Steven Sintros - President, Chief Executive Officer Shane O'Connor - Senior Vice President, Chief Financial Officer

Greetings! And welcome to the First Quarter Earnings Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions]. I would now like to turn the conference over to Mr. Steven Sintros, UniFirst’s 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. We'd like to welcome you to UniFirst Corporation's conference call to review our first quarter results for fiscal year 2020 and to discuss our expectations going forward. This call will be on a listen-only mode until we complete our 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. For more information, please refer to the discussion of these risk factors in our most recent 10-K filings with the Securities and Exchange Commission. I'm happy to report that UniFirst’s first quarter of fiscal year 2020 produced solid results for the company relative to both our top and bottom line. Shane will go into the details shortly, but I wanted to first take a moment to step back and recap the quarter's results. For the first quarter of 2020 UniFirst set record highs for both revenues and profits. Consolidated first quarter revenues were $465.4 million, an increase of 6.1% over the same quarter a year ago. Meanwhile, operating income and net income were $60.1 million and $48.2 million respectively, representing increases of 19.2% and 25.9% when compared to the first quarter of last year. As always, I'd like to acknowledge that we do not achieve our company successes alone. That said, I want to take this opportunity to thank those…

Thank you. [Operator Instructions] Our first question comes from the line of Andrew Steinerman with J.P. Morgan. You may proceed with your question.

Hi. Could you jump a little bit more into the assumptions around the energy end market, and so I definitely understand you're saying it's, you know a more challenging environment for energy companies. Could you be a little more specific? Is this like tied to number of rigs and is there any assumption made by the fact that as you well know, oil prices very recently actually have picked up.

Sure, Andrew. What we're seeing in terms of some of it is rig counts, some of it is simply and you read the articles in the paper like I have, you know these companies have a lot of debt coming due and they are trying to trim their operations to where they can take advantage of some of those higher prices to pay down debt and we're seeing it in management of the heads within some of those companies. And so, you know over the last couple years after the big dip in energy activity in say 2016, we had seen some strong recovery in West Texas primarily, but now we're seeing softness in really all the energy markets in terms of reducing heads and we don't want to overstate the impact of it. As you saw, we trimmed the top end of our range and some of that really is in some of those markets. Last year at this time we were at positive [enhanced deductions] [ph], and this year in some of those markets we're negative, and so we're seeing some of that activity right. The recent development around potentially spiking oil prices you know may or may not change that, but we really haven't had enough time to see what the impact of that might be, whether they'll take that additional profit and pay down debt or start reinvesting again, it's probably going to play out over several months.

And could you just remind us what your exposure is to the energy end market.

So, we've talked about over time that you know oil and gas exploration, depending on what year you were talking about was anywhere from 5% to 10% of our business, but really that's not as much the relevant number as you know the overall geographic exposure that we have to markets that are dependent on oil and gas activity and all the support businesses as well. I wouldn't say we're seeing at this point that depth of an impact down to all the support businesses, but we are seeing the early stages of slowdowns.

Okay, thank you.

Our next question comes from the line of Andrew Wittmann with Baird. You may proceed with your question.

Hey, great! I just wanted to dig a little bit more into that last question from Andrew and just ask, have you lost specific contracts with these customers or Steve, is this really just a reflection of where levels, adds stops that you're seeing.

Yeah, I would say Andy that it's a little bit of all the above, but when look at our growth drivers and you say new accounts sales, adds reductions in lost accounts, and again I think I made the comment to say that they were partially due to the oil and gas; we've seen impact in all. When we look at new account activity year-over-year, this time, this year versus last year there were more energy accounts being sold last year at this time. Certainly I just mentioned the adds reduction metric. I wouldn’t say as much of it is in the lost account number. Although there's some, we are seeing some smaller customers failing.

Got it! I mean I guess when I do the math here, I kind of – it looks like you're somewhere implying for the rest of the year, somewhere in the high, you know around 2%, 2.5% total growth in your organic outlook. If energy is 5% to 10%, call it 7%, I mean from the current rates of underlying organic growth you’d have to see that business get cut in half. So it sounds like – it feels like there is more there and you did mention that you lost one large or maybe several large accounts on a non-economic basis. So I guess can you talk more broadly beyond the energy patch what you’re seeing and specifically on the large account if you could help us understand the size of that, so that could help us understand the deceleration implied in your revenue guidance.

So, I think taking a step back, I think the revenue guidance, we have it at the beginning of the year that assumed organic growth for the year of around 4%. We are basically saying that you know we're coming off that a little bit for the trends we are seeing, but we were always assuming some deceleration of organic growth partially due to the tougher comps in a number of areas, partially related to the strong account sales in ’19, but also the higher merchandise recovery charges. So we always sort of had the model, assuming some deceleration of organic growth that put us at about that 4% mark for the year. Now over the remainder of the year, right now our numbers are a little closer to about 3% organic, which obviously assumes some deceleration. There’s a number of pieces impacting that. The slowdown in energy is a piece on the adds reduction side. I talked about on the lost accounts side. Last year we had as good of a retention year as we really had over the last decade. Through the first quarter, we are ticking a little higher than that for sure, part of it being some of – you know a couple of these accounts that we made the decision to move away from. I hate to get into too much of the details, but those probably make up a few million dollars of revenue. So it's another item around the edges, but as we always talk about our different growth drivers, it’s an area we felt worth mentioning that retention had slipped some. On the new sales side, I will say that I made the comment that activity had slowed some in December and through the holidays, and that's having our outlook for Q2 new sales being a little soft. Last year at this time, we really blew through the holidays with very strong activity on the new account side, which really helped fuel a full year new sales result that was by far a record of new account sales, and we're seeing a little bit of slowing right now. Again, I made the comment partially due to energy, but probably not fully due to energy. So the combination of some of those factors, combined with the originally built in assumption that there was going to be some tougher year-over-year cops as the year went along, is kind of getting us to the results and the guidance that we are putting forth at this point.

That’s great context. Thank you. I think it's probably also worth noting here that your margins were really quite good and I wanted to dig into that a little bit here as well. I mean you did mention that there's – 0.7% of the growth rate was from accounting items of release and some other stuff there as well, timing. I mean even if – are we to assume that even we were to take that 0.7% or about $3 million, I mean that basically, does that come through as like basically pure profit and even if it does, I mean your margins are still up a lot. Is that the right way to think about what you're calling out there in that 0.7%. Shane O’Connor : Yeah, this is Shane. Yeah, that 0.7%, a fair amount of that drops to our operating margin line. When you take a look at the operating margin impact of those, those equate to about 50 basis points on our margins. So clearly, the lion's share of that is translating into profit, because there's no cost associated with some of those reserve adjustments.

Okay, and then my last question for now is just - I've never heard the timing of Thanksgiving being a factor in organic growth and so I was just wondering the mechanics behind that? Why is that the case here?

Yes, I figured that would probably be a question. So again, this sort of relates to our fiscal calendar and actually where Thanksgiving falls this year in the actual calendar. So at the end of our first quarter, Thanksgiving is always the last two days of our quarter and in some cases we're not able to run the routes related to those two days. And we have to run those routes. Some of those routes we run before the holiday, some of them we run subsequent to the quarter, in the subsequent week which falls into our second quarter. Now historically we've always deferred the revenue related to those routes, because we say the delivery is important enough for revenue recognition. Because Thanksgiving is a week later this year, and it's actually closer to Christmas, we ran more of those routes before the holiday, which results in that revenue being recognized in the first quarter, where normally it would be deferred into the second quarter. So again, that's a timing item where the revenue got recognized in our first quarter. Normally it would be in the second quarter, so it will actually be a headwind to the comparison in the second quarter, because not as much is deferred there.

Thank you very much.

[Operator Instructions] Our next question comes from the line of Tim Mulrooney with William Blair. You may proceed with your question.

Good morning.

Good morning.

I had a couple of questions here. So, on the margin side for your core laundry business, correct me if I'm wrong, but I think you were calling for an operating margin of 10.3% at the midpoint for the full-year, is that correct? Shane O’Connor: That's correct.

Okay, so but with the first quarter being so strong here, I think actually up like 140 basis points year-over-year. Do you have updated expectations for that segment or are you still expecting 10.3% midpoint for the full-year? Shane O’Connor: Yes, I had mentioned that in some of my prepared remarks that the expectations for the full-year still have the midpoint being 10.3%. And the first quarter, it was a very strong profit quarter for us, but it often times is. The first quarter is usually very strong. Some of the cost escalations that we see just seasonally are in the second half of the year, and I guess I'll take the opportunity to speak to a couple of those. First and foremost, would be we have set annual salary increases that take place in January, obviously with you know payrolls being the lion's share of our costs. Our first fiscal quarter is benefiting from a lot of the revenue growth during the year, but those salary increases don't hit until those last three quarters. Our second quarter has certain seasonal costs that cause it to almost always be down from an operating margin perspective, and I think historically we've talked about some of these things. They are normal in operating, but – or the resetting of unemployment taxes we have a disproportionate amount of real estate taxes that actually get expensed during that quarter, and we also have a large payout of unused sick time that takes place in that. Some of the other things that are resulting in the margin being reduced in those last three quarters, we have mentioned the fact that we were forecasting in some additional costs related to our CRM project, and we expect those to be heavier in the final quarters as we move toward pilot and eventually we start to ramp up for deployment, and then of course there's going to be an impact related to the modest revenue growth in the second half, the more modest revenue growth in the second half of the year. I guess the last item...

Okay. Shane O’Connor: The last item I'll talk about, just because coming into the year we had commented on the fact that we had some expectations around healthcare costs. Starting at the beginning of our fiscal year we actually redid all our healthcare plans to our employees. So our employees were introduced to those new plans, and right now we have one quarter's worth of experience related to those new plan, but there does remain a significant amount of uncertainty around it, I guess the claims experience related to those plan, and the second half of our year is also maintaining caution as it relates to the costs that are going to be associated with those.

Got it. Okay Shane, yes, thanks for all that extra color; that's really helpful. Maybe one or two more from me. Sticking on your guidance, you pulled up the low-end of your EPS guidance range for the full-year? I think you mentioned in your prepared remarks that was primarily due to a lower tax rate and maybe a more favorable interest expense than you were initially anticipating? Does that make up the majority of why you are pulling that up?

It does. It does.

Okay, and lastly from me, could you just comment on the pricing environment? Is it still pretty favorable? And could you also comment on your merchandise recovery charges. Are you still seeing a benefit there was that more of a 2019 phenomenon? Thank you.

Sure, I think the price environment is relatively stable. I think it's – I've made the comment before that there’s still a fair amount of aggressiveness in our industry in terms of new accounts and the sales process. With respect to merchandise recovery charges, the first quarter was still pretty strong. The growth in that area was higher than the organic growth was overall, so it was a contributor, and I think we're starting to get to the point where we're annualizing some increases there that also leads to the caution of the second half of the year or the last nine months in terms of tougher comps.

Understood! Thank you, gentlemen.

Thank you.

There are no further questions at this time. I will now turn the call back to you.

Okay, I'd like to thank everyone for joining us today to review our first quarter results for fiscal year 2020. We look forward to speaking with everyone again in March when we expect to be reporting our second quarter and mid-year performances for the year, as well as our expectations for the remainder of fiscal 2020. 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 line.