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UniFirst Corp
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Ladies and gentlemen, thank you for standing by. Welcome to the UniFirst Corporations First Quarter Earnings Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions]. As a reminder this conference is being recorded today Wednesday, January 3, 2018. I would now like to 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. This call will be on a listen-only mode until I complete my prepared remarks. 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 were thrilled to have him back at UniFirst.
Before I go any further 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 these risk factors in our most recent 10-Q and 10-K filings with the Securities and Exchange Commission.
And now will provide an overview of our quarterly results. I'm pleased to report that our first quarter revenues set a new record for UniFirst at 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 on the balance sheet, but instead recognize 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 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 $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 cost 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 the 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 clean room 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 segments 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 segments 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 2017. 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 2017 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 in the fourth quarter of fiscal 2016. 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 2018 totaled 374 million up from the 349.8 million reported at the end of fiscal 2017. 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 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 and on an ongoing basis.
For the remainder of the fiscal 2018, our tax rate will be impacted by three 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 non-recurring 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 non-recurring 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 2018, 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 two non-recurring 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 2019 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 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 in their businesses and growth and expansion.
This completes my prepared remarks and we will now be happy to answer any questions that you might have.
[Operator Instructions]. Our first question comes from the line of Joe Box with KeyBanc Capital Markets. Please proceed.
Yeah hey, good morning guys. 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. The 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 one time 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 three 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 three 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 get 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 three quarters, should we think about it being kind of flat to down year-over-year?
Yes, we have it down about 0.25 year-over-year for the last three 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 would 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.
Understood, thanks guys.
Thank you.
Thank you. Our next question comes from the line of Justin Hauke with Robert W. Baird. Please proceed.
Sure, thanks. Maybe I've got two 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 any more 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 continued 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. And at this point we still have that that assumption built in.
Okay, great. Thank you 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, I mean 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 the 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 side there or not. But as it relates to the CRM specifically I don't think it changes our strategy.
Okay, [Technical Difficulty]. Thank you.
Thank you.
Thank you. Our next question comes from the line of Andrew Steinerman with J.P. Morgan. Please proceed.
Hey Steve, I wanted to talk about the new sales that was strong in the quarter and last quarter you say might have a tougher compared to 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 two thirds of our sales come from competition, the other third from no programmers or conversions of direct sale customers. You know that 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 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 that'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 and the consolidation of the industry may help that somewhat as well.
Got it, thank you, appreciate it.
Thank you.
Our next question comes the line of Kevin Steinke with Barrington Research. Please proceed.
Good morning. 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 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 garment side I think I mentioned they obviously had a very strong first quarter. They're 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 and some direct sales in our first quarter that is part of that revenue increase. Some of those are more one time but I think the combination of those few things all contributed to the shift of the revenue guidance.
Okay, thanks and then you did call out a little bit of caution on labor cost as we moved throughout the year here and -- 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?
Yeah, 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 pressure exists and those are things we will be working through.
Okay, you mentioned higher costs related to healthcare claims. I know you had flagged that as a potential headwind in fiscal 2018. I know that's kind of difficult to predict quarter to quarter but what is the experience been like relative to your expectations at least through the first quarter?
So in fiscal 2017 the first two quarters if you go back and listen to our comments were actually fairly modest last year and it was really in the third and fourth quarters that they came on very strong. So I had modeled this year a little higher than the first two 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 am just trying to get a sense of what the outlook is for merchandise because as we move forward throughout the year?
The benefit will probably moderate some as the years goes along. I think some of that benefit is the result of the integration of the Arrow acquisition and that we're now self manufacturing a lot of the products that Arrow supply 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 merchandise and it 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 maybe for the rest of the year?
Yeah, it's probably starting to get a little bit muddy here. I think that 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 it 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.
Okay, thank you for taking the questions.
Thank you.
Thank you. Our next question comes from the line of Tim Mulrooney with William Blair. Please proceed.
Good morning Steve, Shane, welcome to the team. A couple of 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 of 1% to 2% of your organic growth is priced?
I think that's probably a reasonable average but there is certainly quarters depending on the timing of different charges and increases where it's higher or lower.
Okay, got it, thank you. 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 three quarters you based on your guidance and everything that was discussed today would expect the gross margin to be down year-over-year for the remaining three quarters?
Yes, I think that 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 where that is for the remainder of the year that the margins would be down about a quarter of a point compared to the -- well, certainly compared to what we had previously guided but also compared to a year ago. I mean you can sort of 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, 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. Well, what was your comment, could you talk about that a little bit more on what drove that delta?
In the fourth quarter of fiscal 2016 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 2017. And so that influx of cash during the first quarter of fiscal 2017 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 two line items that really impacted on the working capital side.
Yeah, okay. And I'm sorry I got to sneak one more in. I'm just curious on this tax rate, 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 up to update us on the on the second quarter call?
You know we were primarily thinking of just doing it on the second quarter call Tim.
Okay, okay, well thanks a lot for your time.
Thank you. [Operator Instructions]. Our next question comes from the line of John Healy with Northcoast Research. Please proceed.
Thanks. Steve I want to ask you a little bit more about the post-mortem on the Arrow acquisition and I think it's been a little bit over 12 months since you have closed that deal. When you look at kind of how it performed this year compared to your original expectations can you kind of trade that for us and does the success or maybe not as much success as you thought how you grade it, does it make it more or less likely to do more deals do you think in calendar 2018 or 2019?
I think every deal sort of stands on its own John. I think as far as the 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 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.
And 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 two 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 are smaller and looking at one plant add ons in different markets.
Understood, thank you. And then just one quick question just about weather, it seems 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.
Okay, thank you.
Thank you. [Operator Instructions]. Our next question is a follow-up from the line Joe Box with KeyBanc Capital Markets. Please proceed.
Yeah, hey, 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 what the long-term cash tax rate could look like and ultimately what the tailwind of free cash flow could be?
Yeah, 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 2019 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 benefits of the rate that's going to translate into cash.
Understood, okay. And then I apologize if I missed this earlier but can you maybe just flush 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?
I think it -- 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 that most people are going to be benefited particularly companies that are domestic heavy operations like we do and those obviously are ones that we are 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 is becoming more costly as well and so some of that additional capital will go into making sure their 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.
Got it, thanks Steve.
Thank you.
Operator
Thank you. I'm 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 2018. 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.
Thank you 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.