Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded, Wednesday, March 28, 2018. I would now like to turn the call over to Mr. Steve Sintros, UniFirst President and Chief Executive Officer. Please go ahead, sir.

Thank you and good morning. I’m Steven Sintros, UniFirst’s President and Chief Executive Officer. Joining me today is Shane O'Connor, Senior Vice President and Chief Financial Officer. I’d like to welcome you all to UniFirst Corporation’s conference call to review our second quarter results for fiscal ‘18 and to discuss our expectations going forward. This call will be on a listen-only mode until I complete my prepared remarks. But first, a brief disclaimer. This conference call may contain forward-looking statements that reflect the company’s current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties. The words anticipate, optimistic, believe, estimate, expect, intend and similar expressions that indicate future events and trends identify forward-looking statements. Actual future results may differ materially from those anticipated depending on a variety of risk factors. I refer you to our discussion of these risk factors in our most recent 10-Q and 10-K filings with the Securities and Exchange Commission. I’m happy to report our second quarter produced solid results for UniFirst and our shareholders. Overall revenues for the quarter were an all-time high for the Company at $419.3 million, up 7.1% from last year’s second quarter. Fully diluted earnings per share were $2.85 for the quarter compared to a $1.10 per share that was reported a year ago. I’d like to note that our current quarter earnings per share were significantly impacted by the recent U.S. tax reform which Shane will provide further insight on in a few moments. A better comparison to the prior year is operating income which was up 16.1%. All of our operating segments contributed positively to our second quarter results. Our Core Laundry operations reported record revenues of $379 million for the quarter, up 5.7% from the prior year. Operating…

Thanks, Steve. I’m pleased to report that our second quarter revenues set a new record for UniFirst at $419.3 million, up 7.1% from the same quarter in the prior year. This solid top line performance was contributed to by each of our operating segments. Operating income for the quarter was $42 million compared to $36.1 million in the same period a year ago, an increase of 16.1%. Net income for the quarter was $58.4 million or $2.85 per diluted share up from $22.5 million or a $1.10 per diluted share reported in last year’s second quarter. The Company’s 2018 second quarter net income was significantly impacted by the U.S. Tax Cuts and Jobs Act, which was enacted on December 22, 2017. Excluding the impact of the tax reform, which I will talk about in more depth in a moment, the Company’s net income would have been $28.3 million or $1.38 per diluted share, an increase of 25.5% over prior year. Net income excluding the impact of the tax reform for the second quarter benefited from $1.5 million of excess tax benefits recognized during the quarter. The outlook provided during our last earnings call did not include any such benefit for our second quarter or the remainder of the year. As a reminder, in our first quarter of fiscal 2018, we adopted Accounting Standards Update 2016-09 Improvements to Employee Share-Based payment Accounting. Under this revised guidance, excess tax benefits and deficiencies associated with employee share-based payment are now recognized directly to income tax expense or benefit in the income statement in the reporting period in which they occur. As discussed, our second quarter net income was significantly impacted by the recently passed U.S tax reform legislation. With the majority of our earnings generated within United States, we have historically paid a…

[Operator Instructions] And our first question comes from the line of Andy Wittmann of Baird. Please proceed with your question

Great and good morning. Guys, I thought I’d start -- I wanted to start with digging into the guidance a little bit. Obviously there’s some moving parts here. So, as we look at the revenue guidance here, you bought the $5 million from the acquisition. And it looks like it’s fairly unchanged, at least it kind of compares in line with consensus from what you previously gave. I guess I want your thoughts on that first. And then, I wanted to dig into the EPS, which is a little bit more complicated than your EPS guidance. When you pull out the first half results, and correct me if I’m wrong, we estimate around $0.50 of benefit to the second half of the year from tax reform, was it $0.15? It looks like the EPS guidance is maybe a little bit below consensus. But, I wanted to get your take, Steve and Shane, about what the second half EPS guidance importantly is implying here. You guys highlighted obviously some factors there. Some of those factors are the same factors that you cited earlier in the year. But, is it fair to assume that some of the factors got a little bit worse over the course of the last quarter? Sorry for the long question.

That’s okay, understandable. This is Steve. So, I think your assumptions throughout your question were correct. I think when you look at the revenue guidance over the remainder of the year. For the most part, other than the items we highlighted, like the nuclear change in the Specialty Garments segment and the acquisition are largely unchanged. I think at the high-end, they’re a little bit more favorable on our Core Laundry business side. So, I think you’re looking at it correctly there. On the profit side, I think you’re also correct. On balance, the second half of the year, after adjusting for the new tax rates are probably slightly behind what we had previously. I wouldn’t necessarily characterize it as factors that we anticipated being headwind getting worse. I think one thing that was a prevalent aspect of our results this quarter was that a number of areas, expenses ran a little bit lower than normal in some of the areas that they can be variable in terms of repair and maintenance, some of our other production expenses. Healthcare costs, although they were higher than the prior year, were a little bit better than our expectations. And some of that we see potentially pushing out to the remainder of the year. So, some of what you’re seeing I think is a shift to a little bit better results this quarter than anticipated but some things that we feel may end up in the back half. In terms of the specific factors we’re mentioning in terms of wage levels and so on, I think those remain consistent with our cautions from earlier in the year.

Okay. I think that’s helpful. I think I’ll leave that question there and move on to maybe my next question which would on CRM update. Obviously, you guys have been kicking off a new process around that. I was just hoping that you could give us some update on where you are and when you think you’re going to have a direction -- more of a direction and a plan on Phase 2 here?

Yes. I think we’re not ready this quarter to sort of get into the specifics of that outlook. I think, we’ve made good progress during the quarter along that path. And I think we are feeling confident on the path we’re headed towards. We probably will have more to say a quarter from now. As that relates to our ongoing investments, I think, we’ll have more commentary there as well. So, I’d say, it’s been a positive quarter in terms of what we found and what we’re working towards, but no official announcement or direction right now.

Are you still carrying some embedded overhead that would be maybe a little bit unusual as a result of the processing of that plan here today? It sounds like coming of the last couple of quarters that you’ve got people that know your business that know computers that were kind of that important nexus. Is that still kind of running through the P&L right now and in anticipation of another scale-up in that plan?

Yes. I would say, yes. I think the project team we had in place had certainly grown over the years and still remains in anticipation of kicking off this new initiative. And so, I think there is some overhang there and trying to figure out where the balance is there will be part of our communication as we move forward.

Then, maybe my last question, at least for now is, on the buyback, I would say, quite beneficial to A shareholders and hopefully it to B shareholders too, are there any further negotiations on deals like that with the B holders that are ongoing, or is this one wrapped up for now and for the foreseeable future?

The latter; this one is wrapped up for now and for the foreseeable future. This really was an opportunity for the family for the first time in really almost 12 years now to have some liquidity. But really, this is a one-time thing for the foreseeable future.

Our next question comes from the line of Andrew Steinerman from JP Morgan. Please proceed.

Hi. This is Judah hopping on for Andrew. How are you? I was wondering if I could talk a little bit more about the margins. Clearly, over the last few years, you’ve seen margins come down from where they were just a few years back. And you talked a little bit about some of the headwind that are going to be in the second half that are in going to keep at least Core Laundry margin at 9.5, so still a little bit further down. Do you think we’re at a bottom yet? What do you think is the trajectory of those margins going forward? And do you have some sort of medium term or longer term margin goal for the business? Thanks.

I’d probably hesitate to say exactly where we are in the cycle, Judah. But, we’re certainly working to hold where they are and start to build them back. I think one of the wildcard is some of these investments we’re making in these technology products and some other things. I think apps and those items, we’re still optimistic about our ability to have them start moving higher as we move over the next few years. It really continues to be about improving the margins in some of those underperforming markets and regions through acquisitions and growth and some improvements there. So, I know that’s a little bit of punting on the question, but we’re not really ready to say what it looks like for next year until we kind get our investments in line and figure out where the trajectory of some of those costs are.

Understood. As far as the top line organic revenue growth in Core Laundry, you certainly talked about the embedded deceleration inside of the guidance after a very strong first half. Is that -- how much of that is just a function of year-over-year comps with the pricing that you’ve mentioned last year and some of the other benefits, as opposed to maybe something you’re seeing in the market that gives you reasons for caution in the back half of your guidance?

It’s really those items we mentioned. When you look at our actually performance in new sales growth, it’s been very positive. And from a retention standpoint, we talked about it being slightly higher or slightly worse this year from a lost account standpoint. Some of that relates to little bit of a larger accounts that we moved on from somewhat strategically earlier in the year. But no, I wouldn’t say, there’s anything in the market that’s giving us cause. I think the market environment is still relatively healthy and no real red flags there.

Our next question comes from the line of Tim Mulrooney of William Blair. Please proceed.

Good morning. Did you -- Shane, did you say Core Laundry, you expect 9.5% for the full year or just for the second half of the year on the operating margin?

That operating margin at 9.5% is just for the second half of the year.

Okay, just making sure. And do you expect merchandise cost to continue to be a tailwind, even as you enter the second half of the year, it’s more the other items higher wage inflation that kind of thing that’s really impacting that margin.

Yes. As it relates to the benefit that we’ve gotten from our merchandise amortization compared to the first half of 2017, we incurred higher merchandise amortization costs in the first half of 2017 and a lot of that was driven by our Arrow acquisition. And as the year went along that higher merchandise within 2017 started to normalize effectively as we put in our manufactured garments into that acquisition. So, as we take a look at the second half of 2018, we feel that that benefit is effectively going to go away. We might get a slight benefit in the second half but not to the same extent that we have in the last few quarters.

But, wouldn’t be driving a decline or wouldn’t be a headwind, so to speak./

No.

Yes. Okay, all right. And then, Shane one more for you. What were energy costs as a percentage of sales this year and last year for the comparison, do you have that handy? I think, it was 4.1% last quarter.

Last quarter? Last quarter, in Q1 of ‘18, it was 4.1%.

Yes. So, do you have that for this quarter?

Yes. Q2, it was 4.4%, up slightly…

4.4?

Yes, up slightly from 4.3 in the second quarter of 2017.

Got it. And maybe one more, Steve, how should we think about the dividend policy moving forward? I mean, do you plan to raise it annually now. As far as say, there’s been a change here, should we think about it growing in line with the pre-specified range, like EPS growth, any thoughts there?

Right now, we do not -- we have not adopted as part of this increase a formal dividend policy yet. But, it is something that we are going to be looking at going forward. And I think, all I’ll say right now is we’ll continue to look at it in the context of like you’re saying, our EPS performance, our free cash flow performance and other investments that may come along, whether it be other opportunities to buy back shares, to do acquisitions. So, it will really be looked at in the context of all of our other options. But, I think the investors should view this as a change. Obviously, we haven’t made a move in the dividend in many, many years. And it’s something we’ll be actively taking a look at, and looking like you said at potentially whether a formal policy makes more sense going forward.

Our next question comes from the line of Kevin Steinke of Barrington Research. Please proceed with your question.

Hi. I don’t believe you discussed uniform adds versus reductions by your customers. I was just wondering if you could give some color on how those are trending and may be you’re getting lift from that in this economy.

Yes. Kevin, we’re really not seeing that. Our adds versus reductions, part of the reason we didn’t really mention it is, they are really trending very similarly to they were a year ago. We sort of talked about in the past, just a little bit of all the way we internally account for some of that stuff. Typically, when things are stable and it’s a little counterintuitive, but our adds reductions run a little bit negative. And that’s really where we are right now. It’s very similar compared to a year ago. So, we’re not really seeing any significant pull from big adds, big add hiring within our customer base. I think that’s a little bit of indicative as the economy and the low unemployment environment and the competition and the difficulty to define labor. And we’re seeing some of that on our side as well. So, no real big driver there from for adds reductions. I think, the one thing I will say a little bit is, we are starting to see a little bit of strength in that area in the West Texas market, where we’re starting to get a little bit of a pull from energy. Again, it’s not as broad as it was before, so little bit narrower in that West Texas market. But, we are seeing some benefit there.

Okay. That’s helpful commentary. On the Specialty Garments outlook, the $7 million increase. Sounds like second quarter was ahead of your expectation but the revised forecast is also due to your outlook for the remainder of the year. So, are you expecting Specialty Garments to be stronger in the second half than you were previously?

I think slightly. I think most of the benefit actually came in the second quarter. Our third quarter was already projected to be very strong and maybe on balance we ticked it up a little bit. But a lot of the benefit was really in the second quarter.

Okay. And regarding the Memphis acquisition, is this the type of acquisition that is in your pipeline and that you’re mostly evaluating may be these tuck-ins to improve performance in certain specific markets or maybe just the flavor of the overall acquisition pipeline as it stands today?

Certainly, we really like acquisitions, like this one in Memphis. That’s not to say we won’t look at larger regional players of an Arrow size, like last year, or larger. But it seems like the smaller ones like the Memphis size are the ones that are little bit more regular in materializing. Although as we’ve talked about before, most of these are -- almost all of these are family businesses. And Memphis was a good example of one that we’ve talked to many, many times over the years and it finally was able to be executed. So, no, we do like these and they’re ones we’ll continue to go after.

We also have a follow-up question from the line of Andy Wittmann of Robert W. Baird. Please proceed.

Great, thanks. I just thought, it would be informative to check in on the consolidation that’s happened here over the last year in the business and just get your sense of how that’s effectively two things. First off, one, the amount of new business in the market that might be open to changing hands as their providers have changed in the consolidation and your ability to capture that business, I’d like to kind of hear how you think you’ve done on that and if those customers are out there to be had, as well as how maybe the pricing market today stands, if you believe that any of that could be attributed to some of the consolidation that’s happened.

I think we continue to get some benefit from the consolidation. Our new account sales are up about 10% compared to prior year. How much of that is from the consolidation is difficult to say. I think customers for the most part are taking a wait-and-see approach. I think our competitors are being diligent about the process they’re going through and integrating the operations. But on balance, it is creating some more uncertainty in the marketplace for customers that I think we’ve been able to take some advantage of. I think, like when we do acquisitions, even smaller ones, we’re patient in our approach and integration to make sure that the customers are taking care of and stabilize first and foremost. And I think our competitors are doing the same. So I don’t think it’s been a dramatic change in the opportunities out there, but on balance, it has created some. In terms of the pricing environment, I think that again, there are still many competitors out there and in most large markets options for our customers. So, by the nature of consolidation, do we think on balance over time the pricing could firm, I think it could. I don’t think we’re seeing anything dramatic yet. And I think pricing -- good pricing comes from good customer service first and foremost. And I think to the extent we’re doing that we’ll be able to drive price and value to our customers. But, I don’t think there’s been a significant change. Although I would say the environment from that side because it may be somewhat of the unit consolidation, but also just the economy as customers feel better about their companies, usually that helps with pricing as well.

Great. That’s helpful. And I guess my last question here is just I want to hear a little bit about your -- the more innovation products that you’re trying to go to market with. This industry has changed a lot over the decades from a very dirty job economy to not a dirty job economy, I guess. And the employee base has changed of who’s wearing the uniforms today a lot. Steve, as you’ve taken the reins here and had a chance to look at what you service your customers with and frankly your potential customers with, what have you noticed and what do you think and what have you done and what do you think you might do as you look at your overall offering slate that could help you potentially enhance your growth rate?

I think, our offerings have migrated over time, exactly like you said from a more dirty, for lack of a better term, customer base to more offerings that are not just safety and protection from dirt but image and identity. And that continues. I think it is a relatively slow migration because as we’re in contracts with customers, they get there employees in uniforms. They are not really quick to want to change their image and identity necessarily. But, there’s a number of areas, a lot of it comes down to the type of fabric, more of a comfort fit versus maybe the older style garments. And we are currently, without getting into the details, rolling out some product lines that provide more flexibility and comfort in some of the apparel that we’re offering. One of the changes that’s already kind of come full-bore is that more and more customers -- 10, 15 years ago, the amount of our customers in sort of a golf shirt look was really much, much lower and that is much more common now from businesses, even industrial businesses going for more of a traditional work shirt to a golf shirt kind of image and identity. And so, we continue to look at the trends and try to roll out different products that keep us current with the marketplace for sure, and try to give us a competitive advantage where we can get it.

[Operator Instructions] We have not further questions at this time.

Okay, great. I’d like to thank everyone for joining us today for our review of our second quarter financial results. We look forward to speaking with you again in June when we expect to be reporting our third quarter results. Thank you and have a great day.

Ladies and gentlemen that concludes the conference call for today. We thank you for your participation and ask that please disconnect your lines.