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

John Healy - Northcoast Research Kevin Steinke - Barrington Research Associates, Inc. Joe Box - KeyBanc Capital Markets Justin Hauke - Robert W. Baird & Company, Inc..

Ladies and gentlemen, thank you for standing by. Welcome to the UniFirst Corporation First Quarter Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions]. I’d now like to turn the conference over to Steven Sintros, Chief Financial Officer.

Please go ahead sir..

Thank you and welcome to the UniFirst Corporation conference call to review our first quarter results for fiscal '17 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 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 will turn the call over to Ron Croatti for his comments..

Thank you, Steve. I'd like to welcome everyone joining us today to review UniFirst first quarter financial results for fiscal year 2017. Steve will cover all the details in a few minutes, but first I will provide a brief summary.

UniFirst revenues set a new record for the first quarter of fiscal 2017, coming in at $386.1 million, an increase of 3.4% from the $373.4 million reported for the first quarter of 2016. Net income for the quarter was $28.2 million, a 21.4% decline from the net income from the same period a year-ago.

Both the revenue gain and the net income decrease were anticipated, we were affected by multiple factors, including the impact of our recent Arrow Uniform acquisition. The cyclical nature of our nuclear industry business and the continued challenges resulting from the heavy energy sector losses and shrinkage over the last two years.

Our Core Laundry operations, which account for 90% of UniFirst's total business reported a 5% improvement and a new record for the first quarter in revenues. Our growth was derived primarily from new revenues associated with the Arrow Uniform acquisition.

We are encouraged by the positive impact of year-over-year quarterly improvements in our add versus reduction metrics and our overall customer retention.

However, Core Laundries also reported a 17.6% decrease in operating income when compared to last year's first quarter, primarily a result of ongoing increases in core operational expenses and a slower than desired organic growth rate.

And similar to the quarterly gains made in revenue, the income decline was also impacted by Arrow Uniform acquisition.

As we discussed in our last webcast, it will take some time to fully integrate Arrow into the UniFirst operations and systems and until we further along in this process Arrow's operating results combined with the intangible amortization and other purchase accounting will affect our bottom line.

Meanwhile, our Specialty Garment segment, which include specialized nuclear cleanroom laundry, ancillary business services, reported a decrease in the quarter in both revenues and operating income when compared to the same period in 2016.

And as I mentioned earlier, these results were expected based on the cyclical nature of this portion of our niche business. That said, we still expect the segment to report full year-over-year improvements for fiscal 2017 in both revenue and income.

Finally, our First Aid and Safety segment reported modest gains in revenue and a slight dip in operating income when compared to last year's first quarter results.

So as we look ahead to the coming quarters in 2017, we expect all our operations from coast-to-coast and all our thousands of team partners throughout North America and abroad to step up their efforts as they always do when it comes to expects, servicing our customers ultimately contributing to UniFirst Corporation achieving solid results for the fiscal year.

We know it won't be easy as projections for the economy and national employment continue to predict slow growth at best for the coming year, which will affect our ability to make target improvements in the organic growth.

So we will be relying on our field and national account sales teams to continue improving upon the productivity and consulting selling skills to boost the bottom line.

We will also be relying on our service team to consistently deliver the highest quality products and value-added services in the industry to help improve customer retention, business referrals, ancillary product sales within existing accounts.

We continue with the Arrow integration to produce further financial gains, recognize the synergies between our two companies to help minimize associated expenditures.

And as always we will be considering any smart business acquisitions we feel are consistent with our long-term growth goals as those we feel produce the appropriate ROI for UniFirst and its shareholders.

And with that said, I will turn it back over to Chief Financial Officer, Steve Sintros for more of UniFirst's first quarter results for 2017 and our expectations for the rest of the year..

Thanks, Ron. As Ron mentioned, revenues for the quarter were $386.1 million, up 3.4% from $373.4 million a year-ago. Net income was $28.2 million or a $1.38 per diluted share, down 21.4% from $35.9 million or $1.78 per diluted share in the first quarter of 2016.

As Ron mentioned, the result of the first quarter include the impact of the Company's acquisition of Arrow, which was completed in September of 2016. Core Laundry revenues were $351.8 million, up 5% from those reported in the prior year's first quarter. Adjusting for the effective acquisitions, primarily Arrow, Core Laundry revenues grew 0.6%.

Our organic growth rate continues to be affected by significant weekly -- these significant weekly uniform ware losses we experienced in oil and energy markets throughout fiscal 2016.

Historically our garment additions versus reductions metric which measures the net impact in our existing accounts has been the strongest in our first fiscal quarter, often showing positive ware increases.

In fiscal 2016's first quarter this metric was sharply negative due to the ongoing struggles in the energy sector as well as the industry that directly support them. We are happy to report that net wearer additions during the quarter were slightly positive for the first time since the first quarter of fiscal '15.

We are cautiously optimistic that this trend will allow us to begin improving our organic growth rate as we move through fiscal 2017. In addition, lost account levels were improved through the first quarter compared to a year-ago. However, new sales lagged fiscal '16s first quarter totals.

This segment's operating income was $43.7 million in the quarter, a 17.6% decrease from the prior year. This operating margin was 12.4%, down from 15.8% for the same period in fiscal '16. The margin decline was primarily the result of higher cost of revenues in selling and administrative costs combined with low organic growth.

In addition the impact of the acquisition of Arrow including the effect of non-cash purchase accounting charges decreased the Core Laundry operating margin by approximately 1.1%. The margin decline as well as the areas of cost pressure were mostly anticipated as we discussed during our year-end earnings call.

Some of the areas of margin pressure during the quarter were plant and service labor, partially the result of upward pressure of minimum wage increases as well as higher selling and administrative payroll and other costs partially the result of headcount additions and other cost to support our CRM systems project and other technology initiatives.

Merchandised expense as a percentage of revenues was also higher during the quarter primarily due to the launch of a direct sale program for a national customer.

As anticipated, we also incurred higher non-cash expenses related to stock compensation expense due to the restricted stock grant to our CEO in April as well as higher depreciation expense from ongoing investments.

Further pressure on the margin was experienced through many other increases in miscellaneous operating expenses, such as workers compensation, repair and maintenance, and other plant supplies. These higher costs were partially offset by lower cost associated with legal and environmental contingencies compared to the first quarter a year-ago.

Revenues and operating income in the quarter for the specialty garments segment which consists of nuclear decontamination and cleanroom operations declined 16.5% and 73.1%, respectively compared to a year-ago. This segment's results can vary significantly from period to period due to the seasonality and timing of reactor outages and projects.

The quarterly results for this segment largely met our expectations as it was anticipated that the reactor outages would be more concentrated in the spring compared to the prior year when the fall was the busiest outage season of the year.

We continue to expect that this segment's full-year results will meet or exceed its fiscal 2016 revenues and operating income. Our First Aid segment reported revenues of $11.9 million in the first quarter, up 2.9% from a year-ago. Operating income for this segment decreased slightly to $0.9 million compared to $1 million last year's first quarter.

UniFirst continues to maintain a solid balance sheet and financial position. Cash provided by operating activities for the quarter was $63.5 million, an increase of $5.9 million from the comparable period in the prior year when cash provided by operating activities was $57.6 million.

The increased cash provided by operating activities was primarily related to the settlement of environmental litigation the Company entered into in the fourth quarter of fiscal '16, which resulted in a gain of $15.9 million booked in the fourth quarter. During the first quarter, $12.5 million was received related to this settlement.

This positive impact on net cash by operating activities was partially offset by lower net income during the quarter. Cash and cash equivalents at the end of the quarter totaled $286.1 million, down from $363.8 million at the end of fiscal '16. The decline in cash primarily related to the $119.9 million expended on the acquisition of Arrow.

Excluding this cash outflow, cash balances would have increased $42.2 million. Of our cash on hand at quarter end $53.8 million has been accumulated by our foreign subsidiaries and is intended for future investments outside of the United States. For the first quarter, capital expenditures totaled $18.2 million.

We continue to invest in new facility additions, expansions, and automation that will help us meet our long-term strategic objectives. We expect capital expenditures for fiscal 2017 to be between $90 million and $100 million. Other than the Arrow deal, we did not close any other significant acquisitions in the quarter.

The business acquisitions have historically been an integral part of our growth strategy and will continue to seek out opportunities that make sense for us and meet our long-term business goals.

We continue to have significant cash on hand and borrowing capacity available under our line of credit for additional acquisitions or other capital allocation options. At this time I would like to provide an update -- updated outlook with regards to our operating results for fiscal '17.

We continue to expect that revenues for fiscal 2017 will be between $1.55 billion and $1.565 billion. We now expect that full-year diluted earnings per share will be between $4.85 and $5.

Although the year is unfolding mostly as anticipated to this point, certain expense categories including workers compensation claims and other operating expense categories are trending higher. As a result, we are modifying our full-year earnings expectations.

We experienced higher than normal claims during the quarter related to workers compensation and have also incurred large claims subsequent to the end of the quarter. These claims as well as the adverse trend in this area has impacted our expense forecast for the remainder of the year.

As discussed in our year-end call, approximately $9 million to $10 million of the incremental costs in fiscal '17 relate to non-cash items such as depreciation, stock compensation and intangibles amortization. So although our guidance calls for earnings to be quite a bit lower than fiscal '16, the drop in projected cash flows is not as significant.

Many of the increase in expenses I’ve discussed previously are viewed by UniFirst as important investments in our people, systems, and infrastructure that will allow us to meet our long-term objectives. In the short-term as we struggle with macroeconomic factors impacting our top line, we will feel the pinch on our margins.

We will continue to update investors on the status of these investments as we move forward as we’re committed to ensuring that they will provide long-term success for UniFirst and its shareholders.

Finally, I do want to remind investors that our guidance for fiscal '17 does not include any depreciation related to our unity 2020 systems project as we do not expect we will begin deploying the system during the current fiscal year.

As we move closer to deployment, we will also likely begin to incur costs that do not qualify for capitalization under the accounting rules. In addition, additional headcount maybe needed to support the system during deployment.

We’ve not included any of these costs in our guidance for next year as it is unclear to the timing and the amount of these expenses. We will continue to update shareholders on the impact of any such costs in the quarters ahead. This completes our prepared remarks and we will now be happy to answer any questions that you may have..

Thank you. [Operator Instructions] Our first question coming from the line of John Healy with Northcoast Research. Please proceed with your question..

Thank you. Ron and Steve, I wanted to ask just a little bit about the Arrow deal.

Now that you’re a few months into the acquisition, any major surprises as it relates to kind of the thought process in terms of how the business fits, any -- anything that kind of bubbled up that makes you feel better and makes you feel maybe less optimistic about the acquisition?.

John, this is Ron. At this point, the first 90 days, we were basically trying to understand what the business was doing and how it's getting along. There was nothing strategically that surprised us, but now this is the next timeframe where we start to make some changes.

Over the next nine months we are going to be making some changes as far as moving business around and equipment around. And the biggest thing we have to do is and that won't start immediately, it will start probably in six months -- is build a sales organization. So there were no significant surprises, I guess, that’s the summary..

Okay, great.

And Ron, I wanted to ask, just now with the election behind us, have you seen any sort of or have you heard from the sales force any sort of real meaningful mood change amongst the customer base? Is there anything that makes you feel more optimistic about the growth outlook for the business over the next 12 to 18 months or anything that makes you feel less optimistic about it?.

I think the general business attitude out there right now including ourselves is let's wait and see what this guy can do. I mean there is all kinds of ….

Got you..

… rumors and stories out there, but nothing is happening..

Got you. And then lastly, I just want to ask Steve, I think you -- I thought you mentioned in the prepared remarks that, ex oil and gas, the SDOT metric went positive for the first time, and I think you gave a quarter when that last was and I missed it when you were going over that. I was just hoping you could repeat that..

Yes, just to clarify and this is actually including oil and gas, so really our complete adds reduction metric for wearers was slightly and I do want to emphasize slightly positive during the first quarter. In the last time that happened was two years ago, the first quarter of fiscal '15.

I mentioned that our first quarter is typically our best additions versus reductions quarter. And historically it's not abnormal for it to be positive. Last year it was sharply negative which sort of underscore the continued impact that we were having with the oil and gas. So the messages is that, you know, we are starting to get past that.

Anecdotally, we've talked to some of our managers in Texas and some of those key market and there's been some slight add back of jobs in some of those areas..

Great. Thank you, guys..

Thank you..

Thank you. [Operator Instructions] Our next question coming from the line of Kevin Steinke with Barrington Research. Please proceed with your question..

Good morning.

So, circling back on the Arrow acquisition, do you have a specific revenue number that they contributed in the quarter, and also was currency essentially neutral in the quarter?.

Yes. I think the number in the quarter you can sort it back into from what we said was the impact of acquisitions. There really wasn't currency impacting the quarter, so the whole difference between total growth in organic was acquisitions primarily Arrow. The revenues were approximately $12.5 million.

But this maybe the last quarter that I give specific revenues related to Arrow as its going to become more and more difficult as we integrate the operations to definitively pin down some of those revenues. But for the current quarter you were in that ballpark..

Okay, fair enough. That’s helpful. Thank you. And just following up a little bit more here on the change in EPS guidance, you called out the workers comp claims specifically, but you also talked about other operating expenses trending higher.

Any other specific buckets of expenses that you would call out there?.

I think it was a little bit around the horn, Kevin. We’ve talked about the areas we expected to be up in labor and some of these other things. These were more repair and maintenance on vehicles and in some of the plants, some related to building projects we have going on where certain cost didn’t qualify to be capitalized.

So it was really miscellaneous, some were related to increased recruiting costs related to our systems project where we had some headcount increases. Some of these costs were anticipated, some came in a little higher than expected, particularly with some of the repair and maintenance. We've had to utilize a little more temporary labor we'd like.

And as Ron has talked about, it's becoming increasingly difficult to make hires with respect to some of our plant personnel, given the low unemployment right now.

So it really is sort of in a number of different areas that that are little bit higher each, which again in an environment where our organic growth isn't very strong, can hit the margin quickly..

Okay. That’s helpful. And then you mentioned there is some recruiting for CRM headcount and, I guess, that’s separate from the actual deployment costs, which could potentially come later in the year.

So could you just kind of talk about the hiring that you’re doing now in that area versus the potential costs of deployment that could happen and potentially ramp up later in the year?.

Yes, certainly some of the higher costs we're experiencing now with respect to headcount in technology is to continue to get the system to completion, but also will help support the system during deployment. So there is some crossover there.

There may need to be a ramp up further with respect to not only technology, but some operational resources as we go through deployment and those are what have not been built in as they likely be in the earlier part of next fiscal year.

But as we move towards the end of the project there may be some cost we start to incur that can't be capitalized as part of the project or more in preparation of deployment and we will call those out when they happen. But you’re right, some of these costs are starting to cross over to costs that will be there to support the deployment..

Okay. That’s helpful. And then, you talked about last quarter, one of the potential expense headwinds in fiscal '17 being increased over time pay related to the Fair Labor Standards Act.

I think you said there was a relatively small potential headwind, but given that that rule has now been delayed, does that change anything in how you’re going about running the Company, or you kind of already made changes ahead of time in anticipation of that going into place, or just wondering how you’re dealing with that delay in the rule?.

There was some changes that we made related to the rule because the deferral happened so late that we went through and made, particularly some increases to certain positions so that they would continue to qualify for salaried -- for being salaried employees. There were other positions that we did not convert to hourly when the FLSA was deferred.

So there is a group of employees that we put on hold and we continue to do business as we currently have been.

So what I would say is that there still is some impact from the changes we’ve made, there is certainly another group that we did not move to hourly based on the deferral of the rule and I think what that does is primarily take some risk out of our numbers that some of those positions might have incurred more overtime than we had expected.

So at this point, I think that's the benefit is that there is probably less risk in some of the numbers based on that rule being deferred until such point that it does become enacted if that's what happens..

Okay. That’s very helpful. And then just lastly, you mentioned new sales trends I think you said maybe a little softer than last year.

I mean, anything meaningful to call out there, or is that just kind of a normal quarterly fluctuation? I know you’ve been adding a little bit in the sales area, so just any overall comments on the trends there and expectations for the remainder of the year?.

I think, Kevin, as you well know there is a shortage of qualified people, Glassdoor and so forth. You hear them all the time, so most salespeople are pretty active on the internet sites. So we are getting hit with some of -- by some of these other companies on the tenured level.

So we're trying to keep the headcount where we wanted, but it's a continual effort to keep our people tenured and trained in place. So we're struggling in that direction. I'd say that the force is down a little bit in tenure..

Okay, fair enough. Well, thanks for that color. That was helpful and I appreciate you taking the questions..

Thank you..

Thank you. The next question coming from Joe Box with KeyBanc Capital Markets. Please proceed with your question..

Yes, hi. Good morning, guys. So, I just want to dig into the garment inventory.

Can you maybe talk to where you’re sitting with excess energy garments? Do you think that there is an opportunity to redeploy a lot of these garments or do you think you’re going to have to actually replenish that inventory? And then, specifically, what are your plans with Arrow garments? I guess I would have thought that the inventory contribution would have gone up a little bit more from the deal.

Are you guys looking to swap these out upfront or is it just going to be a normal kind of schedule on the garments?.

So to take the two pieces, with respect to the energy garments, we’ve been redeploying those garments over the last year. I mean, I just use an example, our largest energy dependent plant in West Texas has a significant amount of used inventory come back as you'd expect, but energy business didn’t go to zero.

So instead of having to buy new garments to replace over the last couple of years, he has been using whatever used inventory he can use and he is starting to work through that. So I think we have been getting some of the benefit of that and I think we will continue to get some benefit.

But depending on how quickly the business ramps back up, we will have to probably invest some more as we move along. With respect to the Arrow inventory, I think it's more just business as usual there.

I mean, they were putting normal amount of inventory into their customers and we brought that over upon the acquisition and we will continue to supplement that in the normal course. I think so far we haven't seen a significant need to put in more inventory to Arrow than expected..

Okay. That’s helpful.

And I guess maybe just to tie it all together, can you give us a sense of how merchandise amortization could play out in aggregate over the next year?.

What we’ve is that it’s projected to be relatively flat as a percentage of revenues. A lot of it does depend on the mix of new sales.

I made the comments at year end and in prior quarters that our merchandise probably would have been down a little bit based on the benefit we were getting from lower influx of -- or influx of garments into the energy sector, but the mix of our sales was a little more slanted toward national accounts.

We had some big installs, we had some heavy upfront merchandise investments. So I think it really depends on the mix of our sales through the remainder of the year, but right now we have it modeled relatively flattish..

Okay. I appreciate that. And then lastly, Steve, I think you called out 110 basis points of non-cash headwind to Core Laundry margin.

Can you specifically give us the deal amortization component from Arrow?.

So the 1.1% I think you're referring to was the impact of Arrow during the quarter. That was not all non-cash related. About $1.4 million of that was intangibles amortization.

Now I do want to clarify that our valuation of the intangibles is -- it was done on a preliminary basis for the quarter and we will continue to tweak that over the course in the next quarter. So I wouldn't use that run rate for the full-year. I think that was actually a little heavy in the first quarter, but that was the intangible amortization piece.

There was also some other non-cash charges that we did take related to Arrow in the first quarter related to some transition on just the way we treat inventory and some other supplies that was probably another $0.5 million or so.

So there were some of those transitional charges that were taken related to Arrow that maybe impacted Arrow a little higher during the quarter..

Okay.

I mean, I guess, just directionally, should we think about it being closer to about $1 million in just amortization going forward?.

Yes, that’s probably about right. I don't have that number in front of me..

Okay. That’s helpful. That’s it for me, guys. Thank you..

Thank you..

Thank you. Our next question coming from the line of Justin Hauke with Robert W. Baird. Please proceed with your question..

Good morning. Thank you, guys..

Good morning..

I guess, I just wanted to clarify a little bit on the workers comp expense and the impact to the guidance.

Was that due to the claims that you’ve incurred thus far, or is that kind of a structural change because now you’re taking a higher reserve for that going forward so we should think about that as an ongoing margin hit?.

It's a little bit of both, Justin. The way we reserve for our workers comp is we make estimates based on the policy year of expected claims and those continue to get tweaked, and we actually have an actuarial analysis done of that annually.

So high claims in the quarter doesn't necessarily change our outlook for the year, but where we sit through four months we felt the need to do that. So some of that did hit particularly in the first quarter, but the larger piece of it was an adjustment to our expectations for the full-year..

Okay.

So in other words, that’s a cost that you will continue to incur for the next several quarters as you accrue at that higher rate?.

That’s correct..

Okay.

And then I guess the second question I had -- and I apologize if I missed it, but I didn’t hear it on the prepared remarks, but in the First Aid business, what were some of the items that were impacting the margins there since the Arrow acquisition and some of the other items are all in the Core Laundry? So just a little bit more color on the margin headwinds in the First Aid segment..

I think there was just some small mix changes during the quarter. I mean, there is a few different pieces of that business with the van business and then some of the wholesale distribution work. So I don’t think there was anything significant. I think it was just -- I think it was only down a $100,000 from the year-ago on slightly higher revenues.

But I think the merchandise mix was just a little bit different during the quarter, nothing overly dramatic..

Okay. Thank you very much. That’s all from me..

Thank you..

Thank you. Mr. Sintros, there are no further question at this time. I will now turn the call back to you..

Well, this is Ron. We'd like to thank everyone for joining us to review UniFirst's first quarter results for fiscal year 2017. We look forward to speaking you -- with you again in the spring time when we will be reporting our second quarter and year-to-date numbers. Have a great day and a happy healthy New Year..

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. Have a great day..