Ladies and gentlemen, thank you for standing by, and welcome to the second quarter earnings call. [Operator Instructions].

I would now like to turn the conference over to Steven Sintros, Chief Financial Officer. Please go ahead. .

Thank you, and welcome to the UniFirst Corporation conference call to review our second quarter results for fiscal 2016 and to discuss our expectations going forward. I'm Steven Sintros, UniFirst's Chief Financial Officer. Joining me is Ronald Croatti, UniFirst's President and Chief Executive Officer. [Operator Instructions].

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 10-K filing with the Securities and Exchange Commission..

Now I will turn the call over to Ron Croatti for his comments. .

Thank you, Steve. I'd like to welcome everyone on the line joining us for this review of UniFirst's second quarter and the 6 month year-to-date financial results for fiscal year 2016. Steve will be covering all the details. But first, I'd like to provide you with a brief overview of our performance. .

UniFirst's revenues for the second quarter of fiscal 2016 were $363.1 million, an increase of 0.5% from the $361.5 million reported for the second quarter in 2015. However, if we remove the negative impact of foreign currency fluctuation related to continuous weaker Canadian dollar, quarterly revenues were up 1.6%.

6 months year-to-date revenues were $736.5 million, a 0.6% increase over the 2015 midyear mark. .

Net income for the quarter was $23.5 million, a 7.7% decline from the $25.4 million net income reported for the same period a year ago. And similarly, net income for the first 6 months of the year fell short of the 2015 midyear mark by 5.5%. .

Our Core Laundry Operations, which make up about 90% of UniFirst's total business, reported a 0.2% decline in revenues and 11.7% decline in operating income when compared to last year second quarter.

Unfortunately, despite once again reported solid new sales results in the second quarter, our laundries also continued to experience significant weekly uniform wearer losses and lost accounts in our energy-dependent markets as well as those industries that support them.

The lion's share of those losses were a direct result of lower energy prices worldwide and continued concentration in Texas and energy-related markets in the U.S. as well as Western Canada. In fact, the wearer losses accelerated in the second quarter from the first quarter.

These setbacks have been especially challenging for us as we benefited from holding particularly strong market positions in these areas in recent years.

As we mentioned in the past, these losses have a cumulative effect on our recurring revenue and have a negative impact on our adds over reduction metrics, all affecting the top and bottom line of both our Core Laundry in our company. .

Adding to the second quarter headwinds, the continued weakness of the Canadian dollar versus the U.S. dollar as well as a significant spike in quarterly healthcare costs, our employee team partners provided significant financial challenges from our primary business lines [ph]..

On the plus side, our Specialty Garments segment, which is our specialized nuclear cleanroom unit, reported solid gains for the quarter in both revenue and operating income when compared to the same period in 2015.

And our First Aid and Safety segment also reported solid financial results for the second quarter despite also being negatively impacted by pullbacks in the energy market. .

So as we look ahead to latter half of 2016, we remain optimistic that our team partners will again rise to the many challenges as they've always done, allowing us to ultimately report solid financial results for fiscal year 2016.

We also hope that recent oil price, that have been trending higher around the world, will bring some stabilization to the energy-related uniform wearer losses, allowing us to spend less time managing the deficit and to, once again, focus our full attention on executing our short and long-term growth plans and bring returns to all our UniFirst shareholders.

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We also are hopeful that solid national job gains we saw in February were not an anomaly but a singular positive trend that will ultimately translate into ongoing organic uniform demand increases. So we're watching the national employment situation very closely in the coming months in anticipation of capitalizing on additional sales opportunities.

As always, we'll be counting on our field and National Accounts sales team to intensify their efforts and continue to improve the business results through innovative sales programs, skills training and professional consultative selling, while I'm sure that our local operations throughout North America and Europe continue performing as efficiently as possible and controlling costs in these areas, but never to the point of sacrificing service levels to our customers.

And of course, we expect our service teams from coast to coast to remain focused on each and every customer, striving to ensure every one of the unique business needs is being met and every expectation is being exceeded in order to make their customers more [indiscernible]. .

With that, I will turn it back over to Chief Financial Officer, Steve Sintros, for all the details of UniFirst's second quarter and 6 months' results as well as our expectations for the remainder of the year. .

Thank you, Ron. Revenues for the quarter were $363.1 million, up 0.5% from $361.5 million in the year-ago period. Net income was $23.5 million or $1.16 per diluted share, down 7.7% from $25.4 million or $1.26 per diluted share in the second quarter of fiscal '15. .

As a reminder, the results in the second quarter of fiscal '15 included a $3.6 million charge to selling and administrative expenses to increase the company's environmental contingency reserves. Excluding the effect of this item, net income for the second quarter a year ago would have been $27.7 million or $1.37 per diluted share.

In addition, the comparison of net income to the prior year was impacted by higher effective tax rate in the current quarter compared to a year ago. .

The effective income tax rate in the current quarter was 39.7% compared to 38.5% a year ago. This increase is due to a change in the mix of jurisdictional earnings, primarily related to a reduction in expected profits in our Canadian operations, which has a lower tax rate than our U.S. operations.

We now expect our effective income tax rate for the full year to be approximately 39%..

Core Laundry revenues in the quarter were $331.4 million, down 0.2% from those reported in the prior year second quarter. Adjusting for the effects of acquisitions and a weaker Canadian dollar, revenues grew 0.5% for this segment.

The weaker Canadian dollar negatively affected our Core Laundry Operations growth rate by 1% compared to the second quarter of 2015. .

As Ron mentioned, our growth during the second quarter continued to be impacted by the loss of uniform wearers and customers in energy-dependent markets in the United States and Canada.

In fact, during the quarter, uniform wearer reductions have accelerated from levels experienced in our first quarter and were slightly higher than any quarter during fiscal 2015. This is a signal to us that we may not yet have hit the bottom of this economic cycle as it relates to the impact that lower energy prices are having on our customer base.

We continue to sell a solid amount of new business, lagging slightly behind where our new sales were a year ago at this time. .

Excluding the environmental charge in the second quarter of fiscal '15 I discussed earlier, our Core Laundry operating margin decreased to 10.9% from an adjusted operating margin of 13.4% a year ago.

The largest driver of the margin decline was significantly higher healthcare claims during the quarter compared to a year ago, which impacted our margin by full 1%. In particular, a much higher number of large claims, which we define as claims greater than $50,000, drove these costs higher.

Merchandise as well as many of our other costs were also higher than the prior year, which negatively affected -- which negatively impacted the margin further due to the lack of top line growth in this segment.

Bad debt expense was also higher during the quarter, primarily due to concerns regarding amounts owed by energy and energy-related companies, many of which are experiencing financial difficulties. These items were partially offset by lower energy expenses during the quarter compared to a year ago.

Energy cost decreased during the quarter to 3.9% of revenues compared to 4.6% a year ago, due to lower fuel costs for our fleet of delivery vehicles as well as lower natural gas cost for our production facilities. .

Revenues for our Specialty Garments segment, which consists of nuclear decontamination and cleanroom operations, were $20.5 million, up 9.6% from $18.7 million in the second quarter of fiscal '15.

Due primarily to the improved revenue performance, this segment's income from operations increased to $1.1 million in the quarter from a loss of $0.4 million in last year's comparable period.

As a reminder [indiscernible] from our Specialty Garments segment can vary significantly from quarter-to-quarter due to seasonality as well as timing of reactor outages and related projects.

We continue to expect that this segment's results for the full year will meet our original expectations with revenues coming in about 5% higher than the full fiscal 2015 and the segment's operating margin coming in at approximately 10%. .

Our First Aid segment reported revenues of $11.3 million in the second quarter, up 5.1% from the same quarter a year ago, and operating income from this segment decreased to $0.9 million compared to $1.1 million in the second quarter of fiscal '15. .

UniFirst continues to maintain a solid balance sheet and financial position. Cash and cash equivalents at the end of the quarter totaled $335 million, up from $276.6 million at the end of fiscal '15. Cash provided by operating activities year-to-date was $105.5 million, down slightly from $107 million a year ago.

Although lower net income impacted cash flow levels, they benefited as anticipated from a lower demand for inventory and merchandise and service, which is typical for our company in times of slower growth. Year-to-date, we utilized $44 million on capital expenditures.

We continue to invest in new facility additions, expansions and automation that will help us meet our long-term strategic objectives. We continue to expect capital expenditures for fiscal 2015 to be approximately $100 million.

Although we did not close on any sizable acquisition so far this year, we continue to look for good acquisition targets as acquisitions remain an integral part of our overall growth strategy..

Of our cash on hand at quarter end, $56.2 million has been accumulated by our foreign subsidiaries and is intended for future investments outside the United States. We also continue to have significant capacity under our existing bank line of credit to fund potential acquisitions or other capital allocation options.

Although our line of credit expires shortly, we're in the process of renewing the line to ensure we maintain our financial flexibility.

With top line growth a challenge, we will continue to vigilantly focus on cost controls and as a result, we are optimistic about our ability to continue generating significant free cash flows and ultimately deliver value to our shareholders. .

As reflected in our press release earlier today, we've adjusted our full year guidance downward to reflect the continued impact of the struggling energy-dependent markets on our customers that we service across the country.

This new guidance also reflects the higher than anticipated healthcare claims incurred in the first half of the fiscal year as well as a higher effective income tax rate. We now believe that full year fiscal 2016 revenues will be between $1.455 billion and $1.467 billion, and that our full year diluted EPS will be between $5.45 and $5.65.

This guidance, particularly at the lower levels, does allow for some further deterioration in our wearer base as we continue to experience these reductions at much higher than normal levels. This guidance also seems a more modest increase in healthcare claims in the balance of the year compared to the second half of fiscal '15. .

This completes our prepared remarks, and we will now be happy to answer any questions that you may have. .

[Operator Instructions] And our first question comes from the line of Andrew Wittmann from Robert W. Baird & Co. .

I was hoping you could help us understand in a little bit more detail the impact of the energy business.

Steve, can you talk about what that meant to the top line the energy headwinds that you saw in the quarter? How much of a hefty growth that was?.

Sure. It's a very difficult thing to quantify accurately, Andrew, but our estimates would have our growth -- organic growth being about 3%, if not, for the reductions we have experienced over the last several quarters that all sort of accumulate to impact this quarter's growth.

So that's probably the best estimate we can give to the top line impact at this point. .

Okay. And just given that, 3% growth rate-ish, can you talk about -- I mean, you mentioned, I think, account losses in the prepared remarks. Obviously, that was a little bit new, I thought; the fact that add stops were negative is not.

Can you talk about the account losses? Was that energy patch related, too? And can you just talk about how your overall retention rate is affecting that growth rate? Do you feel like retention is a fact and that your growth rate isn't maybe closer to the peer levels because of retention?.

I wouldn't say that the Delta is made up by retention. We will say that the higher lost accounts is partially energy patch related. Nonenergy patch related, they're probably running a little bit higher than last year.

Last year was, on average, a little bit -- of a better-than-average year for our retention, and this year, even excluding energy patch, it's probably a little bit worse.

I don't think there's any particular trend necessarily there, but in different years it tends to run a little bit higher or lower, but we're not that far off the median to say that that's a significant driver of the gap. .

Okay. Maybe one other question, then, focusing on the top line. You mentioned good sales force productivity. I guess, new account sales are -- you mentioned that overall sales was good. I guess, the question there is, how good? Over the last couple of years there were points where we're at record levels.

I don't expect that's the case today, but where are our sales, our new sales production? Are we down 5%, 10% year-over-year? I'm just kind of curious as to how the sales trends are going. .

All right. Andrew, this is Ron. Our new sales are down about 3%. .

Got it. Sorry, I have a lot of questions here. I will do one more now and then probably jump back in queue to give some help to other people here. Can you give us some details, then, on the healthcare costs? 100 basis points seems like a lot; it seems like it was kind of lumpy. You're expecting it to moderate.

Is there anything else structurally going on in the healthcare costs that you're seeing? Or do you think this is really a 1 quarter issue that's more likely to normalize?.

Just a little background there, which we talked about probably a year ago at this time. About a 1.5 year ago, at the beginning of our fiscal '15, we made some changes to one of our health plans to become in compliance with the Affordable Care Act.

Part of that change was taking one of our lower cost plans and providing uncapped coverage, whereas previously that coverage was capped. The Affordable Care Act does not allow for capped plans. And so if you remember, we were concerned that the uncapping of that plan would cause some larger claims to sprinkle through our experience during fiscal '15.

Now during fiscal '15 we did not see a significant increase in those large claims, although we did experience some. In the first quarter this year, we had some increase, but not too dramatic.

Really in the second quarter, and as I alluded to in my comments, the increase really -- the delta from a year ago was solely related to a handful, or maybe more than a handful, large claims. And so we expect that to moderate. To what extent we're not really sure.

In our guidance, we have built in sort of a more modest increase in the second half of the year, and we do expect these large type claims to come and go from time to time, but not to sort of hit the way they did in our second quarter. So we certainly are optimistic that this is more of an anomaly, but it's something we're closely watching. .

And our next question comes from the line of Joe Box with KeyBanc. .

So Steve, can you maybe just help us bridge the $0.15 gap between the new guidance and the old guidance? I'm coming up with about $0.10 of headwind from claims. It sounds like maybe there is a little bit of that, that bleeds into the back half of the year, also coming up about $0.03 from tax.

So how much of that is going to continue in the back half? And then how much incremental headwind are we thinking from oil and gas? And is there a positive impact from FX?.

Sure. So I think you're on the right track there. You're about -- it's about $0.04 on the tax rate. The healthcare, depending on where we come in later in the year, but really even just from the impact so far this year, it's probably about $0.06 or so compared to our expectation.

And then the delta there is really related to what I'd call worse-than-expected performance in the energy markets during the second quarter. As we came into the second quarter, we were sort of cautiously optimistic that those reductions may be moderating as we mentioned in our comments.

That did not happen, and they sort of picked back up during the quarter. So that revenue shortfall will translate into some profit headwind as well. So it's really those 3 pieces are the significant drivers of the change in guidance. .

And then just remind me, on the FX side, what were you guys modeling last quarter versus this quarter?.

Yes. During the quarter the FX dropped more significantly than anticipated, but it did rebound. And so as far as the FX goes, not a real significant driver in the change of full year guidance. .

Okay. I appreciate that.

And then given a step down that you alluded to in the oil and gas sector, how should we think about the core uniform margin cadence maybe as we move to the next 12 to 18 months? Curious if there is really any levers out there that you can pull to maybe drive some margin improvement in that business? Or are we basically just looking at the revenue headwinds and maybe some of the merchandise amortization expense offsetting some of those levers?.

I think you hit it on the head. But it really depends on when we sort of get to the bottom of the cycle here and when we can start to stabilize the volume levels and start to return back to growth and have our new sales sort of take hold and start that growth again.

Another 3 to 6 months of sort of reductions at the levels we had will give me one answer to your question, whereas if they sort of stabilize in the next couple of months, it will be a much different answer. The merchandise, as you said, should continue to come in line if we see -- continue to see softer wearer levels.

And then I think from there, it really depends on where we can get the growth rates back to given the reductions. .

I appreciate that. And then maybe just one last one on the oil and gas sector.

I mean, if you look at the actual number of energy employees that are coming out of the market, that's hitting your add quit [ph] relative to maybe the contagion effect, the hotel employees, the manufacturing employees, the people that support the energy market, have you noticed any sort of a change in that mix as we start to move maybe into the later innings of this energy contraction?.

I think I would say -- and the best way for us to look at it is sort of geographically, and I think, we were seeing more of a heavy impact in the pure oil and energy markets like West Texas and so on earlier on in the cycle.

And I think, we are starting to see the impact spread out a little bit more, which I think is, is the effect that you're speaking to, that it is sort of trickling down to the other industry.

So I think we're probably further along in the cycle, and as Ron alluded to, if energy can tick back up and break and sustain $40, I think some of these companies may stabilize. But if it trickles down into the low $30s, there may be other shoes to drop from some of these companies that have to make further cuts. .

And the next question comes from the line of Chris McGinnis with Sidoti & Company. .

I guess, just 2 questions. One to follow up on the energy. I guess, the worsening kind of trend, was that through the quarter.

Did that -- was it materially worse exiting the quarter? And can you maybe just talk about that a little bit more, how it played out?.

Sure. Yes. I wouldn't say that it differed materially during the quarter, Chris. It probably picked up in the January time frame and has continued right through the end of the quarter. .

All right. And then just second. I know you kind of -- it's not too much of a concern, but just on the lost accounts.

Is pricing playing effect [ph] or just kind of maybe due to the energy-related markets and people fighting for share? Is that starting to come about [ph]?.

I don't -- I think so. I don't think it's anything -- any dramatic change in trend. There are always some losses to competitive pressures and maybe those have ticked up a little bit. But I think it's just sort of a down year to exacerbate the issues with the energy. .

And the next question comes from the line of Kevin Steinke with Barrington Research. .

Kevin Steinke, Barrington Research.

The modest decline in new account sales that you talked about, 3%, would you tie that to the energy markets as well?.

Well, I think not specifically, Kevin, but there certainly is some impact. When you look at the sales that we sold last year and the year before, there were certainly energy companies in that mix that were not selling new business of now.

I think, Ron, if you want to add to that?.

No. I think Steve is absolutely correct. Our primary 2 regions that are in the oil business are West Texas area and New Mexico and Oklahoma and then Edmonton, and the sales in those areas have really dropped off, and that's the impact. .

Okay. Makes sense. .

It's hard for you guys to relate, but you go to Midland, Texas and Odessa, Texas, there is a recession down there. .

Yes. Yes. Okay. Got it.

Outside of energy, do you feel like you're still getting your fair share of no-programmer new account wins and expanding the market in that sense?.

I think, as I have said before, we were about a 60/40 split, about 60% competitive, 40% no-programmer, and those ratios have basically stayed intact. .

Okay, okay. Good. So I think, Steve, last time you were talking about maybe -- on the last call talking about Core Laundry organic growth picking up just a little bit in the second half of '16 has maybe lapped some more difficult comps.

I mean, is that still what you're assuming for Core Laundry, or has that outlook changed a little bit given the greater wearer reductions?.

Kevin, I would say it has changed a little bit in the model, sort of at the midpoint. You will see -- or you should see some incremental improvement in the third and fourth quarter, but it's more muted compared to what we were projecting earlier in the year and that -- and like you said, that's because of the continued reduction.

So right now, I think our organic growth for the Core Laundry was a 0.5% in the second quarter. And sort of at the midpoint of our guidance, I think it assumes about a 1% organic for the second half of the year sort of growing.

But again, some of that is dependent on these reductions slowing at some point, and that's why the lower end of our ranges reflect some more reductions coming out of numbers. .

All right. And what about the Core Laundry operating margin assumption for the year? I think you were talking about 13% on the last call.

Has that changed?.

Sort of at the midpoint of the range, it's a little short of that at this point, and that's, again, largely due to the healthcare situation. .

[Operator Instructions] The next question comes from the line of Andrew Wittmann with Robert Baird. .

So Steve, you mentioned garments had year-over-year impact on margins.

Can you quantify that for us? And then specifically, maybe address or comment on the impact of garments that went in service, but are no longer in service and have no attached revenue to them effect as well as the effect of new garments going into the service for areas that are growing?.

Yes. I think your overall question is around merchandise amortization and that headwind was about 0.5% in the quarter. And it was certainly very difficult to quantify, but certainly there is an impact of garments coming out that aren't going back into service. We draw the analogy to 2009 and that recessionary period, which was a broader recession.

We had a lot of garments coming out in a broad range of styles and types that we could easier -- more easily redeploy since all the -- or most of the garments coming out in this cycle are specific flame resisting garments. Those can't be as easily deployed.

And there was certainly a excess of garments in merchandise and service that are out of service that continue to amortize. We will work our way through that cycle over the next 6 months or so, and you should start to see some drop in the merchandise.

Now I will say, we do continue to put in merchandise for new accounts and other customers, and some of our merchandise headwind came from a couple of larger national accounts that went through image changes during the year that we needed to make some reinvestments of garments into.

So we'd probably be seeing a little bit more of a help on the merchandise side, if not for some of those infusions of garments. .

Does that mean that you're having to amortize the old garments as well as the new garments? Or just that you had to buy them all new garments and so your overall merchandise line item just went up because they're new garments instead of old garments?.

That's correct. So the old image is sort of working its way through and as we readdress it, it sort of drives the increase because there is more new garments in the account. .

Okay. On CRM implementation, I guess I would like a status update on kind of where we're on that.

Are we still kind of going live early in the next fiscal year? And any update that you have on the cost associated with that when it goes live in terms of depreciation, SG&A costs associated with roll out? I think an overall status update on that would be helpful. .

Sure. The CRM project continues to move along. We continue to make solid progress. At this point, it will not be early in the fiscal year, probably closer to the second half. But at this point, I hesitate to give you an exact time line as we continue to move along here.

The financial numbers that I'd given previously, which was sort of in that $8 million to $9 million depreciation range, are still holding. So right now, it's not as much of an issue that the cost expectations are changing significantly. It's more of a time issue as we continue to work through with the testing of the system. .

Got you.

SG&A cost associated with that in terms of transition cost, consultants training, that will be born as you get closer to that implementation date as well?.

We haven't sort of finalized those projections, and we will provide those as we get closer to that point. .

Okay. My last question is for Ron. Ron, with the balance sheet here over the last couple of quarters, you talked about interest in doing a share buyback. We haven't seen it yet.

Wondering, in your mind, what's preventing you from implementing that, or how you're thinking on the potential buyback is evolving?.

I think it's coming down -- do we want to be opportunistic in this whole deal? Keep in mind that our #1 thing is to use the money for acquisitions. .

Okay. So is that suggesting that the buyback is not on the table at the moment and that there are acquisitions or -- last quarter, it sounded like you had a little bit more conviction, little bit more desire to do the buyback. Here it sounds like kind of not really there.

I was wondering, is there a change from what you were thinking last quarter?.

I don't think there's a change, Andrew. I think we have seen a little bit of an uptick in acquisition activity in targets that seem like they may become available. But I don't think our overall strategy changes. It's still acquisitions first, and I think that we'll continue to evaluate the buyback.

And I think we can't tell you whether that's imminent or coming 3 or 6 months from now, but it's something that we acknowledge is next in line and something we have to continue to consider. .

The next question comes from the line of Kevin Steinke from Barrington Research. .

Just one follow-up question. You talked about wearer reductions being incorporated into your guidance.

Just wondering, what the level of reductions are that you are assuming? Are you assuming at the levels that you experienced in the second quarter continue maybe on the low end of that range or how -- and some improvement on the high end? Just kind of put some kind of a range around the wearer reductions you are expecting there. .

That's probably fair, Kevin. I think at the high end of the range, certainly, it expects some moderation here over the next quarter or so. And at the low end, at the levels that we experienced in the second quarter, we'd probably be pushing the low end if those went right through the end of the year.

But yes, it's sort of a more status quo gets you to the lower end of the range. .

Gentlemen, there are no further questions at this time. .

Okay. My turn. All right. We'd like to thank everyone for joining us to review UniFirst's latest financial results for fiscal 2016. We look forward to updating you again in June, when we're reporting our third quarter numbers. 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..