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Mac-Gray Corporation (TUC)

Q4 2008 Earnings Call

March 05, 2009 10:00 AM ET

Executives

Michael J. Shea - Executive Vice President, Chief Financial Officer and Treasurer

Stewart Gray MacDonald, Jr. - Chairman and Chief Executive Officer

Presentation

Operator

Greetings. Good day and welcome to Mac-Gray Corporation's Fourth Quarter 2008 Conference Call. Today's call is being recorded and webcasted. With us today are Chairman and Chief Executive Officer, Stewart MacDonald and Chief Financial Officer, Michael Shea.

At this time, I would like to turn the call over to Mr. Shea. Please go ahead sir.

Michael J. Shea

Thanks Chris. Thank you very much and good morning everyone. Thanks for joining us on today's call.

Before we begin, please note that the various remarks we may make on this call about the company's future expectations, plans and prospects constitute forward-looking statements for the purposes of the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various factors including those discussed in our annual and quarterly reports on file with the SEC.

I would like to remind you that we will be discussing non-GAAP financial measures during our call this morning, including net income as adjusted, net income per share as adjusted, EBITDA, and EBITDA as adjusted. Please see the tables that follow our consolidated statements of operations in today's press release for a reconciliation of EBITDA, adjusted EBITDA and adjusted net income to net income.

A copy of the press release has been submitted as an exhibit to Form 8-K we filed with the SEC and is posted on the Investor Relations portion of our website, at www.macgray.com.

With that, let me turn the call to Stewart for an overview.

Stewart Gray MacDonald, Jr.

Thanks Mike and thank you everyone for joining us today. I apologize for having a head cold which is a souvenir from last weekend's blizzard here in the Northeast.

Q4 was a very good quarter for Mac-Gray, particularly in light of the economic environment. Our laundry facilities business continued to demonstrate its overall resiliency in the quarter, showing organic growth of 1.3%. The ALC assets we acquired in April also performed on plan and provided us with valuable operating density in the four key markets. Our Product Sales Group just completed its second consecutive year of record revenue, with growth in Q4 from both MicroFridge and commercial laundry equipment sales. And finally, we reduced our funded debt in Q4 by $13.6 million, as a result of our management of capital expenditures and continued strong cash flow generation.

Let me touch on that last highlight first, because I think it's one of the key takeaways from this quarter. With all the challenges we are facing due to the ongoing economic turmoil, our business model is such that we continued to be a strong cash generator. In just nine months since we acquired ALC, we have now paid down approximately $29 million in long-term debt, which is equal to 25% of the entire purchase price of ALC. This rapid pay down also enabled us to cancel our $15 million unsecured credit facility ahead of schedule, which will further lower our interest expense in 2009.

Our ability to pay down more than $13 million of debt in Q4 and $29 million since April, speaks to how well each of our business has performed, the economies of scale we have gained from ALC, and how tightly we manage both our overall operations and capital spending. Mike will provide you with more detail. But a quick financial snapshot of the fourth quarter shows that revenue grew by 21%, with the bulk of that growth coming from our facilities management business. EBITDA as adjusted for the effect of derivatives also grew just over 20% from Q4 of 2007.

In terms of our bottom line, we produced a nominal profit in the quarter, which equated to adjusted earnings of $0.01 per diluted share. For the year, revenue rose by approximately 23% to a record $364 million. EBITDA as adjusted and shown in table 2 of today's press release rose more than that by nearly 25% to $73 million and our net income on an adjusted basis was $1.9 million or $0.14 per diluted share.

Turning to the performance of our segments; in Q4 our laundry facilities business grew almost entirely due to the contribution of the assets we acquired in April. Those acquired assets provided us with significant density in four of our large markets as well as some smaller ones. As we've discussed on prior calls, because of our operating costs such as collections and service personnel are more fixed than variable in this industry, it is advantageous to maximize your density in the markets you compete in. The ALC acquisition provided us with the opportunity to do just that. More than 80% of its footprints overlapped with our existing assets. We continue to believe that these assets represent a great opportunity for us to build long-term value for our business and our shareholders.

In the near term, we're pleased to report that we have exceeded our goal for annual expense synergy from the acquired ALC assets. We had originally targeted taking $4 million in costs out of the business through facility closures, headcount reductions and other cost-elimination initiatives. Based on the excellent fit with our pre-existing operational footprint and the quality of the sales and operations personnel we retained, we believe we will be able to realize synergies totaling more than $5 million annually. The final phase of our integration will be renegotiating the contract portfolio as it comes up for renewal over the next ten years. From what we have seen so far, the quality of the ALC portfolio is exactly what we had expected.

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