Ladies and gentlemen, thank you for standing by. Welcome to the UniFirst Corporation Fourth 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] I would now like to turn the conference over to Steven Sintros, UniFirst's President and Chief Executive Officer. Please go ahead.

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 to UniFirst Corporation's conference call to review our fourth quarter and full year financial results for fiscal year 2018 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 that UniFirst's fourth quarter produced strong results for both our Company and our shareholders. Overall, revenues for the quarter reached an all-time high, coming in at $434.1 million, up 7.6% from last year's fourth quarter. On the profit side, fiscal 2018 and 2017's fourth quarters were affected by one-time items that we reconciled out of our results to provide more meaningful comparisons for investors. As a result of the U.S. tax reform, in the fourth quarter of 2018 we approved a one-time bonus to our valued employee team partners. Our executive team felt it was important to share this benefit with our employees because of the integral role they play in our ongoing success. The total charge in the fourth quarter related to this one-time bonus was $7.2…

Thanks Steve. Revenues in the fourth quarter of 2018 were $434.1 million, up 7.6% from $403.6 million a year ago. And full-year revenues were $1.696 billion, up 6.6% from $1.591 billion in fiscal 2017. Operating income for the quarter was $41.4 million, compared to an operating loss of $10.4 million in the fourth [indiscernible]. [Indiscernible] should be reconciled out to provide a more meaningful comparison of our financial performance. Operating income in the current quarter was reduced by a one-time bonus to our employees of approximately $7.2 million, to share in the benefits received from the recent U.S. tax reform. This bonus was approved in the fourth quarter of 2018 and was recorded to selling and administrative expenses. In addition, in the prior year period, operating income included a $55.8 million impairment charge related to our CRM systems project. Excluding the effect of the one-time bonus to our employees and the impairment charge, adjusted operating income in the current quarter was $48.6 million, an increase of 7% when compared to the adjusted operating income in the prior year period of $45.4 million. Net income for the quarter was $35 million, or $1.81 per diluted share, compared to a net loss of $49 million or negative $0.24 per diluted share in 2017. Net income for the full year was $163.9 million or $8.21 per diluted share, compared to $70.2 million or $3.44 per diluted share in the prior year. Excluding the effect of the one-time bonus and the impairment charge we previously discussed, our adjusted net income for the fourth quarter of 2018 would have been $39.9 million or $2.06 per diluted share, compared to $29.2 million or $1.44 per diluted share in the fourth quarter of fiscal 2017. Our adjusted net income comparison in the quarter benefited from a lower…

[Operator Instructions] The first question comes from the line of Andrew Steinerman with J.P. Morgan. Please go ahead.

My question is to kind of look back on margins to look forward past 2019. For a long time your operating margins were close to 14%, which were on the high end of the industry, and then they've been coming down most recently and into next year. My question is, do you have a medium-term goal for your margins and do you sense that perhaps some of your margin successes in the past are kind of becoming a headwind now, particularly around merchandise amortization?

Andrew, this is Steve. So, I think as far as the 14% and you talked about merchandise amortization, I don't think that's the biggest differentiator between then and now. I think we talked a lot over those couple of years, the benefits from some of the energy markets we were realizing as partially being the reason that the margins had ticked up so much. Looking ahead, and you say kind of a mid-term target, I mean we really would like to push those margins up toward 11%-plus and we think we can get there. But as I alluded to in my comments, we're going through a period right now where we are making a lot of investments in the business to position ourselves for the future, whether it'd be with technology investments in our facilities in a number of areas that we feel are important for the long-term. And that combined with I think some of these near term challenges with the salary pressures and so on are intersecting to create what we're guiding for next year. We'll continue to be looking at opportunities. A lot of the investments that we are making, we do expect to lead to efficiencies, although some of them are sort of multi-year projects similar to this technology initiative we're going through. So, hopefully that answers your question.

It does. Can I just put one more question on merchandise? You mentioned a higher level of merchandise replacement going on right now. I was wondering if there might also be a benefit on your side in terms of merchandise recoveries being charged to customers and what's the timing there?

That's a good question. I mean at times when your merchandise infusions are higher, there is some offsetting recovery. We did have a strong recovery year and quarter. I think we're a little cautious that that may provide some difficult comparisons going into next year, but that is an area when you ask about how do we continue to deal with rising merchandise and rising cost in general, and looking to our customer to make sure we're being fairly paid for those services, and that merchandise is a big part of that. So, we will continue to do that.

Appreciate it. Thank you.

Thank you. Our next question comes from the line of John Healy with Northcoast Research. Please go ahead.

Steve, I was hoping you could talk just a little bit about the trend seen throughout the quarter, maybe what you're seeing to start this quarter, just in terms of the revenue momentum if there was any sort of improving or decelerating cadence as the last few months have taken place?

I think as we alluded to from – I'll break it down in a couple of different pieces – on the new sales side, we've had a very strong year. We sold more new business by over 10% than we did a year ago. So, I think the environment continues to be strong. Our team internally continues to execute on that side. I wouldn't say there has been any major change in trend over, say, the last several months in terms of the environment. From an economic perspective, we talk about adds reductions being an indicator. We have not seen any major improvements or declines in that area. I know a question we get asked often is that oil sector and what we're seeing. So, to kind of answer that one, West Texas continues to be strong, but that's really the only area that we're seeing decent size upticks in business. Other than that, I think our customers are fairly healthy. I think they are dealing with a lot of the same employment and staffing related issues as we are and they continue to work through it. Our retention has been stable during the year, but as I've alluded to before, in my mind not good enough and I think that's an area of opportunity and a lot of the investments we're making are designed around improving that area of our growth drivers to improve the organic growth.

Great. And then just one question about capital allocation, seems like a lot of the internal investments you're making either into technology or the facilities, is there a thought to maybe not pursuing M&A as aggressively until you get some of this stuff behind you, and if there is any sort of kind of updated thoughts on maybe any ways to return cash to shareholders in any unique ways?

As it relates to the M&A, I would say there is not a thought to be less aggressive. Particularly on the smaller tuck-ins, one to two-plant operations, we're still out there aggressively looking for opportunities. As you well know, most of those opportunities arise out of family businesses going through their lifecycle and we continue to keep those relationships close to take advantage of opportunities as they arise. So, particularly for the small or mid-sized deals, we'll continue to be aggressive and try to bring those into the fold. In terms of other capital allocation, we'll continue to evaluate depending on our level of cash flow, the level of those acquisitions that have come along. When you look at this year, obviously we did some share buybacks. We spent about $40 million on acquisitions. We raised the dividend a little bit. And those are the things we'll continue to balance as we move forward and looking at what opportunities are out there, whether it's buying our own stock or looking at acquisitions. So, it is part of the continued evaluations and that will continue. As Shane alluded to, our CapEx will be up some this year and probably some elevated next year as well as we go through, and probably have made somewhat of a conscious decision to do a few more projects that are out there to get some of our infrastructure where we'd like it to be to put ourselves in a good position to grow.

The next question comes from the line of Justin Hauke with Baird Capital. Please go ahead.

So, I guess I'm going to ask a little bit more on the 2019 margins, just hopefully help us understand a little bit more, because what you're saying with the 9.7 at the midpoint, I mean maybe you have to go back till like 2006-2007 that the margin at that level, and given the overall strength, just it's hard to reconcile why the decremental margin would be that significant even recognizing the labor expense headwinds and some of the other items that you talked about? So, maybe the first thing would be, as a total percentage of your cost structure, how much is labor and labor-related and what are you assuming that increase is in 2019's guidance, just so we can understand the labor component a little bit better?

Sure. I mean I guess the best way we can tell you is that we expect about a 0.7 to 0.8 on the margin headwind related to labor, and that is broken up in a few areas. I think probably about 0.5 point is related to more of our service and delivery labor, maybe a little bit more than 0.5 or 0.6 point, and that is directly or at least a lot of it is related to the wage pressures that we're seeing, whether it'd be minimum wage increases or just the trickle-up effect of minimum wage increases across our employee base. Some of the other delta probably fall on labor, probably falls in the category of what I'm been talking about, investments that we'll continue to make in our infrastructure trying to improve a number of different areas just to improve our overall capabilities and improve efficiency in a number of areas. So we're making investments in training and development of our people, efficiency projects on maintenance, and some other areas we're investing in that we think will have a return over time, hopefully later in the year, into the following years, but that makes up some of the difference. So, when you look at the 1.5 or so percent decline that we're projecting, that's the labor piece. And then the remaining, you have a couple of tens on merchandise, a couple of tens on depreciation, a couple of tens on energy, and that's sort of taking us to where we go. We will continue to try to work with our customers and our operations to offset as much of that as we can, but that's what our outlook looks like right now.

Okay, that's helpful in terms of just the moving pieces of it. So, 70 to 80 basis points, so 50 basis points is the direct wage increases. I guess on a percentage basis, I mean how much are wages increasing across the organization? I mean, what are you assuming, is that a 5% increase, is that a 10% increase? I'm not exactly 100% sure how much of the total cost structure is labor.

That number, and I don't have it in front of me, but about 40% of our expenses are labor. It's probably not exactly the right number, but it's in the ballpark.

Great, okay. And that's direct and indirect I guess?

Correct.

Okay. So, shifting years, on the CRM system, I guess it sounds like you went with another third party, you had a third-party before and you were kind of thinking about maybe doing some self-development instead. What is it about this new system or the choice that you made that's different than the last one and why it makes sense, if you could just give a little more on that because that seems like there was a pretty big milestone to make a decision?

The biggest decision, to clarify, is that our previous project was a much more significant custom project, building a lot of the application from ground-up. The new project is working with the partners, develop some technology that's very on point for the industry itself, and working to partner with them to enhance the technology as the base of the system. So, it's a little bit more of a ready-made product, proven product, that we're going to work with them to enhance. So, from that perspective, we view it as much lower risk, and we're excited and happy about the new path that we've landed on.

And when is the at least initial goal for when that system would be live with the [indiscernible] project?

At this point, we're not putting out that timeline. What I'd say is, for fiscal 2019 we will not be actively deploying the system, but we will keep investors updated as we move along. I think for obvious reasons, based on what we went through the last time, we want a little bit more runway before landing on when those go-live dates would be.

Okay. Okay, that's it for me for now. Thank you, guys.

[Operator Instructions] It appears that there are no further questions on the phone lines at this time.

Okay, I'd like to thank everyone for joining us today to review our fourth quarter and year-end financial results. We look forward to speaking with you again in January when we expect to be reporting our first quarter results for fiscal 2019. Thank you and have a great day.

Thank you, 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. Thank you and have a good day.