UniFirst Corp. F4Q08 (Qtr End 8/30/08) Earnings Call Transcript

Oct.29.08 | About: UniFirst Corp. (UNF)

UniFirst Corp. (NYSE:UNF)

F4Q08 Earnings Call

October 29, 2008 4:00 pm ET


Ronald D. Croatti – Chairman, Chief Executive Officer and President

John B. Bartlett – Chief Financial Officer

Steve Sintros – Corporate Controller


Andrea Wirth – Robert W. Baird & Co., Inc.

John Healey - FTN Midwest Securities Corp.

Ashwin Shirvaikar - Citigroup


Welcome to the UniFirst Corporation fourth quarter earnings results conference call. (Operator Instructions). I would now like to turn the conference over to John Bartlett, Chief Financial Officer.

John B. Bartlett

Thank you and welcome to UniFirst conference call to review our fourth quarter and yearend operating results for fiscal 2008 and to discuss our expectations going forward. My name is John Bartlett and I am the Chief Financial Officer. Joining me are Ronald Croatti, UniFirst President and CEO and Steve Sintros, our Corporate Controller. This call will be on a listen only mode until we complete our prepared remarks.

Last evening we released results for the fourth quarter and 53 weeks ended in August of 2008. Our revenues increased 13.4% to over $1 billion and our net income increase 34.9% to $61 million or $3.15 per share. Ron Croatti and Steve Sintros will provide additional details regarding these results, but I can say that we are very pleased with our performance in a difficult economy.

We had targeted the $1 billion sales milestone for several years and it was very satisfying to achieve it this year. Our relentless focus to increase our operating margins is yielding results and we are particularly pleased with the improvements at locations performing below our standards.

Now before I turn the call over to Ron Croatti, I'd like to give a brief disclaimer. This 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, believe and other 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 factors including but not limited to the continued availability of credit and the performance of the capital markets, performance of acquisitions, fluctuations in the cost and materials, fuel and labor, economic and other developments associated with the ongoing war on terrorism and the outcome of pending and future litigation and environmental matters.

Now, I'll turn the call over to Ron Croatti for his comments.

Ronald D. Croatti

Welcome to all those who are joining us for the review of our fourth quarter and full fiscal year of 2008 results. Our numbers were released yesterday evening and I'm happy to report that they showed another year of record revenues and profit. Most important it was a year that saw us pass a milestone $1 billion revenue mark. A key event for our company and one that was especially meaningfully given the tough conditions we faced during most of the year.

This milestone makes us the third largest provider in North America. I want to thank the entire management team and our thousands of dedicated team partners throughout North America and in Europe who worked so hard to make it happen.

For the full year, revenues were $1.023 billion or a 13.4% increase over last year's $902 million. Net income was $61 million or $3.15 per diluted common share a 34.9% increase from the $45.2 million or $2.34 per diluted common share reported in fiscal 2007.

These results which benefited through an extra revenue week in fiscal 2008 as compared to fiscal 2007, were in line with our expectations and consistent with the guidance updated that we provided during the year.

Core laundry operations led the way with a 13.9% revenue increase over the previous year. Also the improvement was the result of internal growth and price increase with acquisitions accounting for 2.9% of the advance.

The 53-week revenue week of fiscal 2008 accounted for approximately 2% of the increase. This was a solid performance in light of the challenging market conditions and once again served as testimony to our solidarity and resilience of our uniform rental business.

Our specialty garment business, our nuclear decontamination and clean room specialists continued the improvements we saw in fiscal 2007 and delivered a 14% revenue increase for the year. Our first aid business saw an essentially flat performance because they were more affected by the overall economic slowdown and the consequent belt tightening of small and mid-sized businesses.

The fourth quarter the company revenues were $251 million, a 10.3% increase over the same period in fiscal 2007. Net income was $12.3 million or $0.63 per diluted common share, a 13.7% increase over the comparable period last year. These results reflect the increase in difficult market conditions we experienced in the latter part of the year and are consistent with the business drop-off we predicted for the fourth quarter.

For the full year, net income was impacted favorably by lower merchandise amortization and by lower production payroll as a percent of revenue. The payroll benefit was due primarily to higher product throughputs in our laundries and the resulting improvements in production efficiency.

Offsetting this, negative impact of [inaudible] and fuel expense has affected all our operations, most particularly challenging in our laundries which are our biggest energy consumers. Specialty driver profits showed a slight unfavorable year-to-year comparison mostly due to direct sales which are lower margin than the rental sales serving as a larger component of the overall growth.

First aid and safety saw a slight drop in profits as well largely due to unpreventable account losses and service reductions caused by the slowing economic conditions.

Even though the market conditions were far from favorable, our uniform rental business showed steady growth throughout the year. Professional field sales were up 9.8% versus fiscal 2007 with sales turnover holding pretty steady but the average number of reps and total workweeks were up slightly.

Sales rep performance continue to show the positive effect of better local management, better training and support systems consistent enhancement to our sales productivity system, and sharper focus on industry specific sales program.

Service sales showed an improvement as well with our stock value totals, a key measure of average route revenue, moving up slightly. Rep sales programs continue to improve with an increased percentage of customers taking advantage of the new service offering route reps were making on a scheduled basis throughout the year.

For the year, national accounts sales were up high single digits over fiscal 2007. Balancing this we successfully renewed service contracts with the vast majority of our current customers who were up for renewal, increasingly successful in selling an add-on products and services to customers who are primarily uniform users.

Both the specialty garment and first aid business expanded in geographic coverage during the year laying an improved foundation for future growth. Both businesses continue to have excellent upside potential. Specialty garments, due to its unique technical expertise in the nuclear decontamination area, stands to realize that substantial new opportunities as nuclear energy once again favoring as a practical and cost effective option to continue the use of fossil fuel.

Then first aid and safety, due to its balance of direct to user service program, wholesale medication business and contract pill packaging operation and its position to serve a broader range of customers in more ways. So, both businesses are looking beyond the current downturn with justifiable optimism.

As we move forward in fiscal year 2009 we are being appropriately cautious. Unemployment rates are over 6%. The economy has already lost three-quarters of a million jobs and there's a possibility of skyrocketing unemployment in the short term.

It seems clear the recessionary conditions will prevail throughout the year and possibly longer. Overall economic conditions are unsettled as many other sales have seen in our lifetime and the experts are cautioning us not to expect a quick fix or turnaround. This means we'll be facing some of the biggest business challenges any of us have run up against.

The fact of the matter is we won't be able to avoid some unemployment in reduction, even business failures in our current customer base. That's simply out of our control. So we will be concentrating on these factors we can control in which we can do the most to buffer losses and give us the opportunity to maintain growth even in hard times.

The focus in all our business segments will be won keeping customers through service excellence and delivery of cost savings and advantages, following aggressively into the market areas as a most resilient and least likely suffering business downturn.

And three, effecting stringent cost control measures to allow for business development eliminate all non-essential spending. In all of this we are buoyed by our belief in ourselves and our business. UniFirst has been around for over 70 years and in that time has weathered many economic downturns.

Throughout, the resilience of our basic business model has enabled us to continue moving forward when others have faltered. So through the current conditions may be some of the most challenging in our history, we are confident in our ability to weather the storm. We have products and services that are needed in the marketplace to represent cost effective solutions to real business needs, and that deliver genuine value to the end user.

In addition, we have the UniFirst family of team partners, operations managers, production workers, sales and service personnel, technicians and administrators who have proven time and time again their ability to get the job done no matter what the challenge. So we're ready for what the year holds in store for us. We're looking forward to reporting to you on the company's progress on the quarters ahead.

Now I'd like to turn the call over to Steve.

Steve Sintros

Thanks, Ron. As Ron discussed earlier, we're pleased to report the best full year results we've ever achieved. We did not originally project that we would reach the billion-dollar milestone in fiscal 2008, but we have achieved this despite challenging economic conditions, while at the same time exceeding our profit goals.

Our full year revenues increased 13.4% to $1.023 billion compared to fiscal 2007. Fiscal 2008 was a 53-week year for us, the company; however, even excluding the effect of the extra week our revenues would still have broken the billion-dollar plateau and grown over 11%. Net income for the full year increased 34.9% to $61 million, or $3.15 a share, compared to $2.34 a share in fiscal 2007.

The full year earnings of $3.15 were at the low end of the revised guidance we provided during our third quarter earnings call. Revenues were $251 million for the fourth quarter, an increase of 10.3% over 2007. Fourth quarter net income increased 13.7% to $12.3 million, or $0.63 per diluted share, compared to last fourth quarter net income of $10.8 million, or $0.56 per diluted share.

The gross of net income for the full year was achieved primarily through strong revenue growth and improved margins in our core laundry operations, which excludes our specialty garments and first aid segment. Our core laundry operation revenues grew 13.9% for the full year to $920 million. Organic growth for our core laundry operation, which excludes acquisitions, the effect of the extra week in fiscal 2008 and fluctuations in the Canadian exchange rates, were 7.5% for the full year.

Income from operations from the core laundries for the full year increased 32.4% to $103.5 million, compared to fiscal 2007. The operating margin increased significantly to 11.3% in 2008 from 9.7% in 2007. The full year improvement was primarily the result of lower merchandise amortization, as well as lower payroll and payroll related costs as a percentage of revenue.

In addition, the results from 2007 were affected by severance expense, and increases to the company's environmental reserves that decreased income from operations by $2.3 million. These benefits were partially offset by higher energy costs.

For the fourth quarter revenues from the core laundry operations increased 10.7% in total and 6.6% organically. The decrease in organic growth in the fourth quarter from previous quarters reflects an increasingly difficult economy that is resulting in higher wearer reductions in our customer base, an increased number of financially distressed customers and more difficult selling environments.

Fourth quarter net income from operations from the core laundries increased 2.7%, from $20.4 million in fiscal 2007 to $21 million in fiscal 2008. Growth in operating income lagged the revenue growth in the quarter due to a decrease in operating margin from 10% in 2007 to 9.3% in 2008. This drop in margin is due primarily to increasing the cost of energy and other commodities.

Both the cost of gasoline and natural gas increased sharply during the quarter to historically high levels. Prices also increased related to other business inputs such as hangers, which put additional pressure on the margin in the fourth quarter. In addition, the benefit related to lower merchandise amortization as a percentage of revenues that we have been realizing throughout the year continue to benefit the fourth quarter, but at a reduced level.

Healthcare claims also have grown at a rate lower than our revenue growth through the third quarter, but higher fourth quarter claims reversed that trend and impacted our quarterly profitability. For the full year the revenues of our specialty garments segment were up 13.9%. Income from operations, as Ron mentioned, however, decreased from $4.5 million in 2007 to $4.2 million in 2008.

For the full year this segment's cost has an increase of the percentage of revenues due to higher energy, payroll and other production and delivery related costs. In addition, overall merchandise costs were higher as a percentage of revenues. Based on the seasonality of the power reactor business, the fourth quarter is historically weak for this segment; however, it improved its fourth quarter results from an operating loss of $0.8 million in 2007, the income from operations to $0.4 million in 2008.

This improvement was primarily due to strong revenue growth of 16.3%, as well as lower merchandise cost as a percentage of revenues compared to the fourth quarter of fiscal 2007. Revenues from our first aid segment were relatively flat year-to-date and fell 9.8% to $7.5 million in the fourth quarter of 2008.

Income from operations for the full year is down from $1.4 million in 2007 to $0.9 million in fiscal 2008, but was flat in the fourth quarter with both years showing income of $0.5 million. The full year decline in revenues is partially due to a product line that was discontinued in the second quarter of fiscal 2008.

In addition, this segment has clearly been hurt by economic conditions, where companies are both looking for ways to cut costs as well as being reluctant to add them. Overall costs, including payroll and energy, have continued to grow causing margins to be squeezed. We continue to invest in the training and growth of this segment's sales organization to help facilitate the growth necessary to improve its profitability.

Our consolidated basis of depreciation and amortization declined as a percentage of revenues from 5.4% to 5.3% for the full year, and from 5.6% to 5.5% for the fourth quarter. Net interest expense for the full year decreased from $10.8 million in fiscal 2007 to $9.8 million in fiscal 2008 and from $2.7 million to $2 million in the comparable fourth quarters. These decreases relate to lower interest rates, which more than offset the higher average debt balances we were carrying as a result of the acquisitions we completed during the year.

We also wanted to bring your attention to the fact that effective this quarter we have begun to show the impact of foreign exchange gains or losses as a component of other risks stemmed from the face of the income statement. Previously these amounts were included in selling and administrative expenses and have not been very significant. As these amounts are becoming larger due to the recent volatility of the U.S. dollar, we feel that breaking out these gains or losses helps show a clearer picture of our operating results.

During the fourth quarter of fiscal 2008 we recognize foreign exchange losses totaling $0.6 million compared to a small gain in the fourth quarter of 2007. For the fourth quarter our effective tax rate was 36.2%, compared to 38.4% last year. For the full year our effective tax rate decreased from 38.5% in 2007 to 38.2% in fiscal 2008. The lower rate in the fourth quarter and full year was primarily due to a reduction of taxes that is no longer required. On an ongoing basis we can expect our income tax rate will be between 39% and 39.5%.

Our capital structure and cash flows continue to be very strong. Our cash flows from operations increased approximately 40% to $119.5 million due to strong net income growth, as well as good controls over our working capital needs. The increases in our supply inventory and merchandising service compared to prior year-end were 4.2% and 7.2% respectively. Based on our overall revenue growth of 13.4%, these increases were modest and the control over the growth in these areas contributed to the improvement in our operating cash flow.

Total debt was $235.5 million as of year-end, a 14.3% increase from the $206 million outstanding a year ago. The increase in debt is primarily related to the funding of $61 million in acquisitions during the year. The majority of the dollars extended related to these acquisitions were the acquisitions of Western Uniform and Towel Service, which was completed in September of 2007, and Quality Linen and Towel Supply Company in May, 2008.

Western Uniform was headquartered in Wichita, Kansas, but also expanded our presence in Kansas City, Tulsa and Oklahoma City. Quality Linen was based in Salt Lake City and has given us a stronger presence in its attractive market. We continue to invest in our infrastructure during fiscal 2008 with capital spending totaling $73.8 million.

In addition to the normal capital outlay for replacement vehicles and other equipment, the company undertook a number of new plant and plant expansion projects during the year. Several of these projects are still ongoing, but we do expect our overall level of capital expenditures to be lower in fiscal 2009 as approximately $55 million.

Total debt as a percentage of capital increased slightly from 29.3% at the end of fiscal 2007 to 29.7% at the end of fiscal 2008. We are currently well in compliance with all of our financial covenants under our debt agreement, and we don't have any significant debt that matures before 2011.

Given the current economic landscape, including the tightening of the credit market, we continue to approach all investments during these uncertain times with the appropriate amount of caution; however, based on our overall financial strength we are well positioned to continue to invest in the business, as well as pursue strategic acquisitions.

Finally, we would like to give some preliminary guidance for fiscal 2009. We project that our revenues for fiscal 2009 will be between $1.15 billion and $1.45 billion, and that income per diluted common share will be between $3.05 and $3.25. Both the revenue guidance and earnings guidance reflects one less week of operations as fiscal 2008 with a 53-week year for the company, and fiscal 2009 will be a 52-week year. The effect of one less workweek equates to a reduction in our revenues of approximately 2%.

We are also reflecting in these estimates that the declining in our consolidated revenues of approximately 1.7%, based on the current strengthening of the U.S. dollar. In addition, the earnings guidance assumes an effective tax rate ranging from 39% to 39.5%.

The guidance that we have provided is highly dependent on certain conditions that have recently been very volatile and largely out of the company's control. These conditions include overall unemployment rates, the cost of energy and other commodities, exchange rate fluctuations, as well as the cost of capital. A significant change in any of these factors could have a significant impact on the guidance that we have provided.

We will closely be monitoring these factors and aggressively taking actions necessary for the company to stay on target with not only our current year goals, but also our long-term strategic objectives. Although we are beginning the fiscal year in the economy surrounded by as much uncertainty as we've seen in recent history, we are confident in the strength of our overall financial positioning, as well as our ability to weather the economic cycle that we are currently facing.

This concludes our prepared remarks. We will be now pleased to answer any questions you may have.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Andrea Wirth – Robert W. Baird & Co., Inc.

Andrea Wirth – Robert W. Baird & Co., Inc.

I'm wondering if you could first just talk a little bit about your '09 assumptions, just in terms of what you're looking for, the core rental business in terms of growth rates. It looks like from your guidance that it assumes that growth is to come down pretty hard, but will probably still stay positive, probably around 2% to 3%. Does that seem to make sense to you?

Ronald Croatti

That's correct, Andrea.

Steven Sintros

I think the range, kind of assuming the reduction related to the extra week, as well as the impact on Canada of the exchange rate, I think the range assumes about a 2% to 4% core organic growth excluding all those factors.

Andrea Wirth – Robert W. Baird & Co., Inc.

And then I'm just wondering if you could address a little bit what you've seen essentially since the end of your quarter end in August? And obviously, a little bit before we started seeing things fall apart in mid-September. Just wondering given the growth rate you're expecting now to come down to 2% to 4%, are you seeing a significant payoff already? I mean, will you probably start getting down to into that range of 2% to 4% already in the fiscal first quarter, or are things holding up still fairly well? We only see a kind of a slight deceleration in the first quarter.

Ronald Croatti

Andrea, we've seen a continuation of the shrinkage of our wearer base. Last year it was over 5.5% of our wearer base. That has continued. Our new business for the first eight weeks has slowed and we're down about 5% in new business. And the outer businesses and small businesses has continued pretty much at the same pace that it was in the fourth quarter. We are cautiously optimistic here.

John L. Bartlett

And just to add to that a little bit, Andrea, we've gotten our September numbers. Next week we'll get out October numbers, and quite frankly they were pretty good. So we're cautiously optimistic. And then I think the recent changes in the financial markets and so forth don't seem to have affected out business as yet. That isn't suggesting that they won't and I think we're seeing some favorable things in the energy costs. I mean everyone knows the cost of gasoline has come down dramatically and natural gas has come down since the last few months. So we actually have seen a couple of positive things.

Steve Sintros

I think when you look at that guidance you’re right Andrew I think that it won’t be as sharp of a decrease in the first quarter. But over the course of the year as these conditions continue we’ll fall down into that range. And we expect that range for the full year.

Andrea Wirth – Robert W. Baird & Co., Inc.

Got it, and just to clarify a couple of things, Ron when you mentioned that new business was down 5% is that year-over-year or sequentially?

Ronald Croatti

That’s year-over-year, it’s just people are less likely to spend right now in the last eight weeks. I mean companies are tightening up all the way along the line. And we have some good programs and we’re focusing towards businesses that have to have uniforms, so but it’s getting a little more difficult in the selling environment.

Andrea Wirth – Robert W. Baird & Co., Inc.

And just one more question. Some of your peers are already starting to really go after their cost base taking some facilities off line. Just wondering if you’ve taken a look at your cost structure at this point and if you feel like there’s any major moves need to be done?

Ronald Croatti

We have no position to take any facility offline. We’re tightening our cost structure making sure that what we spend makes good business sense.

John L. Bartlett

As we go through our acquisition program and acquire companies we are on an ongoing basis we have closed facilities and duplicate plants or whatever. But we’re certainly not looking at any of our facilities today and say we’re going to close it and consolidate it. In fact we actually have just opened one or two. We just opened two.


Our next question comes from John Healey - FTN Midwest Securities Corp.

John Healey - FTN Midwest Securities Corp.

Question, I don't know, just conceptually and how you guys look at yourself and how you look at the industry. For a number of quarters and for the whole fiscal year for you guys, you have outperformed the industry and your organic growth rates are a lot higher than what peers are reporting and probably much higher than what’s taking place in the industry.

Just from your vantage point, and you see yourself operating in the field, what are you guys doing differently than the industry is doing different relative to the industry. I mean, I look at your organic growth figures and they continue to amaze us, so I’m just trying to get a better understanding of how you guys continue to do so much better than the overall market place?

Ronald Croatti

I think it comes back to our restructuring of our sales organization about three years ago and changing the mentality and the focus and the training and the tools and like I said before we basically turned over everything. And then it’s getting that in position getting the people trained and a lot has to do with the location managers.

We’ve changed the mentality of the location manager that he has to be not only a location manager but a sales manager and that’s a constant thing. We’re not there yet where we want to be, but that’s really the difference, it’s the basics of blocking and tackling. The hard sales focus.

John Healey - FTN Midwest Securities Corp.

I guess when you guys look at kind of the guidance you’ve provided here, $3.05 to $3.25. I was hoping you could try to give us a little bit of color John or Steve, just how you guys look at margins for the year. Looks like they’re kind of going to be similar, maybe down a little bit if I do the math on the back of an envelope, but just trying to think how much you expect those to kind of trend as the year goes on?

John L. Bartlett

I don’t think we’ve ever been in as difficult an environment as we’re looking at. We have just faced I think more uncertainly than we have had in the past. I think the one thing that has benefited us this past year, probably the biggest thing, is the merchandize cost. And we do not anticipate we’re going to have the same kind of favorable year-over-year benefit as we go forward.

So I think we’re just concerned with the cost pressures that we might have to squeeze in our margins in general and our goal is to do as well as we can. But I think we’re really looking at, you know we had a 34% jump this year. It’s pretty optimistic that we certainly can’t do that again. And it doesn’t seem unreasonable from where we sit that we might be flat next year.

So we’ve kind of given this a range of kind of plus or minus over the current year. And that’s I think how we see it at this point. Steve you want to add a little bit to that?

Steve Sintros

Well I think a couple of items we talked about the exchange rates in Canada and our Canadian operation had a huge year this year. They were benefited by the exchange rate. Where the rate stands today, I mentioned that’s going to have an impact on our overall revenues of about 1.7% and probably a little bigger percent than that impact on our profit.

We’re baking in a higher tax rate as well. And although fuel has come down a number of our other vendors as I mentioned Hangers in the fourth quarter and some of the other vendors that we deal with have put through price increases that we’re dealing with as well. So although I think energy will have a benefit over time, at the current levels, there are some things working against us. And so like John said, given the market I think flat would be a solid improvement.

John Healey - FTN Midwest Securities Corp.

And just another big picture question, so many pressures taking place in the economy right now. I can't imagine the uniform industry is going to feel it from a top line standpoint, but when you look at some of your smaller competitors out there, when you look at the pressures in the economy, do you think this is going to force the hand of some of your smaller competitors to begin to look to sell their businesses? And would you anticipate that the softening economy is going to push the envelope more towards consolidation in the industry? And maybe how do you guys see yourself pursuing potential acquisitions in a tough environment?

John L. Bartlett

Well I think we’ve seen actually more activity from the smaller people already. I don’t think it’s just the economy. I think they’re looking at the government situation and they’re expecting that tax rates are probably – maybe they won’t go up too much but they’re not going to go down, as they’re looking at it. And they’re looking at it and they’re looking at maybe a good opportunity to get out.

I don’t think the economy is going to force that. I’m not aware really of anyone in our industry that has been forced out of business. It’s more usually a family or kind of a decision that they don’t have children come along that want to run the business and the economics that usually force it. But clearly if they don’t make as much money as they did the year before and they’re trying to divide up the pie with two or three families rather than one, it kind of forces their hand or makes them think a little bit harder about it.

But I think as Steve said in his comments, we’re going to look aggressively at acquisitions that make sense but at the same time we realize how precious cash is and so we’ve actually walked away from a couple of acquisitions in the last couple of months.


(Operator Instructions). Our next question comes from Ashwin Shirvaikar - Citigroup.

Ashwin Shirvaikar - Citigroup

My first question is, is it possible as you look at the year-over-year margin improvement that you can break out the various pieces?

Steven Sintros

So Ashwin, I think we can give you some high level ideas. I don’t particularly want to get down to the actual percentages for each piece, but as we talked about throughout the year the biggest pieces of the margin improvement obviously have been the merchandise and I think that was the biggest piece clearly. And that was in the neighborhood of a 1% increase year-over-year.

Payroll and payroll related costs next in line as the biggest improvement. And there were a number of other small things that contributed to it as well. And then those were offset by the energy. Some of those items flipped around in the fourth quarter. Energy became a much larger negative. For the fourth quarter energy was, it hurt our margin 1.5% over the fourth quarter of the prior year and for the entire year it hurt our margin about 0.07% so you can see how much it accelerated in the fourth quarter.

Ashwin Shirvaikar - Citigroup

On the topic of energy can you go through how the mechanics of the fuel surcharge work in today, do they roll off automatically as the fuel price declines?

Ronald Croatti

No, we basically – it’s a percentage of the invoice and we look pretty hard at what UPS does, how they tally it and based on what UPS does we probably adjust it semi-annually.

Ashwin Shirvaikar - Citigroup

So it’s not really a –

Ronald Croatti

No it’s not adjusted every week like UPS.

Ashwin Shirvaikar - Citigroup

And it’s not negotiated it’s just –

Ronald Croatti

Well it's always negotiated.

Ashwin Shirvaikar - Citigroup

What’s your CapEx for the fiscal '08? I missed that.

Ronald Croatti

We expect about $55 million.

Ashwin Shirvaikar - Citigroup

And could you go into sort of the big part of the CapEx, if you could?

Ronald Croatti

Well about $22 million goes for trucks and computers. And then the difference would go into – we got continued construction of the plant in England, which is costing a lot more than what we anticipated. And additions and improvements and further sortation automation in the plant.

Ashwin Shirvaikar - Citigroup

So basically you’re spending on short-term ROI kind of things where you see immediate benefit.

Ronald Croatti

That’s pretty much it.

Ashwin Shirvaikar - Citigroup

Any way you could, I know you have not in the past but anyway you could get into your end market exposure by verticals, how that looks?

John L. Bartlett

Not sure what you’re suggesting.

Ronald Croatti

We’re looking at each other here.

Ashwin Shirvaikar - Citigroup

I mean with direct exposure to what percent is construction, what percent is maybe travel that kind of thing?

John L. Bartlett

I guess I’m still unclear where you’re in market, what?

Ashwin Shirvaikar - Citigroup

Yes customer exposure, high investment?

John L. Bartlett

Oh I don’t believe we have any major customer. We pretty much go across the board. We don’t have much manufacturing. Probably the single biggest segment is the automobile related which is not just dealers and not really the manufacturers more the auto repair shops, the mechanics, things like that. And traditionally we’ve catered more to the smaller businesses and there’s no question some of those are going to reduce men and some go out of business.

But I think in this environment where people aren’t buying new cars they’re going to continue to have their cars serviced and repaired. We have some, a grocery store business, I mean that’s going to – I don't think we’re not really into the high-end type of restaurant or anything like that. No question we’re going to have some exposure but we have over 200,000 customers and we think we’re pretty, and we’re spread all over the United States, so.


Our next question comes from Andrea Wirth – Robert Baird & Co., Inc.

Andrea Wirth – Robert W. Baird & Co., Inc.

Just a follow-up on energy costs. In the quarter what was it about 6% of sales? Is that about right?

Steve Sintros

Let me get that for you Andrea. Between natural gas and gasoline it was 5.9%. And add another percent for electric.

Andrea Wirth – Robert W. Baird & Co., Inc.

Oh and another percent for electric so all in about –

Steve Sintros

All in about 6.49% for the quarter.

Andrea Wirth – Robert W. Baird & Co., Inc.

And what essentially is baked into your guidance of that$ 3.05 to $3.25 what essentially percent of sales or essentially what’s your outlook for energy for that guidance range?

John L. Bartlett

Well it really depends whether it’s $3.05 or $3.25. We, I think we’re optimistic that the energy prices are going to maybe ratchet up a little bit but not dramatically the way they did a year ago. So we’re hopeful that they won’t see the dramatic changes that we’ve had last year is what we’re contemplating in that range.

If things stay low and we can maybe towards the higher end if they ratchet up we will be at the lower end. That’s one factor obviously there’s other factors that come in, but the unemployment if it stays where it is we’ll do better and if it goes up significantly we’re probably not going to do as well. That’s why it’s just so hard to predict the next year.

Andrea Wirth – Robert W. Baird & Co., Inc.

Is it probably fair to say that the high end of your range assumes energy costs essentially will stay where they are right where they are right now?

John L. Bartlett


Steve Sintros

Yes I think that’s correct.


(Operator Instructions). There are no further questions at this time I will now turn the call back over to you, please continue with your presentation or closing remarks.

Ronald Croatti

Well I want to thank you all for coming to our webcast, our best year ever. And we certainly will stand fast and meet the challenges of the coming year. We look forward to talking to you in the next quarter.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!