Ronald D. Croatti - President and CEO Steven S. Sintros - SVP and CFO.

Joe Box - KeyBanc Capital Markets Andrew Wittmann - Robert W. Baird & Company Andrew Steinerman - JP Morgan Christopher McGinnis - Sidoti & Company, LLC. Kevin Steinke - Barrington Research.

Ladies and gentlemen, thank you for standing by and welcome to the UniFirst Corporation Third Quarter Earnings Call. During the presentation, all participates will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions]. I would now like to turn the conference over to Mr.

Steven Sintros, Chief Financial Officer. Please go ahead sir..

Thank you and welcome to the UniFirst Corporation conference call to review our third 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.

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 the discussion of these risk factors in our most recent 10-K filing with the Securities and Exchange Commission. Now, I would like to turn the call over to Ron Croatti for his comments..

Thank you, Steve. I would like to welcome everyone joining us today to review UniFirst third quarter fiscal results for fiscal year 2016. I begin by providing you with a brief summary on our overall performance and I will pass it back over to Steve who will be covering all the details.

UniFirst revenue for the third quarter of fiscal 2016 set a new record in $367.8 million, an increase of 0.6% from the $365.6 million reported for the same quarter in 2015. Net income for the quarter was $30.1 million, a 7.2% decline from the $32.5 million net income reported for the same period a year ago.

Our Core Laundry operations, which make up the bulk of UniFirst's total business at about 90%, reported a 1.1% increase in revenues setting a new third quarter revenue record and an 8.8% decrease in operating income when compared to last year's third quarter.

During the quarter our laundries continued to experience measurable weekly uniform wearer losses and lost counts in our energy dependent markets are of particular significance. We also experienced increased losses with many of our business customers that support the energy industry.

In addition to the energy related losses, UniFirst was challenged by a fiercely competitive playing field to reflect the new customer approach and a continued weaker Canadian dollar exchange rate that impacted our bottom line.

Although there was strengthening of the Canadian dollar during the quarter, the value was still below the same quarter a year ago. But through it all our professional sales and national accounts sales organization led the challenge for this segments revenue growth by stepping up to post solid new sales results for the quarter.

Our specialty garments segment, which encompasses our specialized nuclear and clean room services reported a drop off for the quarter in both revenue and operating income when compared to the same period in 2015. However the year-to-date results for revenue and income remained up over last year.

Because of the cyclical nature of this business segment, the results were lower than anticipated. In the First Aid and Safety segment this unit reported record revenues for the third quarter as well as solid growth in operating income.

So looking ahead to the fourth quarter in closing out UniFirst's fiscal year 2016 we continue to watch the energy sectors very closely and we will make any required strategy adjustments at Florida.

We do however expect these industries to achieve greater levels of stability as we move forward, although the exact timing of this stability remains uncertain.

We also expect our thousands of employee team partners to once again answer the call to overcome the market adversities in a competitive marketplace by continuing to implement our back to basic business approach concentrating on the key factors that weren’t in our control to further rate our top and bottom lines.

These include satisfying our large customer base and increasing business referrals through unwavering service excellence.

Selling aggressively in a constructive manner into existing and new markets and maintaining smart cost controls in all our operations and to support bottom line by never sacrificing service levels and required quality to our customers.

By adhering to these basics we anticipate reporting another year of growth for UniFirst Corporation in 2016 with all three business units positively contributing to the growth.

That said we remain confident that the future of UniFirst is bright and that we will continue delivering annual returns to our shareholders, our UniFirst family members throughout North America and Europe. Now I would like to turn the call back over to Steve, Chief Financial Officer for the third quarter's financial details. .

Thank you, Ron. As Ron mentioned revenues for the quarter were $367.8 million, up 0.6% from $365.6 million in the year ago period. Net income was $30.1 million or $1.49 per diluted share, down 7.2% from $32.5 million or a $1.61 per diluted share in the third quarter of fiscal 2015.

Core Laundry revenues in the quarter was 331.2 million, up 1.1% from those reported in the prior year's third quarter. Adjusting to the effects of the acquisition in a weaker Canadian dollar, revenues grew 1%.

Although it did strengthen during the quarter, the Canadian dollar negatively affected our Core Laundry operations growth at 0.3% compared to the third quarter of fiscal 2015.

As Ron mentioned, our growth during the quarter continued to be impacted by the loss of uniform wearers and customers in energy dependent markets in the United States and Canada over the last 12 months.

These reductions of wearers have continued at similar levels to those experienced in recent quarters and to date have not begun -- yet begun to slow down.

Although we were cautiously optimistic that the recent increase in oil prices may help to stabilize employee levels in our customer base, we have not yet seen this translate into our actual results. In addition new sales although solid continued to lag slightly behind last year's performance.

Our Core Laundry operating margin decreased to 12.9% from an operating margin of 14.3% a year ago.

Many of our cost relating to operating our processing facilities as well as overall selling and administrative expenses and depreciation were higher than the prior year which negatively impacted the margin due to the lack of top line growth in this segment.

Bad debt expense was also high during the quarter primarily due to concerns around amounts held by our customers in energy and energy related industries that are experiencing financial difficulties. These items were partially offset by lower energy expenses and legal cost during the quarter compared to a year ago.

Energy cost decreased during the quarter to 3.8% of revenues compared to 4.3% a year ago, due to lower fuel cost for our fleet of delivery vehicles as well as lower natural gas cost for our production facilities.

Revenues and operating income in the quarter for our specialty garment segment, which consists of nuclear decontamination and clean room operations were down 6.9% and 11.7% respectively compared to a year ago.

As a reminder the results from our specialty garment segment can vary significantly from quarter to quarter due to the seasonality and timing of reactor outages and related projects. Through the first nine months of fiscal 2016 this segment has produced solid results with revenues and operating income growing 6.4% and 53.3% respectively.

We continue to expect this segment's results for the full year will approximate our original expectations with revenues coming in about 4% higher in fiscal 2015 and the segment's operating margin coming in at approximately 10%. Our First Aid segment reported revenues of $12.5 million in the third quarter up 4.6% from last year's third quarter.

Operating income for this segment also increased to $1.6 million compared to $1.4 million a year ago. UniFirst continues to maintain a solid balance sheet and financial position. Cash and cash equivalents at the end of the quarter totaled $347.6 million, up from $276.6 million at the end of fiscal 2015.

Despite lower income levels cash provided by operating activities year-to-date increased 1.7% due to lower cash outflows for working capital needs compared to last year. Year-to-date we utilized $72.1 million on capital expenditures.

We continued to invest in new facility additions, expansions, and automation that will help us meet our long-term strategic objectives. This quarter we opened a new state of the art facility in Baton Rouge, Louisiana and we expect to open another new laundry production facility in New Jersey by the end of the fiscal year.

These facilities are good examples of the investments that UniFirst continues to make not only in future growth but also in our ability to provide high quality service to our customers. We continue to expect capital expenditures for fiscal 2016 to be approximately 100 million.

During the quarter we also closed on an acquisition of a one plant industrial laundry operation in Chattanooga, Tennessee. We are excited about bringing this business into the UniFirst family and the opportunities it will provide for us in that part of the country.

As always we will continue to look for good acquisition targets as they remain an integral part of our overall growth strategy. Of our cash in hand at quarter end, $55.2 million has been accumulated by our foreign subsidiaries and is intended for future investments outside the United States.

During the quarter we renewed our existing line of credit to help ensure that we maintain our financial flexibility to fund potential acquisitions or other capital allocation options.

As we have expressed previously with top line growth a challenge we 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 delivering value to our shareholders.

As always we’d like to take this opportunity to update you on our outlook for the remainder of our fiscal year. We currently expect that fiscal 2016 revenues will be between $1.460 billion and $1.470 billion and that our full year diluted earnings per share will be between $5.45 and $5.65.

As I mentioned earlier we continued to experience wearer reductions at higher than normal levels which continues to be a headwind with respect to our top line performance.

Despite this ongoing challenge the acquisition that we closed as well as the slight strengthening of the Canadian dollar both during the current quarter had allowed us to increase our low and high end of our previously communicated range.

As you may have also have noted, during the quarter on April 23rd the company entered into a new long term employment agreement with Ron Croatti, UniFirst President and Chief Executive Officer. It ensures he will remain in his current position for the next four years.

The agreement provides Ron with the ability to earn up to 140,000 shares of restricted common stock. Shares are based on the achievement of performance criteria for fiscal 2016, 2017 and 2018. Once in the shares we will invest 50% on each of the third and fourth anniversaries of the grant.

Under the accounting rules compensation expense related to this grant is only recognized if it is deemed to be probable that the required performance criteria will be satisfied.

As a result the company will assess over the performance period the probability that these criteria will be met and adjust the life today compensation expense recognized accordingly.

It is expected that stock compensation expense related to these grants recognized in the fourth quarter of fiscal 2016 be approximately 0.7 million or $0.02 per diluted share. Stock compensation expense recognized in fiscal 2017 and beyond will depend on the company’s assessment of the likelihood that these performance targets will be achieved.

Based on the company’s current assessment, stock compensation expense recognized in fiscal 2017 will be approximately 2.9 million or $0.09 per diluted share.

Actual compensation expense for fiscal 2017 could rise as high as 5.1 million or $0.15 per diluted share if it was determined during the year that it was probable that the highest level of performance criteria for all periods would be achieved.

In addition to higher stock compensation expense, looking ahead to fiscal 2017 we expect our results to be impacted by increasing labor cost primarily the result of increasing minimum wages in many parts of the country, as well as the recent update to the Fair Labor Standards Act which has expanded the pool of employees who are eligible to receive overtime pay.

In addition fiscal 2017 will likely bare additional costs associated with the continued effort to complete our CRM systems project. We expect to have more detailed projections regarding the impact of these items on our fiscal 2017 results as part of our year-end earnings call in October.

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

[Operator Instructions]. Our first question comes from the line of Joe Box from KeyBanc Capital Markets. Please go ahead..

Hey, good morning guys. .

Good morning..

Just wanted to dig into the margins here a little bit.

Just using the midpoint of the guidance range, off of my rough math here it seems to imply about a 10% total op margin in 4Q, are there maybe any onetime costs that could be expected to pick up in 4Q because the 10%ish type number seems to imply accelerating margin degradation?.

I wouldn’t say there is necessarily any onetime cost Joe. I think there is a few things that have us cautious over the fourth quarter results. Energy costs have started to come back up a little bit as you may have noticed tied to the oil being increased.

There is some depreciation related to the new facilities that I mentioned that will start to kick in as well. We talked about some of the impact from Ron’s grants.

Merchandized cost although they have started to moderate with some recent national account wins there is some merchandize cost that we will be experiencing over the next year related to some new account, large new account installs that will impact the numbers as well.

So that combined with the uncertainty on the trajectory of the revenues probably has us a little cautious on the fourth quarter. .

Okay.

Can you maybe just put a little bit of color around the new facility openings and what that might mean just from a cost standpoint, just so we could kind of bake it into the model?.

Yes, I probably don’t want to get into that level of specifics but its two new facilities. Whenever we build the laundry facility it is sort of $10 million to $15 million and that’s including equipment and so on and so. There will be some additional depreciation.

I don’t want to get into sort of that level of detail but we’ll talk about it a little more at year-end as it relates to next year. I really wanted to mention some specifics there just so you had an idea of some of the things that were going on. But these are things that are not atypical to our capital expenditures. .

Understood, maybe just to dig into the top line here a little bit, I mean we’re obviously starting to lap some of the wearer losses that we have seen within the energy business.

Can you maybe just talk to your expectations for either organic growth or contraction within the energy component and then maybe differentiate that relative to what you’re seeing among the rest of your customers?.

Sure, I mean I think at this point and we reflected this in our comments, we continue to see reductions at much higher than normal levels. The levels were consistent with that of the last four or five quarters and that’s a signal for us that we are not yet at the bottom of this cycle as it relates to the energy.

I think anecdotally we are starting to hear from some of our customers in some of our locations that the impact is coming now less from the direct energy companies and a little bit more from the foreign industries as well as some of the even further downstream hospitality and other support companies in markets that are being impacted.

So I think we are certainly further along in the cycle as you’d expect. But we have not seen sort of the flattening in our numbers yet and as a result we aren't really seeing the impacts of the annualization of those losses because they have continued.

The first quarter or two that we flattened out in ads reductions, then we’ll start seeing the bounce back of the organic growth. So the fourth quarter I think I have projected slightly better than the third quarter organic growth for the total laundries. .

Okay, that’s helpful on that front and then Ron you eluded to earlier more competitive bids.

I know you’ve mentioned this in the past, I just want to ask if you look at your organic growth was price a positive factor on organic growth or was it a negative factor?.

I think it was a slight positive. .

Okay, so was it just new account wins or signing up new programmers where you were seeing more aggressive bids, if you could just flush that out that would be helpful?.

I think we had a few new programmers come in. .

I think it’s a function Joe of we continue to get annual increases from our customers. The environment for new accounts is really not that different than we have been operating in and as Ron said before the competition from large accounts does tend to be price sensitive and continues as such..

Got it. I’ll leave it at that, thank you guys. .

Thank you..

Our next question comes from the line of Andrew Wittmann with Robert W. Baird & Company. Please go ahead. .

Thanks.

So I think at the last maybe couple of quarters you guys have commented on what you think the business is doing outside of those energy geographies, I was just wondering if you could give us an update on that so we can prepare the broader businesses in the broader industry?.

I think outside the energy geographies growth is certainly better but not spectacular. We’re probably 3% or 4% outside those geographies. What's difficult is some of those other geographies still have support industries that feed into the energy sector, and I think that’s the part that’s been a little deeper than probably anticipated.

But, when you look at our overall sales numbers, although slightly behind last year they are still fairly strong and it indicates that even without selling a heck of a lot into the energy industry or some of the supporting markets we’re still selling a good amount of new business.

And so I think that keeps us positive here and I think we will hit the bottom of the cycle here. But I think we’re fairly confident about the business outside of energy but I would characterize it as solid not spectacular. .

Got it, thank you.

Thank you for some of the detail that you’re giving on something that’s clearly uncertain like the stock compensation but just the said expectations relative to 2016 you guys talked about and I guess 700,000 or $0.02 here in the fourth quarter, how much of that would be -– what was the comparing in 4Q 2015 so we understand the delta or was the $0.02 the delta, not the absolute?.

The $0.02 was -- it’s practically the same thing, there really wasn’t much left in prior year's fourth quarter. .

Got it, so is that the same thing for all of fiscal 2016 or was there now lot of stock comp in 2016 because I don’t believe that would be the case.

So what's the 2.9 million in 2017, how much of that would be incremental?.

In 17?.

Yes..

That’s a good question, I don’t have that exact number in front of me Andrew. For the full year it would certainly be up by $1 million to $1.5 million but I don’t have that exact number in front of me. .

Okay, that’s at least a starting point. Other changes in the marketplace, is this in terms of the pricing environment.

Ron are you seeing it just in certain geographies or is it more broadly becoming a factor in the industry where new business pricing is getting more competitive for you?.

I think it is pretty broad. We’re particularly seeing it on a national account level and that’s all around but like anything else and some of the local markets which depends on the strength on the local management..

Okay, I think those are all my questions. Thank you very much. .

Thank you..

Our next question comes from the line of Russell Kell [ph] with JP Morgan. Please go ahead. .

Hey its Andrew, could you talk about client retention year-over-year and to the extent that there has been a change is that because energy clients have gone out of business or is there anything else to know when talking about client retention year-over-year?.

I’ll start and then Steve will clean it. I think it’s -- the energy clients continue to shrink up and then I think that’s evident by the amount of emphasis we put on the bad debts that were up. But we’ve also seen it in the supporting industries Andrew.

And that has continued and then like I said earlier we have seen an increase in the national account activities by some of the competition and pricing is a factor. .

Right, but on those national accounts seeing that you mentioned you are taking some on, you might have lost some like do you feel like national accounts you are maintaining share or do you feel like you might be losing share on national account?.

I think we have gained some share. .

Okay, thank you..

[Operator Instructions]. Our next question comes from the line of Chris McGinnis with Sidoti & Company. Please go ahead..

Good morning, thanks for taking the questions. .

Good morning Chris..

Can you just maybe talk about the sales force whether you are investing or whether you are redeploying assets away from energy, can you maybe just talk a little bit about your strategy in the current environment? Thank you.

Chris, this is Ron, we have not basically cut our sales force at all. We may have deployed some of the assets to some other markets that we normally would have put the energy market, but there has been minimal shifting. So we keep a major focus on discreet sales force in the national account level.

We’ve not won a nickel in payroll or heads in the sales force. .

And are you continuing to invest or you are just keeping it at level at this point? Thank you..

Every year we will continue to add some positions based on what we think we can achieve growth in the market..

You noticed our SG&A cost they are up and some of that is from continuing to invest in sales infrastructure and that’s not always just reps but additional management and other supports training and other things to motivate and make sure the sales force is well trained. All designed around improving rep retention and rep productivity. .

Okay, thanks very much for taking my questions. .

Thank you..

Our next question comes from the line of Kevin Steinke with Barrington Research. Please go ahead..

Good morning, you talked about a number of expense items being higher than the prior year but does that include healthcare cost.

I know you called that out last quarter but did you see kind of a normalization on the healthcare side in the quarter after the unusually large claims last quarter?.

Last quarter was interesting for two reasons, one we certainly had much higher than normal large claims and from a year-over-year perspective the second quarter of fiscal 2015 was our lowest quarter. So we had a real tough comparison. I would say that the large claims moderated a little bit in the third quarter.

Claims were still reasonably high, but last year's third quarter which is sort of a good news bad news was also high.

So the year-over-year impact was not nearly as dramatic as the second quarter which is why we didn’t specifically call it out, it might have been up a tenth or so but it was more or less flattish from a percentage of revenue than the year before..

Okay, that’s helpful and could you just clarify too on the CRM rollout.

Are you still kind of expecting the timing second half of fiscal 2017 or you just going to wait till next quarter to kind of give more detail on that?.

Probably next quarter on that one. To be honest we’re making good progress with our testing but we are not at the point right now where we really want to peg a deployment date and we will have more visibility in our fall call..

Okay and just lastly you noted the expectation of increasing labor cost in fiscal 2017.

Again I assume if we are going to get more detail on the next quarter but any just high level thoughts on how significant or the magnitude of that how cognizant we should be of that as we kind of think about modeling out next year?.

We’re not prepared to put actual numbers to it but we have a number of positions within the company since as you know we manage a large workforce of relatively low wage workers. And with those workers there is number of supervisory level positions that have historically been salary positions but now with the new rules will be overtime positions.

We think we can work through that but we do think that it is going to have some increasing costs around with some of the minimum wage increases.

So again I don’t really want to peg -- I mean we are not talking about a percent on the margin here with some smaller portion of a percent but and look these kind of cost increases we do look to our customers and try to work with them on annual price increases. So until we work through some of that we’re not really ready yet to peg a true impact. .

Okay, that’s very helpful though. Well, thanks for taking my questions. .

You’re welcome. .

We have a follow up question from the line of Andrew Wittmann from Robert W. Baird & Company please go ahead..

Great, thanks.

Not my normal follow up this time but given all the cost headwinds with labor CRM stock comp, some of the new depreciation I think it is probably appropriate to talk about what are some of the offsets that you are looking at are on the margin side in the face of pretty soft top line here this year and even part of last year? What are you guys working on specifically that can give us some confidence that some of these real meaningful cost headwinds will be mitigated into a challenging revenue environment?.

I think you are right. I think it is a challenging revenue environment and until we know when that starts to turn and we start to show some growth there is going to be certainly uncertainty as to where the margin might land for next year.

I think the one thing I will say about some of those costs with respect to CRM particularly the depreciation of it or stock compensation expenses that they are all non-cash expenses. Most of the CRM dollars have been spent to this point but your point on the margin is a good one. I mean, we will continue to push new sales with our customers.

I think from a merchandized perspective even though I did mention some large inputs with some of these national accounts the overall merchandize is starting to come in line with respect to our revenue which is normal.

We talked the last couple of quarters about there being some lag about the uniforms coming out of service that are continuing to amortize but we are starting to get through that.

And so if growth does remain slow it is not inconceivable that we could have a merchandized benefit as we move forward which is part of the normal cyclical nature of our business when we -- when things slow down. So, that could be an area that there is some offset.

In terms of cost, we continue to uncover the stones and see where we can become more efficient. A lot of our capital projects are designed around maximizing efficiency in the plants and minimizing labor so some of these labor impacts can be minimized as well. So, I don’t know Ron if you want to add anything to that. .

No, I think we keep focusing on technology in the plants and obviously it is a cost benefit to us to do that because it is very difficult for us when we have hundred people in a plant and 14 are out in one day. So, we wanted to continually work to reduce the level of people we have in the processing facilities. .

What about -- is there -- have you or could you conceivably look at the number of routes that you are running particularly in the more revenue challenging areas or the number of shifts or partial shifts at the plants and are those things on the table or are they needed at all operationally.

That seems like where some of the bigger dollars could rest?.

I think if you look to divide our routes into our revenue you will see we run probably some of the larger routes in the industry. And we are always looking at routes there is no question about that.

In the plants it really comes down to kind of what we can do to become more efficient, whether it is automation trying to work standards and will also not involve looking at the non-laundry portions in the corporate level and all of that. I think we have got some efficiencies we can pick up here and there.

So I think it is pretty much like Steve said, we are looking at every stone. .

Okay, thanks a lot guys. .

Thank you..

[Operator Instructions]. We appear to have no further questions on the phone line. .

Very good Carlos. We appreciate everyone joining us today to review UniFirst's third quarter and financial performance. We would like to also invite you to attend our next broadcast in October. We will be reporting on our fourth quarter and year-end results for fiscal year 2016 as well as our expectations for 2017.

Thank you and have a great day and a great holiday. .

Ladies and gentlemen that concludes today's call. We thank you for your participation and ask you to please disconnect your lines..