Steve Sintros - SVP & CFO Ronald Croatti - Chairman, President & CEO.

Justin Hauke - Robert W. Baird John Healy - Northcoast Research Andrew Steinerman - JPMorgan Kevin Steinke - Barrington Research Associates.

Welcome to the Third Quarter Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Steve Sintros, Chief Financial Officer. Please go ahead..

Thank you and welcome to the UniFirst Corporation conference call to review our third quarter results for fiscal 2015 and to discuss our expectations going forward. I'm Steven Sintros, UniFirst Chief Financial Officer. Joining me is Ronald Croatti, UniFirst 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 these risk factors in our most recent Form 10-K and Form 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, and welcome, everyone, joining us for the review of UniFirst's financial results for the third quarter of fiscal 2015. I'll provide a brief overview of our performance, then I'll turn it back over to Steve to fill you in on the details.

I'm glad to report that UniFirst's revenues for the third quarter of fiscal 2015 reached an all-time quarterly high, setting a new record at $365.6 million which was a 3.8% increase over the $352 million reported for the same quarter in 2014.

Net income also set a third quarter record, achieving $32.5 million which was a 5% improvement over the $30.9 million recorded for the same period last year. As some of you may know, our core laundry operations make up approximately 90% of UniFirst's total business.

And our laundries, particularly those in the U.S., led the company's positive performance, with revenue setting a new quarterly record by increasing 4.6% over the 2014 third quarter. Similarly, our operating income for the core laundry operations also set a quarterly record, improving by 5.5% when compared to same period last year.

Our specialty garments segment which is our specialized nuclear clean room service unit, reported a revenue dip for the quarter, primarily related to the weaker Canadian dollar and euro, but was able to hold its operating income flat when compared to same quarter in 2014.

Finally, our First Aid and Safety segment reported a strong third quarter financially. Continuing the trend of recent quarters, the first aid group improved both revenue and operating income when compared to 2014 revenue.

Although our growth rate continued to be challenged by various economic conditions beyond our control, we're generally pleased with the financial results of UniFirst's third quarter. And continued quality performance and execution of our 12,000 team partners throughout the U.S., Canada, Central America and abroad.

I can't stress enough that in the end, it's our UniFirst family members who are the ones responsible for the company ongoing strength and annual growth. So my heartfelt thanks goes out to each and every one of them and for all they do in the name of our customer and for UniFirst.

When it comes to organic growth, it is our field sales and national account selling organization that set the pace, with 2015 sales trending year to date to slightly exceeding last year's financial year record.

Our sales reps continue to succeed by servicing our business customers, consultant, and to our diversified prospect [pace] [ph] rather than more traditional salespeople. Now more than ever, business customers are looking for us to articulate how we can improve their business and employee image, not just provide them with a price quote.

And our sales teams are answering the call by expertly communicating the benefits and the bottom-line value that UniFirst provides to our managed uniform and facility service programs.

Our local UniFirst teams also aided in growth and profitability during the quarter by continuing to maximize efficiencies in their area of operations and production, and in delivery of the highest quality products and services to our customers and in containing cost and spending.

These accomplishments in the field were essentially during the quarter to help us counter the persistent headwind facing UniFirst and much of our industry as a whole.

The primary challenges we were dealing with and expect to face for the remainder of the fiscal year into fiscal 2016 include operating operational cost increases, particularly those related to labor and healthcare benefits for our UniFirst team partners; continued uniform wear losses in the profitable oil and gas sectors in Texas and Alberta markets; losses that contribute to a negative result in our adds over reduction metrics for the third quarter and negative impact of the weaker Canadian dollar exchange rate; limited employment gains in uniform-wearing industries that restrict organic growth market opportunities; and always, a very competitive playing field that often affects new customer price in a negative way.

Knowing all of this, we will be counting on our service teams to continue doing all they can do to achieve complete customer satisfaction. One customer at a time in order to improve customer retention and new business referral numbers.

We'll be looking to our sales team to continue closing more new accounts in a consultative manner, as well as converting more no programmer business to our managed rental programs and thereby adding to our customer base and our top line.

And of course, we need our operational teams to remain committed to cost control, creative management and all they do to preserve the bottom line without sacrificing service level to our customers.

I have full confidence that our UniFirst team partners will once again step up and succeed in the face of expected challenges and we continue our impressive track record of success, growth and return to both our shareholders and our team partners as we close our fiscal year.

And with that said, I'll turn it back over to Chief Financial Officer, Steve Sintros, for our third quarter details..

Thanks, Ron. As Ron mentioned, third quarter revenues were $365.6 million, up 3.8% from $352.2 million a year ago. Net income for the quarter was $32.5 million or $1.61 per diluted share, up 5% compared to $30.9 million or $1.53 per diluted share reported in the third quarter last year.

Revenues in the core laundry operations for the third quarter were $327.8 million, up 4.6% from those reported in the prior year's third quarter. Excluding the negative impact of the weaker Canadian dollar which was 0.9%, as well as the positive contribution from acquisitions which was 0.8%, the core laundry operations revenues grew 4.7%.

New account sales continue to be strong and higher than a year ago. The largest driver of the sequential decline in our core laundry revenues has been reductions of wearers at our customers and energy-related markets.

During the quarter, we experienced significant reductions in these markets, including Texas and the surrounding states as well as Western Canada. Overall additions versus reductions, excluding these markets, were also slightly worse than a year ago.

Lost accounts are also running higher this fiscal year compared to last year which was a particularly good year for retention, partially due to these same macroeconomic factors. The core laundry operating income during the quarter increased 5.5% and operating margins increased slightly to 14.3% from 14.2% a year ago.

The margin benefited from lower energy costs during the quarter which was substantially offset by higher merchandise costs and administrative costs as a percentage of revenues. Energy cost decreased during the quarter to 4.3% compared to 5.6% a year ago due to lower fuel for our fleet of delivery vehicles as well as lower natural gas costs.

The revenue reductions experienced in the quarter were a contributing factor to the higher merchandise amortization as a percentage of revenues. Higher administrative costs were partially due to certain IT infrastructure investments as well as other miscellaneous expenses.

Revenues for the specialty garments segment for the third quarter which consists of our nuclear and decontamination and clean room operations, were $25.9 million, down 6.4% from $27.6 million in the third quarter of 2014.

This decrease in revenues was due primarily to fluctuations in foreign currency exchange rates on this segment's European business as well as certain Canadian customers.

Despite the lower revenues, this segment was able to match its income from operations from the same quarter a year ago of $4.0 million due to strong cost controls as well as a more profitable mix of projects during the quarter.

Our First Aid segment produced another solid quarter of results, with revenues increasing 5.6% and operating income increasing to $1.4 million compared to $1 million in the third quarter of 2014. UniFirst continues to maintain a solid balance sheet and financial position.

Cash and cash equivalents at the end of the quarter totaled $235.7 million, up from $191.8 million at the end of fiscal 2014. Cash provided by operating activities year to date was $158.4 million, up 19.8% from a year ago and capital expenditures were $82.3 million.

We continue to invest in our Unity 2020 CRM systems projects as well as planned updates, expansions and automation that will enable us to achieve our long-term strategic objectives. We expect capital expenditures for fiscal 2015 to be approximately $100 million.

Year-to-date, the company has also spent $19.8 million on several small acquisitions, primarily in our core laundry operations. We continue to look for additional acquisition targets, as acquisitions remain an integral part of our overall growth strategy.

Of our cash on hand, $56.7 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.

At this time, we would also like to update you regarding the New England Compounding Center or NECC, matter. As you will recall from our past disclosures, NECC was a pharmaceutical company that made and sold tainted drug which was reported in a widespread outbreak of fungal meningitis and other infections.

Our UniClean division provided limited once-a-month cleaning services to portions of NECC's clean room facilities. As we previously disclosed in the second quarter, we along with our insurers agreed to a $30.5 million settlement to be funded entirely by our insurers.

We're happy to confirm that this settlement, together with the orders of the bankruptcy court that release us in full and bar all persons from asserting any claims against us relating this matter, are now final and not subject to any appeals.

While we believe the quality of our service we provided NECC was appropriate and we were not responsible for the contamination of NECC's drugs, we're pleased to put this matter behind us. As always, we would now like to provide you with an update regarding our outlook for the remainder of the year.

As Ron mentioned, our revenues over the remainder of the year and into fiscal 2016 will be negatively impacted by reductions in wearers that we have already experienced in energy-related markets in the U.S. and Canada. And this will cause our organic growth to continue to decline.

Although the reductions have slowed recently, we do continue to experience them at higher-than-normal levels. Although some level of further declines have been built into our guidance, it is difficult to project how long and at what depth our results will be impacted.

We currently expect that revenues for fiscal 2015 will come in between $1.452 billion and $1.458 billion. Based on the strength of our third quarter profits, we're raising our earnings guidance for fiscal 2015 to a range of $5.90 to $6.00 per share.

As a reminder, our earnings guidance includes the impact of the $3.6 million environmental charge incurred during our second quarter.

Although we do not give guidance this far in advance for fiscal 2016, we do want to communicate that the economic slowdown in our energy-dependent markets, we currently anticipate that organic growth for our core laundry operations next year will be in the low single digits.

We look forward to update you on our thoughts regarding fiscal 2016 revenues and the related impact on our profits on our year-end earnings call in October. This completes our prepared remarks and we will be now happy to answer any questions you might have..

[Operator Instructions]. Our first question comes from Justin Hauke of Robert W. Baird. Please go ahead..

So topic du jour, I guess I just wanted to ask a little bit more on energy, just to help us kind of understand. Maybe quantify the impact of how much it is weighing on the top line. Do you have any metric on that or maybe a metric would be within your energy-related vertical.

How much is that down year over year? Or anything that can help us get our arms around it..

Justin, I think one way to look at it is if you look at our organic growth in the current quarter compared to the organic growth last quarter, most of that sequential decline was the result of energy.

So I think that should help you frame how much weekly business we've lost at this point and how much that is sort of impacting our year-over-year growth rates..

So something in the 3% to 4% range would be kind of the impact that it's having on the top line..

Well when you say 3% 4%, our organic growth last quarter for the laundries was 6.1%. And this quarter, it's 4.7%. So right now, it's 1.5% or so..

And then maybe just a little bit, since you did touch on talking about 2016, I think your guidance for the fourth quarter implies another sequential downtick from where you were in the third quarter. You're looking for 1% to 2% revenue growth roughly.

When you say low-single digits for 2016, is 1% to 2% more the pace that you are seeing as you look out or is there something unusual about the fourth quarter? I know you had a difficult comp with the growth rate last year..

Right. No, we certainly had a difficult comp related to the fourth quarter and again, sort of purposefully, I don't think we want to get into too much of 2016 because a lot can happen between now and when we typically talk about next year. But when we talk about low-single digits growth, 1%, 2%, 3% I think are all sort of in play.

There's a lot that can change where you end on that spectrum. Do the reductions continue? Like I said, we continue to see some reductions. How is our new sales performance over the next four or five months? Same thing with customer retention in our annual pricing adjustments.

So there is too many factors to say that whether it's 1% to 2%, 2% to 3%, 3% to 4%, where we're going to end up. But I think we did want to signal that what's impacted us thus far will have that year-over-year impact and we want to at least send that early signal..

And then maybe just one more, if I could throw it in there, just on overall pricing, I think there is been kind of a trend the last year or two with pricing being still competitive, but maybe a little bit less so than it was four or five years ago.

Has that changed at all with the dynamic you are seeing in the energy verticals? And if so, is it more broad-based or is it really just in the markets that are more impacted there?.

I would say that we've seen a little bit more competitive activity at some ridiculous prices and it's outside the energy market..

I think just to add to that, it is a little bit more broad-based. But you're right, in the energy markets, even the customers that remain are a little more price sensitive right now based on their profitability and what they can charge for their products..

We do have John Healy from Northcoast Research next. Please go ahead, sir..

Steve, I was hoping you could talk a little bit about the uniform garments on the energy side.

Could you just review for us kind of what the amortization schedules or life is for those garments? And was just trying to understand where we're at maybe in terms of energy costs today? Obviously, you quantified the benefit you got on the P&L offsetting some of the merchandise headwind.

But how do you see those two variables kind of running through the cost structure out the next three or four quarters? And when do you see, assuming energy costs are stable, it become more of a headwind rather than still a net positive for you guys?.

I think you asked a couple different things there. Just to make sure I understand, on the merchandise to start, we've talked about this over the years. We amortize our merchandise over an estimated useful life which can be, depending on the garments, between 15 and 24 months, primarily.

When you are losing volume, because of the way the whole industry amortizes merchandise, you can lose volume, you get those garments back, but they continue to amortize. And so in some cases, you do have garments amortizing without the revenue. Now the idea is that you can redeploy those garments as well to existing or other customers.

But that takes some time to get those garments redeployed. So I think that's part of the impact to why we're seeing some higher merchandise costs now. Now, as you can see from looking at our cash flow, we're also putting in less merchandise in service right now because our overall merchandise needs are less.

That will eventually start to work in over the next couple of quarters and cause our merchandise costs to flatten somewhat. And so it will sort of catch up with the trend of the depressed revenues and start to flatten out.

I think the second half of your question was related to energy cost fuel, John?.

Yes, exactly..

Yes, I think this quarter was sort of -- as I'm looking at it, sort of the peak of the energy benefit on the cost side. Because as you've seen, the cost of gasoline has turned and gone higher again, with some of the rebound of oil prices up to $60 a barrel from the bottom of $45 or so.

And so that's sort of an unfortunate timing item, because I think we got the benefit this quarter, but as we move through the next couple of quarters, the energy benefit won't be nearly as great because the revenues will be coming off even greater. And the energy costs, fuel in particular, has started to come back up.

So I don't have a particular number to tell you what the margin is going to do over the next couple quarters related to energy, but it won't have the same impact. And it's going to start to -- it won't be a headwind the next couple quarters, but it won't be as good of a benefit..

I was trying to think about those two variables and the net impact on you guys. I wanted to ask about the specialty business. Any sort of change in outlook for that business? I know that the last couple quarters have been hurt by some of the reactor activity.

And just wondering if you could give us some insight in terms of how you see that business trending the next four or five quarters..

I probably hesitate to give you too much of an answer. We meet with our management team over the summer to sort of schedule out the next year.

They did have a very strong spring; they were able to supplement their normal laundry rental work with some tool and metal decontamination projects which is something they've gotten into in the last several years. So I think they are optimistic, actually, over the next quarter or so.

And then as it relates to next year, we will have to get the outage schedules when we meet with the team and let you know next quarter. But bigger picture, they think there's some projects on the horizon; whether their second half of next year or beyond, that's what we need to try to nail down..

And I just wanted to ask, the balance sheet remains in great shape and the cash is there.

Any sort of updated view on how you might want to put some of that cash to work in the foreseeable future?.

I don't think our outlook has changed much. We're going to continue to invest in the company and look for acquisitions. And our second is stock buyback..

Thank you. And our next question comes from Andrew Steinerman of JPMorgan. Please go ahead..

It's about the S&A line which -- I don't think we've spoken as much about what's driving that in the quarter. The S&A line separate from D&A was at 19.8% of revenues; it was down sequentially in dollars from the February quarters.

Could you just go over are we going to stay at these levels as we go into the fourth quarter? What's implied in the fourth quarter in terms of the guidance of kind of S&A as a percentage to revenues?.

The sequential decline has somewhat to do -- if you remember, we took a charge last quarter on the environmental side. That would've been in the SG&A line. We did mention this year that some administrative costs were running a little higher than the year before. Some of those will stay with us; some of those were more maybe some timing items.

I would say probably next quarter; it will continue to be a little bit of a headwind, some of that just being impacted by the revenue dropping..

I'm really just saying that in the quarter, S&A was 19.8% of revenues.

As you look at the fourth quarter, do think it's going to stay at a similar level or go up from here?.

I think it will probably go up..

[Operator Instructions]. Our next question comes from Kevin Steinke of Barrington Research. Please go ahead..

Just wanted to follow up a little bit on the job losses among your energy-related customers, and I know you’ve seen some slowing there in terms of losses.

But would you be willing to talk a little bit about the month-to-month trends you saw throughout the quarter and what you've seen thus far in June?.

We've had a couple of weeks that seemed to indicate it was slowing somewhat, but not enough to sort of declare that we've seen the bottom.

Talking to some of our managers down that part of the country, they are sort of hearing from their customers that things are sort of stabilizing a little bit, so we sort of expect to see maybe that bottom hit pretty soon. Through the quarter, though it was fairly consistent. I wouldn't say it slowed toward the end of the quarter.

It's only really been in the last couple weeks that we've seen some lower amounts. But again, amounts that are still negative and greater than what we'd consider a normal amount..

Just to add on to what Steve is saying, it's just that the oil and gas guys, it's the support industries that supported the energy industry, pipe manufacturers and so forth. So it's a little deeper than one tends to realize..

We've sort of been characterizing that as energy-related customers, but it's not just the oilfield accounts, as Ron is indicating. And that's where we still may see some trickle effect continue is in those markets where the overall economic activity has decreased.

Those downstream impact customers probably hold out longer before they start cutting back..

And I think you mentioned in the prepared comments again the focus on new account sales and particularly going after the no programmers.

What are you seeing in terms of your ability to win those no programmers? And has there been any meaningful shift in kind of the percentage of your new account wins that are no programmers?.

At this point, Kevin, it's remained relatively consistent with our historic past. It's a 60/40 split..

You also mentioned healthcare costs.

How have they impacted you thus far in fiscal 2015 and what do you expect going forward?.

We've actually been fairly pleasantly surprised. They have run higher than a year ago when we made some changes to our plans, but they have not had quite the dramatic impact that we potentially feared. So I would say they have been up slightly as a percentage of revenues.

What do we expect going forward? We're still feeling our way through the first year of a new plan. So it's difficult to say. Right now, I would sort of expect them to be slightly higher as a percentage of revenues. But overall, I think we're more pleased than the potential outcome could have been..

Lastly, you mentioned you spent a little bit on acquisitions year to date.

Does that indicate anything at all about perhaps a loosening of the acquisition environment? Or is it kind of as you've characterized over the last few quarters?.

I think it's similar. We've seen a little bit more activity on some of these smaller maybe one plant operators. We've seen a little bit more interest and activity. But really, I would say when you get into the sort of larger regional players that we're certainly interested in, there hasn't been a lot of change..

[Operator Instructions]. And Mr. Sintros, we have no further questions at this time, sir. I'll turn the call back over to you..

Very good. Thank you, Tina. This is Ron. We would like to thank you for all your participation and interest in our company. We look forward to speaking to you again in the fall, when we will be reporting on UniFirst's fourth quarter and year-end results for 2015. Thank you for the interest in our company 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 all lines. Thank you and have a good day..