UniFirst Corp (UNF) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the UniFirst Corporation second-quarter earnings release conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. time (Operator Instructions). I would now like to turn the conference over to Mr. John Bartlett, Senior Vice President of UniFirst Corporation. Please go ahead, sir.

Thank you and welcome to the UniFirst's conference call to review our second-quarter operating results for fiscal 2004 and to discuss our expectations, going forward. My name is John Bartlett and I am the Chief Financial Officer. Joining me are Ronald Croatti, Unifirst's President, Chief Executive Officer, and Dennis Assad, Senior Vice President of Sales and Marketing.

This call will be in a listen-only mode until we complete our prepared remarks.

Before we begin, I have 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 uncertainties. The words 'anticipate' and 'should' and other 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 performance of acquisitions, economic and business changes, fluctuations in the cost of materials, fuel and labor, economic and other developments associated with the ongoing war on terrorism, breaks in unemployment levels, demand in price for the Company's products and services, improvement in underperforming rental (ph) operations and the outcome of pending and future litigation and environmental matters.

Now, I will turn the call over to Ron Croatti for his comments.

Thank you, John. I would like to welcome all of you this afternoon to our conference call. All of you are joining us for this review of our second quarter and the first half.

The good news is the results for both periods show an increase in revenues and profits for the Company. John will provide you with details of the numbers shortly but let me begin with a quick recap.

Revenues for the second quarter were a record 177.4 million. That is a 21.2 percent increase from 146.4 million in the same period a year ago. Acquisitions, primarily Textilease, account for 14.4 percent of those percentage points with a combination of price increase and a turnover making up the balance -- 6.2 percent of UniFirst laundries.

Second-quarter net income was a record 6.6 million, or a 74.7 percent increase from the 3.8 million in the same period last year. Net income per share was 34 cents as compared to 20 cents for the same period a year ago.

For the first half of the year, revenues were a record 358.3 million, a 21.2 percent increase from the 295.6 million for the first half of fiscal 2003. Almost three quarters of that increase resulted from the acquisition, again primarily Textilease. Pricing had less than 1 percentage point impact and the balance came from organic growth.

Net income increased to 58 percent from the 10 million (inaudible) or 53 cents per share in fiscal 2003 to 16.1 million, or 84 cents per share in 2004.

New uniform service sales, both for the quarter and the first half, lagged behind the comparable period of last year, so we are pleased we were able to show this kind of growth even without the boost we hoped for in our new rental sales. You're probably aware that, after hitting historic highs last summer, the index of consumer confidence has been falling and though we know the Institute for Supply Management index continues to read about 50 percent, indicating an expanding economy, we are just not seeing a lot of business buyers confident out there. We mentioned this last time and said we believe it would take at least another quarter for the buyers' caution to subside. I want to reemphasize that even though we have benefited from some internal growth, we aren't seen much in the way of either wearers (ph) or product service additions at our current customer base.

Our subsidiary businesses are seeming to hold up well. UniTech is on a pace to have another good year with prospects for continued growth and the European markets looking especially bright.

Our Greenguard (ph) first-aid and safety business got a substantial boost from the addition of Textilease (inaudible) and (indiscernible) business is now working against a much bigger base for growth. They're making progress and also look like they're having a good year as well.

Integration of the Textilease acquisition continues to move along essentially on schedule. We presently have four locations converted over to UniFirst systems and are sticking with our plan of doing roughly one per month.

A couple of the smaller locations are in the process of being closed and have service operations being shifted over existing UniFirst locations. Virtually all personnel are being reassigned or retained. Affections (ph) of former Textilease customers have stabilized and we expect we will continue to be hit by losses in the months ahead.

As far as spending is concerned, we continue to be cautious and are holding back on capital projects wherever possible. We expect the economic recovery to continue and we're still being very careful with expenditures and are only committing to major new projects until we see irrefutable evidence the economy is on solid footing again. To this extent, it is necessary to sustain our larger operation base (indiscernible) headcount is up a bit and in the sales area, we're definitely planning to add extra reps, both to counter the sales slowdown and to better prepare ourselves to take advantage of the market uptick when it comes.

Now, for additional details regarding our financial presentation, here is John Bartlett, Chief Financial Officer.

Thank you, Ron. As Ron explained, we were pleased with the results for the second quarter fiscal 2004. Revenues for the first 26 weeks of fiscal 2004 were a record $358.3 million, a 21.2 percent increase of the prior year's first 26 weeks. Of this increase, 15.3 percent arose from acquisitions and the balance of 5.9 percent from internal growth and price increases. The acquisition of Textilease accounted for substantially all of the growth from acquisitions.

For the quarter ended February 28, 2004, revenues were $177.4 million, a 21.2 percent increase over the prior year. Of this increase, 14.4 percent was due to acquisitions and the balance of 6.8 percent from internal growth and price increases. Again, the Textilease acquisition accounted for substantially all of the acquisition growth.

The pricing environment continued to be difficult and the revenues from price increases were less than 1 percent in both periods.

The laundry segment of our business increased 20.2 percent in both the first 26 weeks and the second quarter of fiscal 2004. Of this increase, 15.1 percent and 14.3 percent were due to acquisitions in the 26 week period and 13 week periods, respectively. The balances in both periods were from internal growth and price increases.

The first-aid business nearly tripled in both periods due to the acquisition of Textilease. The segment is performing well and we're optimistic it will make a positive contribution to our operations as we move forward.

Finally, our UniTech business increased 1 percent -- 1.7 percent from the results in the first 26 weeks of fiscal 2003 and 6 percent in the second quarter.

Operating costs increased from $191.1 million to $230.8 million, or 20.7 percent over the prior 26 weeks. As a percent of revenues, these costs decreased from 64.7 percent to 64.4 percent of revenues. For the 13 weeks ended in February, the operating costs declined from 67.2 percent to 65.2 percent. The primary driver of these decreases was lower merchandise costs. These decreases were offset by significantly higher energy costs and the fact that the Textilease laundries have higher production costs than the existing UniFirst facilities.

One of our goals will be to bring these costs in line as we consolidate the operations over the next couple of years. We do not expect any significant benefit from this consolidation until fiscal 2005 or 2006, when we will have fully integrated the two entities.

Selling and Administrative costs increased 16.2 percent from $63.6 million to $73.9 million for the 26 weeks ended in February and from $31.7 million to $37 million, or 17 percent, for the 13 weeks ended in February of 2004. As a percent of revenues, these costs declined from 21.5 percent to 20.6 percent for the 26 weeks ended and from 21.6 percent to 20.9 percent for the comparable 13 week periods. These decreases were the result of the quick closure of Textilease's corporate office as well as relatively fewer salespersons as a function of the combined operations.

Depreciation and Amortization increased 15.4 percent from $19.7 million to $22.7 million for the 26 week period and 19.3 percent from $9.8 million to $11.7 million in the second quarter. The primary driver of these increases was the impact of the Textilease acquisition. However, as a percent of revenues, depreciation and amortization declined in both periods. For the 26 week periods, Depreciation and Amortization declined from 6.7 percent to 6.3 percent. And for the 13 week period, they declined slightly from 6.7 percent to 6.6 percent of revenues.

The net result of the above factors was that income from operations increased 45.7 percent, or $9.7 million, from $21.2 million to $30.9 million for the 26 week periods, and 98.8 percent or $6.4 million for the 13 week periods. As a percent of revenues, income from operations increased from 7.2 percent to 8.6 percent for the 26 week period and from 4.5 percent to 7.3 percent for the 13 week periods.

Net interest expense for the first 26 weeks increased from $1 million to $4.7 million and for the second quarter, $400,000 to $2.2 million. These increases are substantially all due to the additional debt arising from the Textilease acquisition.

The provision for income taxes remains confident in all periods at 38.5 percent.

Finally, income before the accumulative effect of the accounting change reported in the first quarter fiscal 2003 increased $3.7 million, or 29.6 percent, from $12.4 million, or 65 cents per basic share, to $16.1 million or 84 cents per basic share. In the first quarter fiscal 2003, the Company recorded an expense of $2.2 million net of tax, or 12 cents per basic share, as a result of implementing FASB 143 regarding long-lived assets.

Accordingly, total net income for the comparable 26 week periods increased 58 percent, or $5.9 million from $10.2 million, or 53 cents per basic share, to $16.1 million, or 84 cents per basic share.

The second-quarter net income increased $2.8 million, or 74.7 percent, and $3.7 million, or 20 cents per basic share to $6.6 million or 34 cents per basic share.

Overall, we're pleased with the results of operations for the first half of fiscal 2004 and continue to be optimistic for the balance of the year.

Looking at our operating results from another viewpoint, the acquisition of Textilease contributed approximately $5 million to our income from operations in the first six months of fiscal 2004. This $5 million contribution was essentially offset by an equal amount of additional interest expense and amortization costs arising from the acquisition.

Also, the contribution of our UniTech segment declined slightly from fiscal 2003 to fiscal 2004 although it is still having a very good year. Thus, the improvement in our operating results this year has been driven by significant improvements in our core laundry operations.

As expected, the balance sheet of the Company incurred a significant increase in debt as a result of the Textilease acquisition. Total debt at February 28, 2004 was $233.8 million, or 40 percent of total capital, as opposed to $69.9 million, or 17.3 percent, at August 2003.

(inaudible) the cash flow of the Company remains very strong and we expect to reduce the debt level significantly over the next couple of years. The Company has moderated its capital expenditure spending and anticipates capital expenditures to be approximately $30 million in fiscal 2004 as opposed to $39 million in fiscal 2003 and $33 million in fiscal 2002.

Due to the impact of the Textilease acquisition, comparisons on the balance sheet are not meaningful. The most significant increases in intangible assets, which have increased from $20.5 million for amortizable intangible assets and $62.6 million for goodwill as of August 30, 2003 to $60.9 million for amortizable intangible assets and $181.2 million for goodwill as of February 28, 2004. That means (inaudible) retained an independent third-party to appraise the assets resulting from the Textilease acquisition. We have included the expected results in these financial statements but the final report has not yet been issued.

I would also like to point out the amount of merchandise and service on the balance sheet as of February 28, 2004, which is $63.6 million. This amount was $60.5 million as of August 31, 2003. However, as a result of the Textilease purchase accounting, we added over $12 million to this account as part of the opening entries, which means the adjusted opening balance at the beginning of fiscal 2004 was approximately $73 million.

Plus, over the first six months of fiscal 2004, we have amortized cost to our P&L of approximately $9 million more than we have placed in service or added to this account. This is an extremely positive issue which we expect will result in favorable merchandise expense in future periods.

In our January conference call, we provided guidance that we expected fiscal 2004 revenues to be between 710 and $720 million and basic income per share to be between $1.55 $1.65 for fiscal 2004. We continue to believe revenues will be between 710 and $720 million but are more optimistic about basic income per share. We now believe basic income per share will be between $1.65 and $1.70 per share.

That business aside, our Senior Vice President of Sales and Marketing has a few comments.

Thanks. As Ron mentioned, new sales for the quarter and for the first half were off from the same period a year ago. Part of this was due to the slight temporary reduction in headcount but mostly, it was just related to a drop-off (inaudible) weekly averages resulted from broad-based market resistance to new purchase commitments.

As we pointed out in our first-quarter webcast, the year-to-year sales comparison does not benefit from the fact that the first part of last fiscal year was partly good from a new sales standpoint. As a result, any follow-off this year is somewhat magnified.

In addition to our professional sales team being impacted by this continuing buyer uncertainty, our service sales team has been as well. Consequently, the (inaudible) sales organization is also behind last year's pace in terms of new rental sales to the existing customer base. Not only are customers resisting the addition of new product services, for example, floor care or restroom services through current uniform accounts, we're not benefiting from the rarer additions that normally come when the economy picks up and customers add new employees. In other words, the effective of this so-called jobless recovery is very much inevident.

A couple of compounding factors are also worth noting regarding our professional sales teams' results. First, late last year, we make a strategic decision to cut out the low margin business we had occasionally been taking primarily in an effort to thwart competition. The result is that the average pricing is now 6 to 8 percent higher than before and that is cutting out some business we would have ordinarily won.

Second, as a result of some large national account wins at the latter part of fiscal 2003, a good portion of our professional sales team was temporarily diverted to sell through support at these new customers' far-flung facilities. That meant time away from their normal field sales focus and I believe territory prospecting continuity suffered a bit.

Through all of this, our national accounts team continued make good progress. New business signed in the last quarter of last year and the first quarter of this year is starting to (indiscernible) and that has helped revenue. There's more to come as some significant new contracts were signed during the second quarter, including one with a major utility and one with a large oil exploration and refining company.

Positionally (ph), the national accounts team has several large prospects working and we believe will fall in the next two quarters.

There are also some positive things going on in other sales areas. In protective garments, our in NFPA 70-E (ph) initiative directed to current customers is beginning to pay off with expanded usage of flame resistant garments by many accounts that formerly made do with conventional clothing. We are also seeing more interest on large -- part of the large prospects here considering UniFirst as primary service suppliers for major protective garment programs.

To help with new sales, we're also just launching a new program for the food processing industry that will provide them with special clothing and services that are consistent with government mandated requirements for cleaner in-plant processing conditions and improved control of cross-contamination. We believe there is significant potential is this niche application, particularly since the same products and services will also have application in foodservice, fast food and other food distribution areas.

Another boost to sales, we're currently running a major prospect development program combining direct-mail and telemarketing for the specific purpose of qualifying some new sales opportunities and more importantly, setting immediate appointments for reps to get in front of decision-makers who may be ready to buy. We are only a few weeks into this effort but response so far is encouraging.

(indiscernible) setting has gone well. The first sales are now just starting to hit the books and we anticipate a benefit for at least the balance of the quarter.

In the sales support area, the development of new, more comprehensive and more flexible sales training programs continues at a rapid pace and the incremental rollout of our sales force automation system is on track and on schedule. Both are expected to have a positive influence on rep retention and productivity.

In short, we have a lot going on and to the extent that the recovery continues and buyers gradually regain the optimism that comes with sustained economic growth, we will benefit from new rental program sales opportunities that are sure to follow.

Thank you, Dennis. Now, we will turn it over to the operator for some questions from participants.

(Operator Instructions). Michael Schneider of Robert Baird.

Good afternoon, guys. Very nice quarter, guys. It looks like you're doing well in a tough environment. Maybe you can just address the 6.8 percent organic growth, because that is higher than anybody in the industry right now and yet you guys sound downbeat about business prospects, so somewhat of a disconnect -- or maybe you can walk us through the elements of that growth, be it ad stops (ph), pricing, new business, etc.?

I will take a shot to start, Mike. I think, really, it is the year-over-year impact from some of the large national accounts we sold last year that we're getting the revenue this year that weren't last year and we're sp downbeat about our current sales, it is really the sales we're writing today which will impact us a year from now. I hope you can add to that, Dennis.

Sure. We did get significant, large national accounts in the last quarter and first quarter of this year. That has really kicked in substantially. Again, the reason for -- part of the reason for the decreased sales from our field sales is due to that concentration they had on supporting the national accounts initiatives. There was a lot of revenue coming in that last quarter of last year and first quarter this year.

Okay. On pricing specifically, Dennis, you mentioned that pricing is up 6 to 8 points above last year on new business. That is obviously a big number consistent with what Cyntas (ph) is saying. But you seem to indicate it is more just a function of you avoiding low margin business and therefore, the weighted average comes up. By that, do you also mean that pricing, just on a standard account, whatever that means, is really no better than a year ago?

Pricing on standard -- the low accounts, the smaller accounts?

Sure. I guess what I'm saying is if the only reason pricing is better by 6 to 8 points is that you're no longer quoting on the low margin business, to me that says that pricing really is no better year-over-year for the market.

I will take a shot at that, Michael. I think it is a combination of we are seeing an extra nickel or dime of change out of the smaller stops. On some of the national accounts, like there was a large food chain that just went this quarter, we basically drew the line in the sand. We could have went (indiscernible) but we didn't and somebody else got it.

To answer you, I think it is a combination of both -- (Multiple Speakers) -- some opportunity and we're seeing a little better price on that 5, 7 (indiscernible).

Okay. Then, John, you had mentioned that operating profit for Textilease now roughly about $5 million in the first half. That means that business is running at roughly 11 or 12 percent operating margin. Is that the right number?

That is the contribution from the laundries, Mike. When we say that, we're not really factoring into the additional costs that we are incurring here in the corporate office or our distribution center to support that operation. The distribution center has been minimal to date. That is a contribution from the laundry.

As a company, we have never allocated our corporate costs out to the laundries. I mean, we know that there is a percentage that has to be considered. That is really the operating contribution from the laundries and also from the first-aid business.

So while the $5 million from the laundries equals interest expense and added (ph) amortization, if you load on its proportion and share of corporate right now, it is still probably mildly dilutive?

I think that is correct.

Address the number you gave about the additional $9 million in amortization. Presumably, you're changing out a lot of the Textilease uniforms. That is why the inventory in service is up so dramatically.

It actually it isn't up. I think -- (Multiple Speakers). It is really -- as of February 28, it is down to $63.5 million. What I'm suggesting (inaudible) we have amortized in the six months, we've had pretty heavy amortization already.

I guess that's why -- that is the disconnect. I guess I'm trying to figure out -- you have owned this business less than a year. Presumably, you put a lot of new uniforms into service at the Textilease accounts. How is that inventory number actually down?

Actually, I don't think that's true. I don't think we have had to put a significant amount of new garments into Textilease. I think they were in pretty good condition and I think it reflects that we have not had to reinvest heavily in their accounts.

Okay, so this is just accelerated amortization related to Textilease?

Right, and we accelerated the amortization related -- I mean, on all things being equal, if they were about 15 percent of our size, we would have gone from 60 to $70 million anyway. I'm just suggesting the level we have in merchandise and services is really a pretty low level. (Multiple Speakers) -- we are not including Textilease.

At what point does this accelerated amortization run out then?

Well, the way we did the accounting for Textilease, we really front-end loaded it pretty heavily, so a significant amount is incurred in the first six months from what we started with.

So the pressure actually begins to fade in the fiscal third quarter?

That is correct.

Okay. I will get back in line. Thanks, guys.

(Operator Instructions).

Bruce Simpson of William Blair.

Good afternoon, guys. Can you be a little bit more specific (indiscernible) desegregated internal growth, following on Michael Schneider's question? I wonder if you can kind of run us through -- you said pricing is essentially flat or less than one. How else can you give us the drop-add metric? How much business is being lost and new business and so forth?

I will give you the metrics here. Again, keep in mind, we got that rollover effect (inaudible) business (inaudible) last quarter but the new business in service sales is at 14.3; the loss business is at 7.5, Bruce; the shrinkage is at 3.5 and the pricing is about 1.2.

Okay. Can you give us an update on where we are in terms of total number of salespeople? What percentage growth that represents and whether the new business that you're throwing on that 14 percent is consistent with 14 percent more salespeople, or are the changes in productivity and so forth?

We are actually about 8 percent behind last year in terms of growth and 4 percent of that is in headcount and 4 percent of that actually is in lost productivity. Related to that issue I spoke about before, really the concentration on supporting national accounts initiatives.

Okay. I guess I'm wondering and I'm scratching my head a little bit how I reconcile kind of 8 percent behind last year with a new business change of 14 percent growth?

Maybe it is the way we're calculating it, Bruce. What we're doing is we are basically taking the rental volume that we do on a weekly basis and then we take what we wrote in new business for the quarter and we take that as a percent against the rental volume. That is how we get the number. In hard dollars, we have written less business this quarter or this six months than we wrote the first six months of last year. What the difference is, even though we have a budgeted headcount that is supposed to be higher, we are 4 percent less in headcount than we were, so we are not doing as good of a job recruiting or getting the guys in the slots that we should be. We did lose 4 percent productivity off of their weekly selling average. That is basically two things; at the beginning of last year, there was more of a price battle going on there and we may have been a little more aggressive in taking some business at lower prices than we are today (inaudible) our shorter contracts, a combination of the two. I think we tightened up and that is partly -- I'm not saying that is the whole thing. I'm sure part of it is execution but it is partly headcount, partly execution and partly pricing.

Okay. Just to clarify that a little bit more then, should I be interpreting, Ron, when you say you have written less new business in total dollars in the first half of fiscal '04 than in the first half of fiscal '03, should I be interpreting -- when you give us a 14.3 percent new business contribution as one part of organic growth, is a fair to say that that is the contribution to revenue in this quarter that comes from new business written in the last 12 months?

I would say that we look at it differently. We look at it as a percentage of rental volume at the beginning of the quarter. It comes in on a weekly basis. It's not that -- we wrote $350,000 all last week, or the first week, so much of it comes in in each quarter, each week. I guess when I see it I can explain it a little bit better.

It is always difficult explain this because the way we really -- and I think all of the companies manage their -- I would say there business is really the current weekly revenue that we're generating under contract. We follow that with new sales, (indiscernible) and so forth but how you then capture that in a revenue from new sales within a quarter or six months or a year over the prior year is very difficult.

So what Dennis reporting is really his progress of how he performed in selling new five-year rental contracts this year versus how he performed a year ago. He saying he is not doing as well this year in selling new five-year contracts but those contracts he sold last year are going to last for a long time. It is very difficult to translate the revenue impact from one to the year-over-year revenue impact.

Okay, fair enough. I did want to ask you a little bit about -- did you break out -- I didn't understand. Did you break out the contribution from direct sale of uniforms within that total 6.8?

No, I do not believe -- we've not broken that out -- (Multiple Speakers) – we've never really broke out our sales, which are fairly small.

Okay, let me switch gears and talk about profitability a little bit. It seems like though you had kind of a nice quarter from a gross margin perspective relative to the November quarter, given that there is some seasonality there and it just did not dip that much, it still seems as if the total absolute level of gross margins is a good bit lower than it was let's say in the fiscal '02 year. I wonder how much of that you think is just kind of reflective of the recent Textilease acquisition, or is that reflective of kind of softer pricing, or do you think that gross margin levels that we have reached here in kind of the 36, 35 range, that is probably sustainable for the indefinite future?

You asked two or three questions there. I think I am optimistic that we're going to be able to increase our gross margins a little bit, going forward, for the balance of this year and then we get into the consolidation of Textilease, I think it will help us even more. I, of course, perceive modest improvements in the gross margins for the third quarter and more back to what we had in the first quarter and possibly even a little bit better. The fourth quarter is always a little bit like the winter; it is always a little difficult to predict, particularly because of the UniTech side. But I think we are going to be able to improve a little bit as we go forward this year and also next year.

Okay. John, can you give us a little bit about ad-stops (ph) during the quarter? It seems like this has become popular as sort of a metric of how many weeks out of 13 were positive versus negative and just what is the trend there?

We had, out of the 13 weeks starting 12-6 through 2-28, we had two positive weeks on the garment wearer side.

Okay, so the majority is we're still losing wearers out there?

That is correct. Not at the rate of last year but we're still losing wearers.

Last one for me, guys -- cash flow, do we have that either from a quarter or for a first-half number? Similarly, CapEx historic quarter or half?

I can give you the CapEx but we have not finalized the cash flow schedule but the capital expenditures for the first six months were a little less than $15 million, which is in line with our expectation of about 30 for the year.

The cash flow was very strong. Our receivables actually went out $5 million over the quarter and as you see, our cash built up a little bit. We really -- this Q a little bit, we would expect to take down about $5 million more debt but we were committed with some short-term borrowing commitments. We're doing very well from that standpoint.

Do you expect to use that cash just to keep chipping away at the debt balance?

Yes, we basically borrow or pay down debt every day. We have a daily borrowing and we only keep in our bank account what we need for current expenditures so yes, we will -- (Multiple Speakers) -- acquisitions and we're not planning any stock repurchases; we will be paying down the debt.

Thanks a lot, guys.

Michael Schneider of Robert Baird.

Michael Schneider; Okay. Maybe you can spend a minute on the UniTech profitability. John, you mentioned it was down slightly year-over-year first half versus first half but yet, it looks like revenue has been up mid single digits. Is there a mix issue or a profitable account that has since gone away?

No. I think what happened is their revenues in the first quarter were a little less than last year; in the second quarter, they were a little bit more but there has been no big changes in customers other -- but it is kind of a lumpy business and some customers will use a lot of services in one quarter and none the next -- (Multiple Speakers) -- actually performing a little bit better than we anticipated.

It was up 6 percent in the second quarter. Is that right?

That's correct.

Looking at Textilease now, you are doing one plant a month for the systems. When you enter fiscal '05, you're going to start shuttering plants. I think you have mentioned three plants likely. How should we model the expenses for that, or is they're going to be one large charge taken up front and all three done at once? I'm just trying to figure out how we should model in '05 now for these items.

That is a very good question. I think we are thinking about that ourselves. I think the first one is going to be Richmond and that will be closing our Richmond plant and moving into Textilease's Richmond plant. I think, right now, we anticipate that is the next location to be converted. Once it is converted to our system, we can really proceed with that once it settles down, so that could happen as early as this summer. I don't know if you want to add to that, Ron. At the time, we are anticipating that that move -- the way the accounting works is we have to absorb whatever costs we have on our Richmond facility because it was ours to sell the building and liquidate the equipment. We think that cost is going to be in the neighborhood of 1 million to maybe high as 1.5.

We have not yet I guess really concluded when that charge will have to -- I think it will have to hit in the period in which you make the decision to close. I mean, you currently start moving out of it and stop using it and that (indiscernible) be the fourth quarter or probably the first quarter of mixture. I don't know if you want to add to that, Ron.

No, I think John is pretty much on par. I mean, as I tried to say, it is a multi-phase approach; it is a combination of -- the first thing is getting them on our billing system and accounting system; the next 60 days later is getting them on our inventory control or management system, stockroom system. I think, after we get them on that, we would like to settle them down. We have been (indiscernible) we have computerized, plot the routes who goes where. When it has settled down, we will start to lose stops (inaudible) Route 23 or so forth. There is a cost of retagging at each location that will incur the garments. It is not a huge amount of money.

So let's say all three plant closures and rerouting going in fiscal '05, have you guys ballparked a figure for the total expenses of -- (Multiple Speakers)?

I think we're working on it.

First of all, Mike, I don't believe there will be three; there will be two. We're going to move from our Richmond plant into Textilease's Richmond plant and we think -- and I think we've just about decided we will be moving from our Charlotte plant into their Charlotte plant. The third plant that we may close would be Rocky Mount, which would be their plant, and we can cover most of that cost as part of the purchase (inaudible) because that was there facility, so it would really be two facilities.

Now, in addition, there's going to be some branches that will be moving, which we will just absorb those costs as we go. For example, Durham -- THERE Durham has already been -- their branch in Durham has already been closed and moved into our Raleigh plant, which -- and their Beltsville (ph) branch, which was part of their home office, has moved into our Landover plant. There will be a few more branches like that but I don't think we will really highlight those as what it costs or whatever; it will be just cost of operations to move forward. (Multiple Speakers) -- two facilities. In ballpark, it is probably going to be $2.5 million plus or minus -- (Multiple Speakers) -- that we're going to have to absorb in some period over the next 18 months.

Okay.

We're going to do what's right for the business, not what (indiscernible) looks good to do it. We have got to follow when it makes sense for us to do it from an operating standpoint.

The activities around the Textilease customer attrition -- Ron, you mentioned it has slowed down but it still does continue. Can you give us a sense what net rental revenue you think you're going to get out of this acquisition and then give us an update on the sale of the small linen operations?

I think we will start backwards. On the linen, we're still working on it location by location. Hopefully, it will occur and get it behind us by the end of the fiscal year.

On the losses, the losses at Textilease are 3 percentage points higher than UniFirst and the competitive pressure has not let up. They are still swarming out there. It has slowed down but the pressure is still there.

Okay. That 3 points, or that customer attrition, is embedded in the 7.5 percent lost business -- (Multiple Speakers)?

That's correct.

All right, thanks again and great quarter.

Thank you.

Mr. Bartlett, there are no further questions at this time. I would now like to turn the call back to you. Please continue with your presentation or closing remarks.

Thank you for participating. We look forward to the balance of the year and as we've said, we're optimistic and we will look forward to our next report in three months. Thank you very much.

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.