On our staffing side, it becomes more challenging and wage pressures exist. And those are things we'll be working through.

Okay. You mentioned higher costs related to health care claims. I know you had flagged that as a potential headwind in fiscal '18. I know that's kind of difficult to predict quarter-to-quarter, but what was the experience been like relative to your expectations, at least through the first quarter?

So in fiscal '17, the first 2 quarters, if you go back and listen to our comments, we're actually fairly modest last year and it was really in third and fourth quarters that they came on very strong. So I had modeled this year a little higher than the first 2 quarters and a little lower than the third and fourth quarters. And to be honest, the first quarter came in reasonably close to what I had projected. So how the year -- even though it was close to what I projected, it was still quite a bit over last year's first quarter. That's my comment earlier. How it turns out over the remaining part of the year obviously remains to be seen and we're watching it closely.

Okay. And you mentioned merchandise cost is a benefit to operating margin in the quarter, although I'm wondering if we might expect that to reverse as we move throughout the year, given that you're still -- you're winning new accounts and growing organically. I'm just trying to get a sense of what the outlook is for merchandise cost as we move forward throughout the year.

The benefit will probably moderate some as the year goes along. I think some of that benefit is the result of the integration of the Arrow acquisition and that we are now self-manufacturing a lot of the products that Arrow supplies to their customers so we're getting some of that benefit on the merchandise side. So I think we expect maybe this quarter to be the peak of the margin benefit related to merchandising and probably will moderate over the course of the year.

Okay. And just lastly, I don't know if you're able to still separate out the impact of the hurricanes on the quarter or maybe for the rest of the year.

Yes. It's probably starting to get a little bit muddied here. I think the numbers we gave are still pretty good. I mean, I think the thing -- and maybe we didn't talk too much about it last quarter, but part of the impact for the hurricane was certainly the impact on those weeks when our locations were going through it and not being able to serve certain customers and part of the impact is customers that were lost because of either catastrophic facility losses or so on in those markets. And so some of that will be with us over the remaining of the year. So the impact I guided toward at the beginning of the year, although it was maybe a little bit more Q1-heavy, probably is fairly evenly spread over the course of the year. So at this point, I think we still feel pretty good about those original numbers.

Our next question comes from the line of Tim Mulrooney with William Blair.

Shane, welcome to the team.

Thank you.

A couple quick ones from me, guys. Did you actually say how much of that 4.5% organic growth in your Uniform segment was price versus volume?

No. We don't typically break out the components of that, Tim. So we did not provide that detail.

Is it fair to say that, typically, in any given quarter, 1% to 2% of your organic growth is price?

I think that's probably a reasonable average, but there's certainly quarters, depending on the timing of different charges and increases, where it's higher or lower.

Okay. Got it. There's been a lot of moving parts to gross margin that were discussed today, but can I just summarize it by basically saying gross margin was up 80 basis points year-over-year, I think, in the first quarter? But for the remaining 3 quarters, you -- based on your guidance and everything that was discussed today, would expect gross margin to be down year-over-year for the remaining 3 quarters?

Yes. I think that this is generally true. The comments I made, though, were more on the operating margin line. And the reason I make the distinction, when you look at our overall gross margin, it gets a little muddied with the Specialty Garments segment and so on. So the comments we made earlier about margins were on the operating margin level and it basically -- to summarize for the remainder of the year that the margins would be down about 0.25 compared to the -- well, certainly compared to what we had previously guided, but also compared to a year ago. I mean, you can figure out where they are compared to a year ago. I think the comment earlier I made was compared to the prior guidance that they had been ticked down some.

Okay. Okay. That's helpful. And, Steve, I know you made the comment in your prepared remarks, but I didn't completely follow it. On the working capital side, it was a big use of cash for the quarter. Last year's first quarter was a big source of cash. I think the biggest delta was on inventories and prepaid expenses. What was your comment? Could you talk about that a little bit more on what drove that delta?

Sure. In the fourth quarter of fiscal '16, we had a settlement related to some environmental litigation where we received about $12.5 million as part of that settlement and that was received in the first quarter of fiscal '17. And so that influx of cash during the first quarter of fiscal '17 showed up in that prepaid and other assets line. And so that was really the biggest delta on the working capital side as well as some of just inventory build during the quarter compared to some inventory shrinkage or reductions during last year's first quarter. So those were the 2 line items that really impacted on the working capital side.

Yes. Okay. Okay. I'm sorry. I got to sneak one more in. I'm just curious on this tax rate stuff.

Sure.

Do you plan to issue an update to guidance once you finalize your work on the tax rate so that we can update our models? Or do you just plan to update us on the second quarter call?

We were primarily thinking of just doing it on the second quarter call, Tim.

(Operator Instructions) Our next question comes from the line of John Healy with Northcoast Research.

Steve, I want to ask you a little bit more about the postmortem on the Arrow acquisition. I think it's been a little bit over 12 months since you closed that deal. When you look at kind of how it performed this year compared to your original expectations, can you kind of grade that for us? And does the success -- or maybe not as much success as you thought or depending how you grade it, does it make you more or less likely to do more deals, do you think, in calendar 2018 or '19?

I think every deal sort of stands on its own, John. I think as far as its performance over the course of the first year, I think on the positive side, the customer retention has been strong. I think the employee retention has been strong in terms of the people servicing those customers and wanting to maintain those relationships. I think on the profitability side, maybe it was a little bit off of maybe our original expectations, just with some of the transition and moving around of the business that was a little bit more costly than we originally anticipated. But no, I don't think it changes our strategy. I think it still is providing us a strong foothold in that part of the country and providing us more volume and capacity and market share that will ultimately turn into better performance in that key part of the country, which is a good uniform-wearing market.

Like I said, as far as it relates to other acquisitions, I think everything sort of stands alone. I think you've been following our business long enough that no 2 companies are alike. I mean, you have the revenue mix, you have sort of the profitability of customers based on a lot of different factors and so we kind of take acquisitions one at a time. But no, I think we still are very interested in deals of that size as well as deals that's smaller and looking at one plant add-ons in different markets.

Understood. And then, just one quick question just about weather since like we're finally really having it here in the Midwest this year. Do you look at weather and what you've seen this year to be a positive or negative compared to maybe how you originally looked at the business maybe a few months ago?

I don't think we view it as a significant difference, John, to be honest with you.

(Operator Instructions) Our next question is a follow-up from the line of Joe Box with KeyBanc Capital Markets.

Just a couple of quick ones. So I appreciate the preliminary outlook on tax reform on the income statement earlier. Have you guys done any analysis of what a long-term cash tax rate could look like and, ultimately, what the tailwind of free cash flow could be?

Yes. We haven't gotten that granular yet, Joe. But, I mean, at the end of the day, when you look at the midpoint of the rate that we're using for our fiscal '19 and just using that as sort of assuming that translates into a cash tax benefit, it's over $20 million. Now, it could be, in different periods, a little bit better than that because of some of the depreciation -- tax depreciation rules on -- accelerated on some investments. But I think if you just sort of look at the very basic benefit to the rate, that's going to translate into tax -- into cash.

Understood. Okay. And then, I apologize if I missed this earlier, but can you maybe just flesh out what the tone is from some of your customers? I guess, I'm particularly interested in color on what national accounts are saying now versus smaller, local accounts and if that could create any sort of change to the overall growth rate for the overall industry.

Yes. I think people are sort of -- as it relates to tax reform, I think people are saying things similar to what I've been saying, which is most people are going to be benefited, particularly companies that are domestic-heavy operations like we do and those obviously are ones that we're servicing. And they are looking to make additional investments in their business. Now, I think they're also saying similar things that I'm saying about labor and the ability to get good people, which is really the cornerstone of any business and that, that is becoming more costly as well. And so some of that additional capital will go into making sure they are firming up their labor force with the best and the brightest to help their businesses. So I think people are sort of taking it one step at a time, but cautiously optimistic that this will provide sort of a boost to the economy and, as a result, we would like to hope, our industry.

I am showing no further questions at this time.

Okay. I'd like to thank everyone for joining us today to review our first quarter financial results for fiscal '18. We look forward to speaking with you again in March when we expect to be reporting our second quarter results for the year. Thank you, and have a great day.

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