Steven Sintros - CFO Ronald Croatti - CEO.

Andrew Steinerman - JP Morgan Andrew Wittmann - Robert W. Baird John Healy - Northcoast Research Kevin Steinke - Barrington Research Tim Mulrooney - William Blair.

Ladies and gentlemen, thank you for standing by. Welcome Second 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 would 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 second 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.

As usual, 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 will turn the call over to Ron Croatti for his comments..

Thank you, Steve, and welcome to everyone joining us today for the review of UniFirst second quarter and six months year-to-date financial results for fiscal year 2017. Steve will be covering all the details, but first, I'll deliver a brief overview of the company's performance.

I'm happy to report the UniFirst revenues for the second quarter of fiscal 2017 set a new record high of $391.4 million, increasing 7.8% from the $363.1 million reported second quarter in 2016. Six months year-to-date revenue were also a record, coming in at $775.5 million, a 5.6% increase from the 2016 mid-year mark.

Net income for the second quarter was $22.4 million, a 4.2% decline from the net income reported the same period a year ago. In summary, net income for the first six months of the year fell shorter than 2016 half-year mark by 14.6%.

Our Core Laundry operations which make up greater than 90% of UniFirst total business had a solid second quarter reporting record revenues of $358.4 million, which was an increase of 8.2% over 2016's second quarter.

These gains were positively influenced by several factors including improved new sales results over last year's second quarter, additional business generated for our recent Arrow acquisition and a stronger Canadian dollar.

The segment's revenue results also benefited from improvements in both customer retention rates, company-wide and add it's over-reductions within our existing customers although still slightly negative. Second quarter operating income for our laundries dropped off $8.5% from the results of the same period ago.

The income dip was partially results from systems integration cost associated with the Arrow acquisition, as well as higher selling administrative expenses during the quarter. As for our specialty garments segment which consist of our specialized nuclear-related and cleanroom service business.

These units reported solid gains for the quarter in both revenue and operating income when compared to the same period in 2016. This segment achieved a 6.5% revenue increase and an 82.8% gain in operating income. But as we have mentioned in previous webcast, this niche business is very cyclical based on customer's nuclear reactor shut down schedules.

So although we anticipate fluctuations in their financial results for the remainder of the year, in the end, we expect to report solid full year results for this segment and in line in our original forecast.

And lastly, our First Aid and Safety segment reported a slight two-tenths of a percent decrease in revenue and an 8% increase in operating income for the second quarter 2017. Ultimately, we anticipate this segment will report a solid overall performance for the full year.

So as we look ahead to our anticipated results for the remainder of the year, we were encouraged by the recent gains in trends in organic growth, in our new sales, in our customer retention. And we're also cautiously optimistic about the balance of the year based on initial signs of potential rebound and some of our struggling oil and energy markets.

As many of you know, UniFirst witnessed significant uniform wearer losses in the niche markets over the last couple of years that affected our top and bottom line. But more recently, we've been saying, in other words stabilization in these areas and actually some slight gains in energy-related uniform wearers.

It would be premature for us to project any future growth opportunities in these relative markets, but these mass improvements in uniform wearers have been more than welcome to say the least.

We're also hopeful that with the new presidential administration, the national employment levels in the overall economy will soon begin reaping the benefits as a result of these new policies and from losing up some of the business-related regulations.

So we'll be watching these areas very closely as we move forward to identify any potentials for additional business and related growth opportunities. Internally, we'll be relying on our field and national accounts sales team to maintain their positive growth prints.

We'll continue improving the new business results through innovative sales programs, events, skill training and professional consultant selling.

And as a non-negotiable, we continue to expect our service teams throughout U.S., Canada and Europe and will remain focused on each and every customer, hoping to ensure that unique business needs are continually being met and every expectation of us is exceeding.

In the end, we will expect fiscal year 2017 to be a solid year for UniFirst, our shareholders and our thousands of employee-team partners. And now I'd like to turn it back over to Chief Financial Officer Steve Sintros for the details of UniFirst second quarter and six months results for 2017 and our expectations for the remainder of the year..

Thank you, Ron. As Ron mentioned, revenues for the quarter were $391.4 million, up 7.8% from $363.1 million a year ago. Net income in the quarter was $22.5 million or $1.10 per diluted share, down 4.2% from $23.5 million or $1.16 per diluted share in the second quarter of fiscal '16.

Results from the second quarter include the impact of the company's acquisition of Arrow Uniform which was completed in September of 2016. Core Laundry revenues in the quarter were $358.4 million, up 8.2% from those in the prior year second quarter.

Adjusted for the estimated effect of acquisitions including Arrow as well as a stronger Canadian dollar compared to a year ago, Core Laundry revenues grew 2.2%. We were encouraged by the improvement during the second quarter of our Core Laundry operations' organic growth rate.

Recent trends indicate that wearer at levels that existing customers have stabilized after enduring two years of significant reductions in our North American energy dependent markets. In addition, overall new sales as well as customer retention have also trended positively compared to the first half of 2016.

We are cautiously optimistic that these trends will allow us to continue improving our organic growth rates as we move through fiscal 2017. Core Laundry operating income was $33.1 million during the quarter, an 8.5% decrease from the prior year. Its operating margin was 9.2%, down from 10.9% for the same period in fiscal 2016.

The margin decline was primarily the result of higher selling and administrative expenses as a percentage of revenues.

Selling and administrative payroll and other cost were partially the result of headcount additions and other cost to support our CRM systems project and other technology initiatives, as well as higher non-cash expenses related to stock compensation due to the restricted stock rent to our CEO in April 2016.

In addition, the estimated impact of the acquisition of Arrow decreased the Core Laundry operating margin by 0.6% as we continue to expend transitional cost, as well as work to integrate Arrow's operations to optimize efficiencies between our companies.

There were also several other offsetting increases and decreasing in cost of revenues during the quarter.

Plant and service labor and other expense is partially the result of upward pressure of minimum wages or higher as a percentage of revenues in the quarter as were energy cost which increased to 4.3% of Core Laundry revenues compared to 3.9% a year ago.

These increases were offset by lower merchandize amortization as a percentage of revenues as well as lower healthcare cost compared to the same quarter a year ago.

Revenues from our specialty garment segment which consist of nuclear decontamination and clean room operations increased 6.5% in the quarter, compared to the same period a year ago and operating income was $2.1 million, compared to $1.1 million last year.

This segment's results can vary significantly from period-to-period due to seasonality and timing of outages and projects. The improvement of results compared to a year ago were driven primarily by this segments in U.S. and Canadian nuclear operations.

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 and operating income of $11.3 million and $1.0 million respectively in the quarter which were substantially flat compared to the same quarter a year ago.

UniFirst continues to maintain a solid balance sheet in overall financial position. Cash provided by operating activities year-to-date were $114.7 million, an increase of $9.2 million from the comparable period and the prior year when cash provided by operating activities was $105.5 million.

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

The positive impact on net cash provided by operating activities as well as the positive timing of other working capital inflows and outflows was partially offset by lower income during the quarter.

Cash and cash equivalents at the end of the quarter total $313.5 million, down from $363.8 million at the end of fiscal '16, the decline in cash primarily related to the cash spend on the acquisition of Arrow during our first quarter. Excluding this cash outflow, cash balances would have increased $69.6 million.

Off the cash on hand at quarter end, $57.5 million has been accumulated by our foreign subsidiaries unattended for future investments outside of the United States. For the first six months of the year, capital expenditures totaled $43 million.

We continue to invest in new facility additions; expansions and automation that will help us meet our long term strategic objectives. We now expect capital expenditures for fiscal '17 to be approximately $100 million. Other than the Arrow deal, we did not close any other significant acquisition so far this year.

Business acquisition has historically been an integral part of our growth strategy and we'll continue to see good opportunities that make sense for us to meet our long term business goals. We continue to have significant cash on hand and borrowing capacity under our line of credit for additional acquisitions or other capital allocation options.

As always, we'd like to provide an update on our outlook with regards to the remainder of our fiscal year. During our last earnings call, we communicated that we expected full year revenues for fiscal '17 would be between $1.550 billion and $1.565 billion, and full year diluted earnings per share would be between $4.85 and $5.

We now expected our full year results to come in at the higher end of these previously communicated ranges. Our improved outlook over the remainder of the year is primarily based on the positive trajectory regarding our revenues as it relates not only to wear levels to customer retention, new sales and pricing trends over the last few months.

These positive top line trends as well as some moderation on our healthcare cost have helped to offset what has continued to be unfavorable trends and work with compensation and other related claims during the last two quarters. Other than these items, the year is progressing very much as originally expected.

We continue to expand time and resources assimilating and integrating the Arrow acquisition into our operations as well as continue to prepare for the eventual deployment of our new CRM system.

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

As we move closer to deployment, we will likely begin to incur additional cost which are not qualified for capitalization under the accounting rules as well. In addition, additional headcount may be needed to support the new system during deployment.

We have not included any of these cost in our guidance as it's unclear as to the timing the amount of these expenses. We'd continue to update shareholders on the impact of any such cost in the quarters ahead. This completes our prepared remarks. I'd now be happy to answer any question that you may have..

[Operator Instructions] Our first question is from the line of Andrew Steinerman with JPMorgan. Please proceed..

Good morning. Congratulations. My question is two.

The first one, Ron, you mentioned some enthusiasm or rather possible 'Trump bump.' Is that general sentiment and hopefulness around your customer base or have you seen evidence that the new administration is helpful to your end customer and benefiting UniFirst already? And then my second question to Steve, it's about the S&A line.

How should that trend throughout the year? Did the S&A line in the first and second quarter start to give you a sense of how S&A will trend throughout the year or are there more cost ahead?.

Hi, Andrew. I'll go first on your question. From the customer visits that we've been making over the last quarter, I think there's a general business hopefulness that this gentleman, the president of the United States will spend some money on infrastructure and maybe military spending to get more jobs going. But everybody has kind of wait and see..

Okay..

As far as the G&A line, SG&A line there, Andrew, I think the trend you're looking at is probably what we can expect over the second half. The comparisons may get a little better.

Some of the headwind coming from the stock compensation expense related to Ron's deal will start to annualize as that deal started to have some expenses in the third and fourth quarter of last year.

But as I said toward the tail end of the call, there may be some additional transitionary cost as we get into preparing to deploy our CRM system that might creep up as we get toward the end of the year into '18 as well. We'll keep you updated there, but I think the run rate we're at now is reasonable..

Great. And it came in line with your expectations for the quarter.

Right? The S&A line?.

Correct..

Okay, thank you..

The next question is from the line of Andy Wittmann with Robert W. Baird. Please proceed..

Oh, great. Thanks. Let's just keep going with the CRM. I know you guys said not this year.

So you have a sense about when you think we might be able to go live next year and just to round out the color on that, can you talk about what the incremental spend will be as you look at the fiscal '17 year in terms of the implementation cost that would be specific to the implementation of that CRM?.

Right now with respect to timing, Andrew, we're looking at piloting the system – a live pilot in the fall in beginning of our fiscal '18. As far as when we would start fully deploying after that, you'd probably be a couple of months pilot period before we start fully rolling out.

So realistically, we're looking at beginning of calendar '18 to start full scale deployment, but there will be some cost that ramp up. You said fiscal '17 cost, I think you probably meant fiscal '18 as far as incremental deployment cost.

We are carrying some heavier cost today with people that are working on the system that it will roll into that deployment team. So although there will be some incremental support and deployment cost, we don't anticipate it being overly dramatic.

It's not a specific guidance at this point and we will have more guidance as we get closer, but there is a fair amount of cost wrapped up our numbers now that will continue to support this thing as we deploy..

Okay. That's helpful. If you don't mind, let's talk a little bit about the margin profile. In the quarter, thank you for breaking out the pieces that you did. I though the labor comment that you made, that you're seeing some labor inflation was interesting.

It's something that I think as analyst, we've been looking for a while and we've been hearing a little bit more of it.

Can you just talk about what labor is and can you quantify how much that is and do you expect this trend to continue? Maybe just in terms of how this has hit your P&L so far, is it just starting to creep in where we don't have to annualize these new higher wage rates that you're paying or what have they been filtering over the last few quarters?.

They really have been filter again. I think the number of states have increased minimum wages and – although most of our employees are above those minimum wages, it does cost wage compression right up the chain, so we've been moving and having to pay more to hire certain positions from the production level up to the service levels.

In our cost, the revenue line, our production in service payroll is up three or four-tenths of a point on the margin in the current quarter and that's something we'll continue to try and stay ahead of. Now as the growth starts to come along, we can get more volume in the facilities and start doing a little bit better on the top line.

The impact to that should moderate. But we've been dealing with that the last couple of years and it's something I think we expect to continue to deal with as many states still have additional initiatives to move minimum wages for..

That's really helpful color. Thank you for that. Ron, I guess I just had one more question now for you that's just thinking about the competitive landscape now with the [indiscernible] deal done. I think there was some hope from other competitors in the industry that there might be some pieces.

It would be force to invest it [ph], certainly you would have been at the table to pick up any of those pieces.

But I guess the question is first, now that there aren't any divestitures out there to pick up, are you more inclined or less-inclined to pull out your balance sheet towards capital allocation, towards your stock, or toward the special dividend or something else that way? And also are you seeing anything from the other players in the uniform market that they feel like they need more scale, that there's potential uptake in M&A that might result from this competitively to respond to the greater scale that your largest competitor just gained?.

I think Andy that everybody is prepared to digest what happened. I think we're all disappointed that there wasn't any divestiture. But at this point, we've seen no real increase in the acquisition market at all.

I think like anything else through the consolidation because our largest competitor tries to get to that $140 million, I think there will be some customer migration. So we're trying to gear up and be ready for those opportunities..

Okay.

If the acquisition activity hasn't picked up, does your thought towards your balance sheet in potentially buying your own stock? Is that more likely today than it was three months ago or a year ago?.

I'd say it's about the same..

Okay. I'll leave it there. Thanks, guys..

Thank you..

The next question is from the line of John Healy with Northcoast Research. Please proceed..

Thank you. Ron and Steve, I wanted to ask just a little bit about the Arrow acquisition now that you're multiple months into the deal.

Have there been any surprises with that acquisition? And maybe if you could comment on just maybe what you're starting to get a sense for in terms of customer retention and maybe the revenue synergies potential with that deal? I imagine your product catalog is a little bit more extensive than their product catalog and how do you see that potential playing out over the next 12 months or so?.

Well, I think, John, the first issue is a cultural difference and whether it was a family company. A little more focused towards direct sales than rental. We're bringing in that culture and we to build the sales team and the organization. It's not surprising. We anticipated that. We think that [indiscernible] a lot of good people.

They are now motivated and stepping up which we're happy to see. As far as customer migration, it's been no significant migration at this point..

Got you.

And just from a cross-sell standpoint, do you see much revenue opportunity in extending the catalog there into the Arrow customer? How long did that take for you guys to really get out?.

Well, I think the first focus is we're trying to bet it now, then get everything on our system so their whole company is on one system and we intend to accomplish that before the start of our new fiscal year and that's our focus. As I said earlier, we're trying to build that sales team now.

Once we get through two building blocks in place, we will go into what we call additional business selling in each customer..

Great. That's helpful. I know that the [indiscernible] deal is closed. I wanted to ask you around how you see that acquisition now that you've had some time to think about it impacting pricing in the industry.

Do you think it changes the level of competition in the industry where things become more rational going forward? Or do you see it as maybe having the adverse effect, or do you see it just kind of as a neutral item?.

I think we'll get a little more rationality on the pricing side..

Okay, thank you so much..

[Operator Instructions] Our next question is from the line of Kevin Steinke with Barrington Research. Please proceed..

Good morning. So you talked about you're pleased with the new sales performance in the quarter that was part for the reason you feel more confident towards the high end of the guidance range now.

And that as well a bit of a change from what you're talking about last quarter when new sales came in a little soft, just wondering if anything has changed as you moved into this quarter and how you're feeling about the new sales outlook for the rest of the year..

I think our new sales outlook based on the momentum we currently got going, we're always in some type of incentive. We're in the March madness incentive right now. I think we're very comfortable to continue the momentum that we have for the remainder of the year..

Yes. I think, Kevin, it was just its accumulative factor. I think we're a little bit behind in new sales to the first quarter. We made up that gap this quarter combined with continued better retention and continued really the ads reductions, continuing the stabilized and providing that year-over-year improvement in comparison.

If you remember last year at this time, we were still sequentially declining in revenue quarter-to-quarter. So naturally, the more we get stabilization with the wearers and the bump from decent sales and retention, it's just going to start to move that growth in the right direction..

Okay, good.

What do you believe is contributing to that improved customer retention as that more stabilization in oil and gas as well or anything else you would highlight there?.

I think that may be a little bit of it. I think we continue to have a number of initiatives which is really just ongoing, but to improve customer service in retention. But I think you're right.

I think for the last couple of years when we've talked about retention rates being a little bit off, there certainly was an impact of some of the energy fall out. So I think some of those losses are probably behind us now and we're starting to move ahead a little more clean..

Does your outlook assume that wearer levels, just the ads versus reductions are stable for the rest of the year? How do you view that as you look to the rest of the year?.

We would say we're operating right now in more of a normal environment which it's not really a big pull form wearers, but it's not a drag either. It's sort of stable and that's our assumption. Ron mentioned we are seeing some pockets of positive ads in some of the energy markets but again, not overly significant.

We don't have anything built in that's a big pull or tailwind..

All right. Fair enough. And then the specialty garments business, solid results year-over-year, you had talk about in the past I believe that you expected some strength in that business more on the second half of fiscal 2017.

I'm wondering if that's still the case or maybe some revenue was pulled forward to the second quarter and that contributes to the second half maybe a little softer.

What's the outlook there?.

Well, we're still behind year-over-year in profits and we expect to make up that gap in the second half. I think the third quarter is still expected to be their strongest season of the year. It's usually either the first of the third quarter and this year it was always projected to be the third quarter.

So we still expect a strong third quarter to make up the somewhat year-to-date shortfall on profits that we're sitting at right now..

All right, great.

And then lastly, what was the benefit of the Canadian dollar at the quarter?.

It was about three-tenths on the growth..

All right, perfect. Thanks for taking my questions..

Thank you..

The next question is from the line of Tim Mulrooney with William Blair. Please proceed..

Good morning.

Can you guys give us an idea of what the negative impact form energy was in the quarter? Or maybe just what organic growth would have been excluding energy?.

Yes, Tim. We don't really have and really since this energy dynamic has started, we have not had specific numbers to say what growth would have been without the impact of energy customers or energy losses. It's just too difficult to sort of parse out what's an energy customer, what's an energy-related customer and so on. So we do not have that.

What I will say is that we're too quarters in now to really not having seen those reductions from the energy sector and once we sort of get another couple of quarters through, we'll sort of have annualized that impact and that organic rate of growth that we'll be sitting at which if you look at our third and fourth quarter guidance pegs us more in that 3% range.

It sort of tells you what I have been telling you for the last few quarters which is without some of those reductions our organic growth probably would have been in about that 3% range and I think we're starting to get back to that now. But we don't have a specific calculation of that..

All right. That's fair. Thanks, Steve. And moving onto your new customers.

What percent of the revenue growth from new customers in core laundry came from no programmers versus market share gains? Are you still leveled out or about that one third, two thirds ratio?.

That's about right, Tim..

Yes, okay. Thanks. Ron, can you give us some examples of where these no-programmers are coming from? Are there new verticals in markets opening up for you? Or is it mainly just increasing penetration at existing markets and that plenty existing markets stand out..

No significant new markets. I think it's just the penetration of a lot of places that were purchasing garments that are now we have convinced them, we have a better alternative..

Okay. Thank you..

We have no further questions at this time. I'll turn the call back to you..

Very good. We'd like to thank everyone for joining us today to review UniFirst's year to-date by natural results from fiscal 2017. We look forward speaking with you again in June and we'll be reporting on our third quarter numbers. Thank you very much and have a great day..

Ladies and gentlemen, that does conclude the call today. We thank you for your participation and ask that you please disconnect your line..