UniFirst Corporation (UNF) Q1 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the First Quarter Earnings Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to 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 would 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 will 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 catalysts for the company's positive quarterly results. Contributing factors for the core laundries growth included a quarterly record for new account sales and positive impact on pricing and a slight gain made in our uniform wearers 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 Garment 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 report a strong financial results for the first quarter setting a new quarterly record for revenues and increasing operating income in 2014 first quarter. Overall, we are pleased with the first quarter results of 2015 and proud of our thousands of UniFirst's team partners and continue to develop new and creative ways to improve our service, sales and operational professionalisms. As we look ahead to remainder of 2015, we expect our core laundry operations to continue driving the company's growth to maintain the positive momentum and achieved through the fiscal 2014 and during the quarter of 2015. As always, to support our organic growth, we look to our field and national account sales team to continue to improve up on 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 major return for UniFirst and our shareholders. For the 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 towards thousands of business customers big and small, no matter where they are located in North America. As I alluded too in our past webcast, by ensuring all of our customer needs are met week-in and week-out, we know our customers satisfaction levels will continue to climb, customer retention will benefit, ancillary service and 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 changes associated with the Affordable Care Act. And with uncertain future in oil and energy cost, we remain cautious. And lower energy costs are particularly good for consumers and the economy as a whole and decrease in oil prices off late would 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 change all of our operations – challenge all our operations and continue performing as effectively as possible, instant productivity wherever possible. Consequently maximizing resources by really focus on all our managers throughout the year. In spite of the situation in a certain trajectories in both the national economy employment 2015, we believe our managers and all UniFirst business segment will again succeed by continuing to effectively execute our short and long-term business strategies as laid out in our listed 2020 business plans. By continuing to follow this corporate plan and keeping our customers who are focused on everything we do. UniFirst will continue to grow and provide quality returns for our shareholders. We are optimistic that fiscal year 2015 will be another year of solid growth for UniFirst and hope we will be able to provide a new financial milestone for our company in the quarters ahead. And with that said, I will 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 margins 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 cost 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 cost relating to the ongoing litigation surrounding New England Compounding Center matter as well as higher cost related to the update of our IT systems compared to a year ago. Revenues for the Specialty Garment 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 segments 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 U.S. 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 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 work and capital items such as account receivables 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 capitalize $3.3 million related to this project during the quarter. We also continued to invest in plan updates and expansions and 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 plan 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 to 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 would 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 were 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 a significant factor in our strong revenue and profit growth has an 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 resisting 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 cost 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 dollar. At the current exchange rates, our full year revenues would be impacted by approximately $2 million to $3 million compared to the projected revenues using the exchange rates assumed when we provided guidance in October. In addition, we continued to monitor other expense items such as healthcare cost and merchandise amortization that we caution may pressure margins during fiscal 2015. Although these items did have a significant impact on Q1, we continue to expect margin pressure associated with these items as the year progress. In summary, we are 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 and the quarters ahead. This completes our prepared remarks, we will now be happy to answer any questions you might have.

[Operator Instructions] And our first question comes from the line of Andrew Wittmann with Baird. Please go ahead.

Hi, guys. Thanks for taking my question.

Good morning.

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 are right, its oil and gas. It's not just oil. That accumulation does include some other SIC code. 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.

Is there any…

Go ahead.

Sorry. 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 are seeing it. It goes way beyond oil. I mean there is support industries that support it, the trucking companies that bring in the water, so all that is starting to be effective. We talk to our manager about an hour ago and the smaller – the drilling is stopped. And with the drilling stopped that affects the guys hauling pipe in the water and so forth. So we are starting to see that slow down, how long the slowdown is, your guess is good as mine. But it's just that the oil it's the supporting industry 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 are correct Andrew. We really did not see them. With the holidays, I think some of the staffing changes in these companies has 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, I mean you have the drillers and you have the pumping stations and the drilling of the new sites has effectively stopped. We know we have a couple of customers that's focused specifically on drilling and they are putting in for reduction as we speak and 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 its coming. And just to add to what Ron said, you sort of hit it on the head, I know you mentioned North Dakota, I just want to clarify we are not in North Dakota at all. Our exposure, although there is some Pennsylvania and we do have significant presence in Edmonton where there is some oil exposure, is primarily the Texas, Okalahoma, 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 the – how will the economies in the downstream businesses get impacted by the slowdown and that's where we have reason for caution.

Yes. I think 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 that, we have just built in the benefit we are going to see from energy prices that would have 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 that the prudent thing to do was to sort of leave the guidance to 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 sort of decided to take a wait and see approach.

Okay. I will 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.

Okay.

Our next question comes from the line of John Healy with Northcoast Research. Please go ahead.

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 resisting garments where five, six years ago, our oil business was not a flame resisting 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 weakly revenue we are getting on those garments. So as I think hopefully that helps to answer some of your question.

No, that has. 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 the past year, I think we have seen that across the board, the pricing has come up a little bit. But, that being said with lower energy prices part of our caution around the benefit we are going to get from lower energy prices is what that might do to the pricing environment. We haven't seen much yet. But, we have always done a good job over the years as energy prices have gone up working with our customers to sharing 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 kind of neutral? How would you describe kind of the impact of weather so far on the business?

I think so far it's been neutral. You are 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.

Our next question comes from the line of Sean Egan with KeyBanc Capital Markets. Please go ahead.

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?

Well, I think it's basically been the same that we have been saying all along, it's just about 55:45 split. My 55% is coming from people who have a current program and about 45% is coming from no programmers. And that 45% maybe also people that had a program but none of the uniform program for two or three years and decide to come back in. But, that's basically where we are getting in.

Okay, great, thanks. And then kind of 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 kind of taper off and what are your expectations for that segment going forward?

Yes. I think in our original guidance we probably had more sort of mid-single digit growth built in for the year and that's probably more what you will see over the remainder of the year absence 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.

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

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. I mean your expectation going into the year was 5.2% at the midpoint. Is there – 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 is anything in particular Kevin. I think that you mentioned the new account sales and we 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 pairing back of that organic growth which we expect to see as we annualize some pretty good period. So no, I don't think there is anything in particular that change and then again, as I mentioned, I think the guidance as the caution built in, those specific amounts but from some of these reductions we know we 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 are still seeing a positive effect. We are seeing service industries, the dealerships and so forth adding people. So we are not doing any great significance but as we said earlier our adds over were or metrics was plus for the quarter. So 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 6/10ths and it was 4/10ths 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 sort of expected in their budget; they, from year-to-year have different strong quarters whether it would be in the fall of the spring. And way the 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.

Thank you.

Our next question comes from the line of Chris McGinnis with Sidoti. Please go ahead.

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 kind of reset of payroll?

No, Chris. I mean the reset of payroll is more coming in this quarter coming up. Some of that was some increase selling cost. But, as we mentioned in the release, we had some legal cost 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 kind of unusual items I guess causing the increase. Other than that it was just some increased selling cost with a ramp up of some of our sales force and sales cost but, nothing else too out of the ordinary.

So that increase should kind of come down over – throughout the year?

Some of these projects we – they are continuing on the IT side, it remains to be seen whether there will be other cost 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 are not quite sure when.

All right, great. Thank you.

Our next question is a follow up question from the line of Andrew Wittmann with Baird. Please go ahead.

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 is the trajectory of price quarter-over-quarter continue to improve?

Yes. I think what we have seen is the pricing market particularly in the street business tighten up and it benefited all of us. And I think most of the companies have done a better job on the so-called extra charges. We are seeing those increase where we have seen the pricing is still highly competitive better than 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 return on that investment.

Yes.

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 have 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 answers.

Thank you.

There seems to be no further questions at this time. [Operator Instructions]

Well, I would 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.