Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter Earnings Call. [Operator Instructions] I would now like to turn the conference over to Steve Sintros, Chief Financial Officer. Please go ahead.

Thank you, and welcome to the UniFirst Corporation conference call to review our second quarter results for fiscal 2012 and to discuss our expectations going forward. I'm Steven Sintros, UniFirst's Chief Financial Officer. Joining me is Ronald Croatti, UniFirst 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 factors, including, but not limited to, the continued availability of credit and the performance of capital markets; the performance of acquisitions; fluctuations in the cost of materials, fuel and labor; and the outcome of pending and future litigation and environmental matters. I refer you to our discussion of these points 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.

Thanks, Steve, and welcome to everyone joining us for the review of UniFirst's second quarter and half year financial results for fiscal 2012. Steve will providing all the details, but here's a brief summary. Company revenues for the second quarter of fiscal 2012 set a new record for UniFirst at $310 million, an 11.3% increase over the $278.6 million reported for the same period in 2011. 6 months year-to-date revenue were also a new UniFirst record, coming in at $623 million, a 12.9% increase over last year's midyear mark. Net income for both the second quarter and year-to-date were also new records for us. Second quarter net income was $19.2 million, a 17.9% increase over the same quarter a year ago. And net income for the first half of the year was $45 million, a 12.4% increase over the same 6 months in 2011. Our core laundry operations which make up the majority of UniFirst's business, led the company's performance during the second quarter with revenues and operating net income increasing by 12.3% and 18.9%, respectively, over 2011 second quarter. These gains were primarily a result of continued strong new account sales, positive trends in both pricing in adds over reductions and increased operational efficiencies at our plant. Our Specialty Garments segment, which includes nuclear and cleanroom operations, reported quarterly revenues that were essentially flat, and operating income lower than last year's second quarter. However, this segment's year-to-date numbers for both revenue and profit were up over 2011 in a 6 months result. In part, these gains came from the group's expanding lines of ancillary nuclear business services being provided throughout the U.S. and Canada, and also in Europe, coupled with a strong nuclear laundering activity in the Canadian nuclear market. Specialty segment performance was also influenced by continuing additions…

Thanks, Ron. Consolidated revenues for the quarter, as Ron mentioned, were $310 million, up 11.3% from $278.6 million for the same period in the prior year. Second quarter net income was $19.2 million or $0.96 per diluted common share, up 17.9% compared to net income for the second quarter of fiscal 2011 of $16.3 million or $0.82 per diluted common share. Core laundry revenues grew 12.3% overall and 11.2% organically. The calculation of organic growth excludes the impact of acquisitions, which contributed 1.2% and a slightly weaker Canadian dollar, which negatively impacted revenues 0.1%. Core laundry revenues continued to benefit from improved sales rep productivity. In addition, certain annual price adjustments, as well as overall improvement in the pricing environment, contributed to the revenue growth during the quarter. Wearer additions versus reductions hovered about even during the quarter compared to the first quarter of fiscal 2012 when they were slightly positive. Our revenues also continue to benefit from higher charges for lost and damaged merchandise, as well as higher garment, makeup and emblem charges compared to 1 year ago. During the quarter, the operating margin for the core laundry operations was 9.9%, up from 9.3% 1 year ago. As a reminder, our fiscal second quarter includes certain seasonal costs that caused a sequential decline in operating margins from the first quarter. These costs include year-end sick pay payouts, January 1 annual salary adjustments and the reset of certain payroll taxes. The increase in operating margins from 1 year ago is the result of improved operating leverage created by this segment's strong revenue growth. Overall production, SG&A and depreciation expense were lower as a percentage of revenues compared to 2011. Energy costs for the quarter were also lower at 5.7% compared to 6% in the second quarter of 2011. Higher fuel…

[Operator Instructions] And the first question is from the line of Joe Box with KeyBanc Capital Markets.

This is actually Andy Debes filling in for Joe today. Just sort of looking into the SG&A performance this quarter, obviously, a positive driver. It looks like since 2008, your sales growth has actually outpaced your SG&A growth by about 130 basis points per year. And year-to-date, it looks like it's outpaced SG&A by 720. Can you just sort of talk about -- are there any structural changes that you guys have made that suggest further leverage from these current levels? And also, sort of relative to your new guidance level, are you seeing SG&A more in this high-teen range or is it going to be back in the low 20% range?

Yes, I guess to address both parts of your questions, I think over the last few years, we've talked about the improvements in sales productivity that we've experienced, and I think that has allowed our performance to exceed the growth in our SG&A costs. And I think that continued more recently. As far as where we expect those levels to continue, I think we would expect a little bit of an uptick over the next 6 months to 1 year back closer to that 20% range, but not too much more than that.

Okay. And then also, just sort of thinking about the core business, you guys had mentioned sort of solid 12.3% growth. 11.2% was organic this quarter. I'm just curious how much of that stemmed from the pricing that you mentioned. And does it -- do you guys feel like there's more upside potential there as we move on?

We don't break out the specific pieces of that growth, but what we can tell you is that compared to prior years, and I think we've said that in the last couple of calls, a little bit larger percentage has come from improved pricing, as well as the impact of some of the things we've tried to do to address -- especially towards the tail end of last year and that impact is carried into this year -- the impact of higher cotton costs and now as well, higher fuel costs. So I think those things have had a little bit of a bigger impact than historically. I think we're reasonably optimistic that the pricing environment will continue to hold, although we may not have as quite the same success that we had last year given the higher costs. On the flip side, we should start to benefit from moderating cotton prices as well.

Our next question is from the line of John Healy with Northcoast Research.

Ron, I had a big picture question for you, Ron. For as long as you have been in the industry, I wanted to get your perspective on what we're seeing today. I've been surprised, to some degree, just how strong the revenue growth turns in the industry appear to have been over the last 4 quarters or so. And I wanted to get your perspective on what you really think is driving it. Because when I look at your business, I don't think employment has been that much of a help to you guys as of yet, and pricing sounds like it's a little bit better than it had been running. But the level of what I guess would be new customers coming on just appears to be the driving factor and I just wanted to make sure if we could get some color from you on what you think is really driving at that.

I think, John, I think you're pretty much right on. I think pricing has stabilized a little bit. The cotton and the poly last year, everybody moved their pricing along a little bit. But I think what we're seeing is primarily out of the energy sector. It has been very successful for, I think, all the companies, and a lot of customers may have been in cotton before and had to go to FR garments now. So you get a little -- you got a redressing but you get a price adjustment. So I think it's really the energy sector's really helped. We're also seeing businesses open up a little more to spending. We see a couple of points shift in the makeup of the new accounts coming from no programmers versus competitive. That's significant but just a couple of points. So in general, I would say that the business atmosphere is a little better, and you're right on with the adds versus reductive, they really haven't been strong one way or the other.

Okay. Do you feel like there's any sort of share shift going on in the industry right now where the larger regional or national companies are starting to be able to take more shares from the smaller guys? Is there something like that happening and maybe more than we've seen over the last few years in your opinion, Ron?

I don't think that's any different.

Okay, great. And then I had a question for you, Steven, just when we think about the margins. If I go back and look at comments you guys made over the years, you always thought about $1 billion revenue company meant about a billion -- about a 10% operating margin for the company. Now that we're kind of through some of this reinvestment phase, where do you think is a good level of aspirational margins or operating margins that you guys could strive to if you're in that $1.2 billion, $1.3 billion-type revenue-sized company?

Yes, I think, as some of my comments alluded to, we're still dealing with some of the reinvestment of the garments. I think when that subsides a little bit here over the next 2 or 3 quarters, I think looking at an 11% operating margin as our nearer-term target to kind of sustain that, absent kind of major fuel or other issues, is realistic. And then I think our goal as always is to continue to build from there and try to work with our underperforming operations and continue to move the needle.

Our next question is from the line of Justin Hauke with Robert Baird.

It's Justin Hauke. I guess I was wondering if you could talk a bit more about the CRM investment. I think it's the first time we've heard about this and maybe you could just elaborate a little bit on some of the initiatives that that seeks to address? And then I guess the second part of my question is related to it but with the balance sheet really, really quite strong here and looking like you're going to be moving into a net cash position by the end of the year, is this type of investment your primary focus for -- to point [ph] the balance sheet?

Well, I think I'll take first part. The legacy system that we've been operating under is about a 20-year-old system and we've updated, modified it. And we basically came to the conclusion to -- we obviously want to be one of the leaders in the industry, in -- with technology changing, in customer portals, Facebook, and all this other stuff coming on. And we think we've got to move ahead on the automation side to the CRM. Better communications with our customers, more access to information for them. So this initiative -- basically it's an Oracle platform and then there's some proprietary software we'll be writing in addition. It's really what we're trying to do is be the most friendly customer-oriented company.

Yes. Just to add to that a little bit. I think this new system will do a number of things to help reduce administrative burdens around the company. As Ron alluded to, from a customer standpoint, it's going to provide better route automation, more functionality for the customers on the route, as well as better information that they can self-manage. I mean, I think that's the way things are going and the customer demands are ever-changing, and so I think we're just trying to stay ahead of that. And as Ron alluded to, we chose this as the time to undertake this initiative, and we think it's the right time that will allow us to kind of get ahead of the current customers market and their demands.

Do you have any type of benchmark targets for, I guess, more so on the cost side but revenue side of what you think this could bring?

They're a certain piece of it. We're going to be updating some of our e-commerce capabilities. And so I think for some smaller piece of it, there are some specific revenue targets, not -- I wouldn't say that we're ready to share at this point. But from an overall perspective, I think we're looking at it as more of improve the customer experience, cut down on lost accounts or accounts that may be looking elsewhere for potential service reasons or demand. So more from -- for service capabilities as opposed to new sales in particular, although I think it will help us in the sales arena as far as selling our service capabilities. So at this point, we're not prepared to give any specific operating targets, but we think -- we're optimistic it's going to do quite a bit for us.

Okay. And then just on the add stops, I think you made the comment that they moved from being additive last quarter to being more neutral. And I guess the question is, of that 11.2% organic growth, does that mean that 0% was from add stops? And I guess, historically, what percentage of your total growth has come from the add stop contribution?

Well, I think when you look at it, just because the current quarter was flattish on add stops, really, the last 4 quarters' performance on add stops impacts the current quarter revenue performance because it's really anything that's happened since last year's second quarter. So what we're trying to say is even though this quarter was flattish, this quarter was positively impacted for add stops because the last 9 to 12 months' add stops were better than the previous years. And that goes with sales or lost accounts or anything we're talking about. So there was a positive impact in the quarter of lost accounts, even though for the quarter in particular, in the 3 months that we're looking at, add stops were flattish. If that makes sense.

Okay. And I guess then should -- the next question to that is are add stops as a contribution to your total growth, is it still below where you were maybe historically? And what contribution historically has it been?

I think historically, it's always been flattish, a little positive, a little negative. And I think it's a little bit of better than that of a contribution right now because we're going from a period where it was a headwind and transitioning to a full year or so now, that it's been either slightly positive or kind of even. So I think it has helped us. To the extent we go another 6 months and it stays flattish or slightly positive, the year-over-year impact is going to be really negligible at that point.

Our next question is from the line of Chris McGinnis with Sidoti & Company.

Just a question on, I guess, the acquisition environment. Obviously, a competitor was -- reported last week and they mentioned that seem to be improving a little bit. I was wondering if you can comment on your thoughts in the space and maybe prices that you're seeing.

I think we've seen a little more activity,#1. And I think the pricing environment is still an issue in our mind. I think some of the companies still got this telephone number in their mind and they live on some rumors of what another guy got. They don't piece it all back together. But we've seen a little more activity but we haven't seen the pricing level that we'd like to see. That's probably the best answer I can give you.

Our next question is from the line of Andrea Steinerman with JPMorgan.

It's Andrew, Ron and Steve. I still have some questions on add stops, and surely, I understood the points you've made so far. But it's surprising to me that the most recent quarter, the February quarter, that add stops would have decelerated. Surely, overall, we're well aware that nonfarm has moved forward in the last few months. And specifically, when I look at the end markets for uniforms within the BLS and kind of aggregate that up on a weighted average basis, that's growing about 2% year-over-year. And that's not any worse than it was in the previous quarter. And so I'm wondering why you think that add stops in most recent quarter have flattened out?

Well Andrew, I think when we look at it, we look at it in different areas of the country. We kind of monitor it that way, and we've got areas of the country -- like the New England area is not a positive area. There's no new businesses or not much going on. We go back to looking at the energy sectors of the country, we're seeing the positives. So all I can tell you is that really, we haven't really seen any real positive pick up this quarter.

Right. And then I think there was also a mention, Steve, that the stock rooms are starting to be depleted. I'm a little surprised at that since add stops haven't moved much. If I caught that comment right, usually, stock rooms deplete when add stops move and you're using used uniforms.

Yes, I think that's more of a comment, again, kind of comparing where we were 1 year, 1.5 years to 2 years ago to today. We worked through a lot of the benefit from the used garments that came back during the recession. And I wouldn't say they're being depleted right now, but they're at a lower level than they were 2 years ago, and that's what's causing -- part of what's causing the higher merchandise costs. So I don't think that the issue is becoming [indiscernible] in the current add stop environment.

Right. But -- so how did you deplete stock rooms over the last couple of years if add stop hasn't moved much? I mean, how [indiscernible] used uniform?

Well, because you're always turning over accounts and even though add stops may be even, when you add an account, you have more opportunity or better chance to use a used garment if you have more availability in your stock room. And so we burnt through that benefit.

Okay. So -- and if you were to describe the level of your stock room right now in terms of the benefit that you would get if add stop started to move forward from here, how would you describe the level of your stock room now?

We would have -- [indiscernible]. You don't think so? I think, Andrew, we measure these stock rooms in numerous ways. But basically, when we get clothes back off a reduction, let's say it's a 22-piece -- I'm going to get technical here with you. 22 pieces are due back, we don't necessarily get all 22 back. We may get 17 back and you get paid for 4 or 5. And then out of the 17, they go through a grading process and basically, it's about a 60-40 split. Of 17, 60% will go back into the stock room. So now you're down to about 10 pieces. Now those 10 pieces will be used for an admin [ph] or replacement piece or a customer that's been abusive to the garment, you will replace it with a used garment. So you're always trying -- the success of this business is trying to use those used clothes as much as you can and frequently as you can. And what basically happens is -- and then going over history again. And when I started, it was 1 fabric and 5 colors. Today, you got 34,000 SKUs out there because of the different variety of customers. And you don't -- in -- as we widen the depth of our offering, so you're forced to put out a new garment. So in that sense, basically, whatever we usually get, we try to put it back in for a replacement piece if the guy has not gone the full length of the service life with the garment.

Our next question is from the line of Diana Rashkow with William Blair.

This is Diana Rashkow calling in for Nate Brochmann. First of all, I just wanted to ask 1 quick question about same customer spend. I know in the past, you've said that customers were still pretty cautious. Any change to the trend at all? And what's your outlook?

Yes, Diana, I think I tried to make reference to that, that we've seen little bit positive attitude out of our customers and new prospects who have little more willingness to spend. It's not like it was in 2007, but when we're talking to customers, they're all concerned about what their competition is doing, and are they in a uniform program or they changed their image or so forth, so -- and we're able to lay a mat in here or a mop in there where 1 year ago, you'd have to struggle to do it. So we've seen a little opening up of the purse strings.

Okay. Great, that's helpful. And then in terms of where the strength is coming from in sales, National Accounts versus more on the local level, is it still the National Accounts that's really driving things?

I'll take that one. I wouldn't say so. I mean, I think we've mentioned National Accounts as a contributing factor to the recent strength of the growth, but it's not a -- the majority of it. Our National Accounts is still less than 15% of our total company. And even though it had some success in the last year or 2, it's not the majority by any means of our new sales. And so I think it's been fairly widespread through local sales and National Account sales where we've had success.

[Operator Instructions] The next question is from the line of Dale Dutile with the Boston Company.

In the past, you've quantified the amount of merchandise amortization increase in the core laundry business. Would -- are you willing to do that for this quarter?

Sure. This quarter, it was running about 2.5% higher than 1 year ago.

Okay. And where do I -- would I see -- if I just look at depreciation as a percent of revenue, it doesn't -- it actually looks down year-over-year. So what am I missing?

Yes, depreciation and amortization, as it shows in the income statement, is for property, plant and equipment, as well as amortization of intangible assets from acquisitions. The merchandise amortization is part of cost of revenues.

Okay. But then in the cash flow statement, wouldn't it be in depreciation, or where would it be?

No. the cash flow statement shows the change in our merchandise and service assets.

Oh, so it's netted out of there.

Yes. That change is a combination of purchases or adds to that net of the amortization.

Got you. Okay. Great. And then -- so just looking, going forward, if I just kind of look at your merchandise inventory relative to revenue, it's actually higher than it has been in the past. And I understand your mix has changed with some of the flame retardant stuff, but I guess what I'm trying to understand, have we kind of -- do you think it's kind of peaked or should -- will the ratio of merchandise inventory to revenue continue to increase as we drive D&A up further from kind of where we are now?

Yes, I think our feeling is that we're cautiously optimistic that it has peaked. We're starting to see kind of a slowing of the growth of that asset. If you look, it grew more from year end to Q1 than it did from Q1 to Q2, and our projections over the second half have that flattening even more. So I think we're kind of at the apex and we're hoping it kind of moderates and ultimately comes down a little.

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

Just following up on the previous question. I believe you said the merchandise amortization was a 250 basis point headwind to core laundry operating margin. Is that the same as it was last quarter? I believe you gave a similar number last quarter?

Yes, it was similar. It was similar. Like I said, we project over the next couple of quarters that that impact -- to moderate. So I think we're kind of at the peak, and our assumptions are that it's going to moderate from here.

Okay. And in terms of the flame-resistant garments being a headwind in terms of higher merchandise amortization cost, how far along do you think that process is in terms of customers upgrading to FR garments? Are you coming up on an easier year-over-year comp on -- in that regard?

Yes, I think we should be, Kevin. I think the one thing that's a little bit of a wild card is with oil prices continuing to go up, the activity in that part of the country continues to expand. But as far as some of the conversions that we saw last year from one product line to the next, it's starting to flow.

As there's no other questions at the moment, I will now turn the call back to you.

Very good. We'd like to thank you all again for the interest in our company and look forward to speaking you in June when we're reporting on UniFirst's third quarter for fiscal 2012. I want to again say thank you, and have a great day.

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.