UniFirst Corp (UNF) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the UniFirst Corporation's fourth-quarter and year-end 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 Mr. John Bartlett, Senior Vice President.

Please go ahead, sir.

Thank you.

And welcome to UniFirst's conference call to review our operating results for fiscal year 2006 and to discuss our expectations going forward.

My name is John Bartlett, and I am the Chief Financial Officer.

Joining me is Ronald Croatti, UniFirst's President and CEO.

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

Before we begin I would like to give a brief disclaimer.

This conference call may contain forward-looking statements that reflect the Company's current views with respect to future events and financial performance.

These forward-looking statements are subject to certain risks and uncertainties.

The words anticipate, believe, 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 the performance of acquisitions, fluctuations in the cost of materials, fuel and labor, economic and other developments associated with the ongoing war on terrorism, and the outcome of pending and future litigation in environmental matters.

Now with the disclaimer out of the way I'd like turn the call over to Ron for his initial comments.

Thanks, John, and welcome to all of those who are joining us this afternoon to review our fourth quarter and full fiscal year 2006.

Our numbers were released earlier today, and I am pleased to report that they showed another record revenue year for our company.

We continue to grow our operations, reach out into new geographic areas, exploit more vertical market opportunities, add products to our service offering, and build the size and strength of our organization.

For the full year, revenues were a record 821 million, a 7.5% increase over last year's 763.8 million.

Net income was 39.2 million or 2.03 for diluted common share, a 9.4% decrease from the 43.3 million or 2.24 per diluted common share reported in fiscal year 2005.

These results have revenues for this year ahead of our earlier year estimates, and net income in earnings per share coming in right around the revised guidance we provided during the year.

Most of our revenue improvement resulted from internal growth and price increases.

Though acquisitions also contributed about 1.5%.

Our uniform rental business remains strong with new sales trending positively throughout the year and per rep sales productivity continuing to improve.

National account sales, new account installations, and renewals remain strong.

Our first aid and safety division showed a revenue increase of 9% for the year, with results benefiting from a combination of sales force expansion and improved productivity.

Specialty garment revenues lagged fiscal year 2005 by some 16.4% due primarily to delays in bringing on some major new installations as offsets to the loss volume from the completed Rocky Flats contract you all heard about.

The drop in net income for the year was due mostly to the slowness in our nuclear business.

This is a highly margined business, and when it does well we benefit from profit contributions that is proportionately larger than what we could generate from our core uniform rental operations.

On the other hand, when there's a drop in volume, we suffer a relatively bigger income hit.

So the drop in specialty garment revenue I just mentioned translates to a much larger percentage fallout from profit dollars and, consequently, a fair to a significant net income impact.

Beyond this, we were also impacted by certain expense increases, primarily associated with energy and fuel, and we experienced an uptick in selling expense as a percent of revenue and saw merchandise expense creep up to a higher rate of new account installs and more flame-resistant merchandise installs.

For the fourth quarter, revenues were at 207.5 million, a 9.9% increase from the 188.8 million in the same period a year ago.

Net income for the quarter was 10.6 million or $0.55 per diluted common share, a 31% increase from last year's 8.1 million or $0.42 per diluted common share.

Again, income performance was impacted by the favorable impact from our specialty garment business in the fourth quarter.

The overall pace of our business remains pretty steady throughout the year.

New sales ran ahead of fiscal year 2005 performance.

Our contract renewal and customer retention numbers were also slightly better.

Professional sales rep performance for new uniform rental sales showed a solid improvement over last year with a good part of it due to productivity improvement.

Total rep work weeks were up resulting from a combination of increased headcount to slightly improved turnover.

And average reps also showed improvement over the previous year.

We're also getting more consistent location manager involvement in all aspects of the sales process.

And that's having a positive result.

The national account selling team added some major accounts and did a good job securing renewals on current contracted business.

As previously reported, we're in the process of expanding this organization through the addition of new territory reps.

Our internal sales function continued their focus on accelerating current account development through services, expansions that sell in additional products.

And as noted in previous calls, we also continue to work of integrating the national accounts required from Uniform Supply Alliance, announced back in April.

This work is nearly done, but we have some carryover into fiscal 2007.

Total sales for our root sales organization were also up for fiscal year 2005.

Part of the reason is our continued improvement at selling add-on services to uniform rental customers.

And for this we credit our ongoing power roots program which has been successful in keeping reps focused on activity seeking and filling customer needs for nonuniform items.

Not only do we get more sales, we also deliver a better total value proposition, and create a stronger service relationship.

And that helps retention.

Our first aid and safety business is in the process of consolidating the [Madeek] operation into a single location.

Once we're past the initial associated expense we expect to achieve some long-term cost efficiencies that will aid margins.

Additionally, we're continuing to ramp up our in-house pill acting operation.

This will aid us in competitive sales situations and add additional opportunities at securing private label business.

UniTech business showed some recovery during the year, though we didn't expect it to bounce back to the 2005 volume levels quite yet, they are pressing to accelerate some new account installations that have been promised for this year, are pushing ahead with the European expansion, and are expanding the use of the mobile safety store concept, for add-on products to current customers.

We've had a better sense of the degree of rebound as we get further into the year our confidence and profit contribution will improve.

As we move into fiscal year 2007 we are reasonably optimistic about the business outlook.

Despite the fact that business round table economic outlook index fell in the third quarter and that CEOs of major corporations are [inaudible] doubtful about the economy heading toward the new calendar year, we believe the indicators favor a continuation of general positive conditions we experienced during fiscal year 2006.

Unemployment at 4.6%, remains essentially unchanged for September, and employment in wholesale, transportation, retail, trade business and service, all private categories for us, were relatively steady.

The institute for supply management reports on manufacturing businesses showed that manufacturing economy grew in September for the 40th consecutive month.

And a report on nonmanufacturing business showed the 41st consecutive month of sector growth.

Both indexes dropped slightly from their August reading, indicating some sector slowing, but both continue to read well above the 50% level and mark overall economic growth.

Still, even if these conditions hold up as we expect, we will be challenged by strong competition on the sales side, and by the need for regular cost control on the operations side.

Though oil prize have recently dropped somewhat, we don't anticipate a return to the per-barrel pricing we saw prior to 2003.

That means many costs of doing business will remain at or near historic highs.

These conditions will put pressure on us to perform more efficiently, to maximize productivity in all areas.

Consequently, getting more from everyone in every resource is a priority that all our managers will focus on throughout the year.

We're optimistic about fiscal year 2007, and in light of the economic and marketing conditions facing us, we realize we must temper this with caution.

Currently we're estimating full-year revenues of between 875 to 890 million with earnings per diluted common share between 2.25 and 2.30.

We'll be carefully monitoring the internal [inaudible] conditions as we move forward throughout the year.

We'll advise you of any changes to our estimates which we believe are warranted.

Meantime, we're looking forward to the challenges and the hope to be able to report new financial milestones for our company in the quarters ahead.

Now let me turn it back over to John for a more detailed review of the numbers.

Thank you, Ron.

Fiscal 2006 was a very challenging year for UniFirst.

Although we were pleased with the growth and results of our core laundry segment, we were challenged by significantly higher energy costs and a retrenchment in our specialty garment business which includes our nuclear and clean room operations.

Obviously there were many other factors which impacted our results.

On the positive side was an overall decrease in the labor and labor-related costs included in our operating costs as a percent of revenues.

On the negative side was the increase in selling expenses as we increased the size of our sales force.

Recently we've also seen an uptick in our merchandise costs which in part is due to our sales successes.

Revenues for the 2006 fiscal year were a record $821 million, a 7.5% increase over the prior year.

Of this increase, 6% arose from internal price and growth increases and the balance of 1.5% was from acquisitions.

For the quarter ended August 26, 2006, revenues were $207.5 million, a 9.9% increase over the prior year.

Of this increase, 8.7% was from internal growth and price increases.

The balance of 1.2% was from acquisitions.

Operating costs increased some $480.7 million to $524.7 million, or 9.1% over the prior year.

And as a percent of revenues, these costs increased from 62.9% in fiscal 2005 to 63.9% in fiscal 2006.

For the 13 weeks ended in August, the operating cost as a percent of revenues decreased from 63.9% to 63.0%.

The primary reason for the increase for the full year was the increase in energy costs, primarily fuel for our route vehicles and natural gas for the boilers in our laundry plants.

The primary reason for the decrease in the fourth quarter was the favorable impact from our specialty garment business, which I will discuss later.

Selling and administrative costs increased 8.6% from $163.2 million to $177.2 million for the year, and 5.7% from $42.9 million to $45.3 million for the 13 weeks ended in August of 2006.

As a percent of revenues these costs increased from 21.4% to 21.6% for the full year, a decrease from 22.7% to 21.8% for the comparable 13-week periods.

The primary reason for the improvement in the fourth quarter is the favorable impact of our specialty garment business, which I will discuss later.

Depreciation and amortization increased from $43.9 million to $45.3 million for the year, and from $11.1 million to $11.6 million in the fourth quarter.

As a percent of revenues, depreciation and amortization declined from 5.8% to 5.5% for the full year and from 5.9% to 5.6% for the 13-week periods.

The net results of the above factors was that income from operations decreased 2.9% or $2.2 million from $76.0 million to $73.8 million for the year, but increased 39.5% from $14.3 million to $19.9 million in the fourth quarter.

As a percent of revenues, income from operations decreased from 10.0% to 9.0% for the year, but increased from 7.6% in the fourth quarter of fiscal 2005 to 9.6% in the fourth quarter of fiscal 2006.

Net interest expense for the year increased $2.7 million from $6.8 million to $9.5 million for the full year, and from $800,000 to $1.9 million or $1 -- I'm sorry, for the full year, $800,000 from $1.9 million to $2.7 million for the fourth quarter.

These increases are due to both higher amounts of debt outstanding during the periods, as well as increased interest rates.

The provision for income taxes increased from 37.3% in fiscal 2005 to 39.0% in fiscal 2006.

This increase primarily resulted from a $500,000 credit income tax as recorded in the fourth quarter of fiscal 2005, related to the reduction of tax-related reserves which were no longer needed, and the $300,000 charge in the second quarter fiscal 2006 to provide for additional tax exposure assessed by the Company.

On an ongoing basis, we expect that our income tax rate will be approximately 39.0%.

Finally, the income per diluted share of common stock decreased 9.4% from $2.24 per share in fiscal 2005 to $2.03 per share in fiscal 2006.

However, the income per diluted share of common stock for the fourth quarter increased 31.0% from $0.42 per share to $0.55 per share.

I would now like to provide some additional information by our operating segments and comment on certain adjustments recorded in the fourth quarter.

Our primary business is our core laundry operations, which include our US and Canadian rental and cleaning business, our garment manufacturing business, and our distribution and corporate operations.

The core laundry operations represented 88.3% and 90.0% of our consolidated revenues in fiscal 2005 and fiscal 2006 respectively.

The revenues for the core laundry operations increased 10.4% in the fourth quarter of fiscal 2006 and 9.6% for the full year over the comparable prior-year periods.

Of the 9.6% increase for the full year, approximately 7.9% represented internal growth and modest price increases, and the balance of 1.7% was from acquisitions.

The income from operations for the core laundry operations increased 8.8% in the fourth quarter and 4.3% for the full year over the comparable prior year periods.

However, the results in the fourth quarter were favorably impacted by certain adjustments made to insurance and environmental reserves, which on a net basis increased our income from operations by approximately $1.3 million.

Without these adjustments, the income from operations for the core laundry operations would have increased approximately $1.6 million or 2.4% for the full fiscal year, fiscal 2006 year, and approximately $200,000 or 1.4% in the fourth quarter.

Presented in another way before these adjustments, the income from operations for this segment as a percent of revenues declined from 10.1% to 9.4% for the full year and from 10.3% to 9.4% for the fourth quarter.

The overall results for the core laundry operations were primarily the result of the Company's strong revenue growth during the quarterly and annual periods and lower payroll and payroll operating costs, offset by higher energy, selling, and merchandise costs as a percent of revenues.

As expected, the results of operations for our specialty garment business had a very favorable impact on our fourth-quarter results.

The revenues for this segment increased 4.9% from $11.0 million to $11.6 million, and as anticipated, the segment's loss from operations declined dramatically from a loss of $3.2 million in fiscal 2005's fourth quarter to less than $200,000 in the fourth quarter of fiscal 2006.

For the full year, the revenues for this segment declined 16.4% from $61.7 million to $51.6 million, and the income from operations declined $6.9 million to less than $400,000.

As we had disclosed in the past, this decline was primarily attributable to the completion of a large government contract in fiscal 2005.

Also, the segment realized significantly less revenues from customers in Canada than expected in fiscal 2006.

In addition, the fourth-quarter fiscal -- in the fourth quarter's fiscal 2005, the Company incurred unexpected additional costs in decommissioning two facilities.

We are optimistic that our specialty garment business will have a favorable year-over-year impact in fiscal 2007.

We were very pleased with the results of our first aid segment.

For the fourth quarter, the revenues for this segment increased 6.9% from $7.1 million to $7.6 million.

And for the full year they increased 9.0% from $27.8 million to $30.3 million.

The income from operations for this segment in the fourth quarter increased $1.1 million from a small loss in fiscal 2005 to a profit of $1.0 million.

For the full year, the income from operations more than doubled from $900,000 in fiscal 2005 to $2.4 million this year.

This segment continues to make progress in the integration of the Textilease business acquired in the fall of 2003 as well as the new pill packaging operation.

Finally, as Ron stated, our preliminary guidance for fiscal 2007 is that revenues will be between 875 million $890 million, and that income per diluted common share will be between $2.25 and $2.30.

The financial position of UniFirst continues to be very strong.

As many of you know, the Company completed a secondary offering this summer which resulted in various members and trusts of the Croatti family selling 4.6 million UniFirst shares.

No proceeds of the secondary were received by the Company.

Subsequent to our August year end, the Company also successfully complete an extension of its line of credit with a group of banks.

This extension resulted in more favorable terms to the Company as well as increasing our borrowing capacity.

The Company also repaid $75 million of its floating rate notes and re-borrowed an additional $100 million on more favorable terms.

Looking forward, UniFirst continues to aggressively pursue potential acquisitions.

Finally, on a preliminary basis, we anticipate capital spending will be approximately $50 million in fiscal 2007.

This concludes our prepared remarks.

And we would now be pleased to answer any questions you may have.

I'll turn it over to Kelly, the operator, and explain the directions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Mike Fox of J.P. Morgan.

Please proceed with your question.

Good afternoon, guys.

And congratulations on another quarter with strong organic growth.

I was wondering if you could talk about the trend in organic growth that you're expecting built into your guidance?

If you're expecting kind of that continued, six-day percent that you've talked about in the past or maybe a little bit higher, which you've seen over the past couple of quarters.?

Michael, thank you.

This is Ron.

I think we're planning to be pretty consistent.

We built out the sales force, as I think as you guys well know.

We will add commensurate to our growth projection.

And I think we'll basically stay in that 7, 8% range as internal growth.

That's our target.

Okay.

Great.

And then can you also talk about the acquisition pipeline, if it's still pretty robust?

There are -- seems to be more acquisitions currently going on.

There are inquiries about being acquired in the last six months that we've had.

Probably in the last two years.

The prices are still substantially up there, but, we look at every deal, and they have to make sense to UniFirst, there're some deals that don't make sense to us, we'll pass on them.

But as they make sense to us and they can help our marketing position, we will certainly go after them.

Okay.

Great.

Thanks a lot.

Our next question comes from the line of Mike Schneider of Robert W. Baird.

Please proceed with your question.

Good afternoon, guys.

How you doing, Michael?

Doing very well.

I add my congratulations as well on a nice year on organic growth.

You led the industry and the stock reflects it.

Thank you.

First just on new sales, can you give us a sense -- you've been running I think around 16% new sales contribution.

You give us a sense of what that number finished the year at?

Then also you mentioned customer retention was up.

You've got me intrigued on that point, as well.

What did I do with my sheet, John?

John's got the sheet here.

I think basically our new business in the quarter, for August-- for the year.

I'll give it to you an a year basis, was 16.3%.

Our loss business compared to last year was, was down about 1/10th, 8.4%.

Our adds versus reductions were a minus 1.6.

Our pricing was plus 1.6.

And the acquisitions were 1.7.

Okay.

Thank you, Ron.

And --

That's the way we measure it, which is a little different than everybody else's.

Well, we appreciate the detail.

UniTech, can you give us a send of the new contracts that have come through in the second half of this fiscal year now.

How much of those have actually started ramping and contributing to revenue, or is it still on the common fiscal '07?

You want to go or you want me to go?

All right.

We, as you well know, we do, John and I meet with every division manager from June 15 through basically the 1st of August, and we do a strategy and a budget for every operating division, and we met with the nuclear boys.

And the nuclear boys basically have the Canada coming back on line to help us out, we are started to see the revenue just the last two weeks out of Canada.

It's not huge yet, but it's started.

And the boys are predicting a profitable year.

Nowhere near the revenue that we had two years ago or nowhere near the profit margin that we had two years ago.

But in that segment, they will be profitable, and the revenues are starting to come back in.

And Ron, the division will be up in revenue year over year in fiscal '07?

We budgeted it to be up, yes, roughly a little less than 10%, yes.

Okay.

So, when we look at the contribution of organic growth and-- and John, could you just repeat, what was organic growth in the rental operations in Q4?

You said it was 7.9 for the year.

What was it in Q4?

I think it was fairly consistent with the year.

You have to understand all these numbers we're giving you are approximations so we can keep our figures.

I mean, we told you what our overall growth was from, internal growth versus acquisitions.

He's talking with his report here.

What did you specifically ask, in the fourth quarter?

Yes, just Q4 organic growth in the rental operations.

Well, the rental operations grew 10.4% in the fourth quarter.

And I think only 1.7% of that 10.4 was from acquisitions.

So the balance was -- [no audio]

Okay.

Thank you.

Final question.

On just headcount expansion, Ron, I believe you grew the sales force this year around 9%.

Is that right?

We did that last year.

And we intend to probably be about a point less or point and a half less this year.

Okay.

Thank you again.

Next question comes from the line of Rick D'Auteuil of Columbia Management.

Please proceed with your question.

Good afternoon, guys.

Good afternoon, Rick.

Where's Dennis?

I thought he'd get a part here, no?

He's on the road.

He's on the road.

Hopefully he's selling something.

Yes, I was going to say.

The -- just, I want to make sure I heard this right.

UniTech last year lost 6.9 million, is that right?

No, UniTech made less -- in fiscal 2005 --

No --

The income from operations for UniTech were $6.9 million, and this year the income from operations were actually about $356,000.

Okay.

Fiscal '06 was -- you made --

Income from operations, $356,000.

Okay.

What --

Actually 358.

Okay.

Okay.

If we look at year over year -- if revenues were up 10% and you expect it to be profitable, I mean, that's not saying a lot.

But how much of -- is that expected to contribute a $0.10 or $0.20 versus what it did last year, or?

Well, let me just caution to say that the UniTech business is always unpredictable, but I think we are hopeful that we'll get maybe half of that $6.9 million back in the 3 to $4 million range.

I think that's the realistic goal.

John might be a little more optimistic than I am.

It might be closer to that three number.

We don't think it's going to be close to the $300,000 number, Rick.

I mean, I think that maybe Ron is more pessimistic than I am.

But it is -- it is unpredictable, quite frankly.

It is not the same as our laundry business.

And we're going to get as much as we can.

And as the year goes by, we'll chat with you.

But we're not going to get back to the 6 or $7 million range right away.

If you were to make a couple million dollars this year, year over year, that would still be a fairly meaningful number on the bottom line.

I mean --

Absolutely.

Yes.

I think we'll be disappointed if it doesn't do that.

Okay.

And if it does, and we look at your guidance, you did a little over $2 in fiscal '06.

You're only guiding up $0.25 for fiscal '07 it sounds like half of that or more than half of that can come from UniTech alone.

Does that mean your -- what's -- I mean, I heard some of the risk factors, but what -- what are you most worried about?

I think the thing we're most worried about is our merchandise costs.

I mean, we've put on a fair amount of new business, and our -- particularly in the flame retardant area, we've put on a lot of garments.

If you look at our balance sheet, you can see that our merchandise and services ratcheted up, and then I think there's a concern that our merchandise costs, which has cycled to a fairly low point is going to trend back the other way.

We've already seen that in the fourth quarter.

So I think that's going to be where we're concerned about that -- we are optimistic that we're going to have very favorable year-over-year results from the energy.

That, again, is -- we'll see how it goes through the year.

But right now we're looking at very favorable comparisons.

Because our fiscal year was right at the time Katrina was a year ago.

So I expect in the first quarter and if things stay where they are we're going to have a very favorable comparison.

I think it's the merchandise that we're concerned about.

Just -- Ron and I have talked about the flame retardant component or -- or I know prices are going up in that arena.

And I think, Ron, you were saying, if I recall from our prior conversation, that there has been, you needed to look at that more carefully and the blend of -- of garments with flame retardant features.

Is -- do we feel like we have control over that line, or is it a little out of control?

John threw that one back at me, but, I think we're still struggling with it, Rick.

I think we're wrestling to get it under control.

I think we certainly like the -- the Nomex fabric more than the Endure Ultrasoft or the other type fabrics.

But we're still wrestling with it.

I think there's no question that we've got some underpriced accounts out there we're trying to deal with in that particular arena.

And we -- like John said, you look at our merchandise.

That's probably the driving factor of what's driving it up.

Yes.

I mean, I get-- just a quick comment.

Back last year at this time when you gave guidance for fiscal '06, my recollection was we were talking roughly a flat year, in that 225 kind of range.

And we had a disappointing year for, if you count the whole year, a lot it driven by UniTech.

Now, a year later, UniTech's sort of on the mend, and we're kind of back to that 225 again, which is flat with two years ago.

I'm a little disappointed with that as sort of the bogey.

But do you have any thoughts on that?

I think the only [inaudible], we look at our budget.

We've just been through kind of an expensive process of -- , of going through every operation.

And I think we gave a range of 225 to 230.

And then that's today looking at everything what we feel comfortable with.

I mean, we -- we certainly if we can we'll do better.

But I think that's the range that every, kind of internally that we think is realistic at this point, and the 225 would be a 13% year-over-year improvement which is consistent with what we've talked about recently. 230 would be a little more than that.

It's a 0% improvement over two years ago.

So it's --

Yes.

But the two years ago if you go back was a pretty big jump over the prior year before that, too.

So it's -- I think in some ways we may have got ahead of ourselves in the short term in that year.

So we're working hard is all I can tell you to do as well as we can.

All right.

I'll pass it on, thanks.

[OPERATOR INSTRUCTIONS] One moment, please, for the next question.

Our next question comes from the line of Bruce Simpson of William Blair.

Please proceed with your question.

Hi, Ron and John.

Hi.

How you doing, Bruce?

Fine, thank you.

Hey, John, what interest assumption is built into that guidance for fiscal '07?

Well, I think it's effectively relatively flat.

Interest staying about where it is today.

We're not anticipating -- hoping it will go up or down.

I did mention that we refinanced our line of credit and our $100 million of our floating rate notes, and we got about 25 basis point improvement in both of those.

So that will help a little bit.

But it basically assumes about where rates are today.

About $10 million in expense for fiscal '07?

I'm sorry.

Let me get the sheet.

I don't know --

$10 million in '07?

You're saying what's the interest forecast for 2007?

Yes, that's right.

By my calculation you spent about 9.5 million in fiscal '06.

I just want to know in that ballpark --

I think it's going to be a little bit more than that.

I think it's going to be closer to 12 million in 2007.

That part -- that's where our current debt level --

Is that net, John, net 12 million, or is it exclusively the expense --

I don't have 2007 in front of me.

I think that's really a gross number.

No, that's a gross number.

So in general there shouldn't be that much change in the net for '07 over '06.

It really is going to depend on what we do with acquisitions, as Ron mentioned, we're actually looking at several right now.

If we do we're going to borrow some more money.

It's really a function of -- if the debt level stays about where it is, I think our interest -- our gross will be little over 12 million.

Okay.

If we don't buy anybody and we pay it down it will be less than that.

And if we make some more acquisitions it will be little bit more.

John, what are you -- if you are right as to your net income number that you forecasted, the EPS number for '07, what kind of operating or free cash flow do you think that will translate to for the upcoming year?

I don't have that number in front of me.

I mean, it -- it's really, it's basically -- you have to help me with how you define free cash flow.

I mean, you're saying cash flow after capital expenditures?

Sure.

Either before or after --

It's roughly net income, I think.

Because we're predicting that our capital expenditures will be roughly equal to our depreciation and amortization.

So it really comes back to pretty close to our net income.

You know it should be around $45 million plus or minus.

Okay.

You say your looking at acquisitions.

Should we assume that that's just in your core industrial laundry business?

Absolutely.

Okay.

Then just a couple of operational things.

Is there any change in the tenor of your relationship with the unions?

No.

We -- we have not had any issues, Bruce.

Knock on wood.

I mean there's no question that they've solicited to our people and so forth.

Like I said before, we work very hard at trying to remain nonunion.

And then Ron, with respect to the auto industry exposure, can you re-summarize for us approximately as a portion of sales or profit what you think your exposure is there?

We do not do one automobile manufacturing facility.

Where we will get some exposure will be in the areas where those factories are and their support industries may be some of our customers.

And we will have some small exposure with -- with that.

I have not quantified it at this point.

But there are always parts suppliers to these factories.

I'm sure we have some of those.

As far as the manufacturers themselves, we have none.

And flipping that around, where do you think is the best vertical about which you have the greatest optimism over the next year or two, real growth areas that you are exposed to?

I think we're -- we're the street business company, in the general service.

We do very well with the midsize customer who does air conditioning and plumbing and refrigeration and parcel delivery.

And we have dealerships.

We have a lot of dealerships.

But that -- that's the foundation of our company.

I mean if you look at the employment growth, the employment growth is really been in the health care industry.

It really hasn't happened in the industries that are industries, [inaudible] generally service.

It's -- it's in the health care industries, and in the -- -- the light service, food business, the restaurant business.

But and we chase, we chase -- we'll write a restaurant here and there.

But it's primarily the service support industries that support that type of business.

Okay.

Appreciate your time.

Thanks to both of you.

Thank you.

All right.

Thank you, Bruce.

Our next question comes from the line of Terry O'Connor of Cedar Creek.

Please proceed with your question.

Hi, guys.

Could you comment for us, either one of you, on the facility utilization issue that you have because of these national account, you mentioned particularly on the Road Show, on the west coast you have some facilities there grossly underutililized.

How are you doing on that, what's your plan for that in '07?

Our basic plan is -- is we carry our -- we carry a heavier sales force on the west coast than we do on the east coast, in other words, let's say it's a 15-route operation, we might have 7 or 8 salesmen versus 4 or 5 to try to gain market share.

It's a continuous problem for us until we get to that market share, Terry.

We certainly look for acquisitions in the area.

That -- that would certainly help us.

Can you just comment fast on what pill packaging is all about?

What we did is through the Greek Guard brand name, which is our service vans and the Madeek brand, which primarily sells to wholesalers, we had a brand called MediFirst Plus, so basically it's the same pill in -- in the same -- in different wrappers.

And we saw an opportunity to take advantage of private labeling and try to combine some of these brands.

So we went into pill packaging, what you would call private labeling, so that we have got some business from a few places that want their own label on their medication when they go in.

So you go into some drug store or -- or it's fast, convenient gas stations and they're selling 3 Aleve for $0.98 and they're selling 2Tylenol for $0.98, but yet they can have their brands for $0.65.

Maybe a little clarification, Terry.

What that basic business is in the route van for our first aid business and also the Madeek and other businesses is rather than dispersing the pills in bottles where you might have 25 or 50, a couple hundred in a bottle, we're actually dispersing the pills in little packets of 2 pills in a little package.

Got it, okay.

So we kind of vertically integrated that function to basically buy the pills in bulk and then package them with our Green Guard, Madeek, different brands and we also can do it for third parties.

We do it -- we do it for the presence, it' really the kind of presence that kind of pushed us, Terry, where we -- we like to pull a guy out of the cell every three days to give him aspirin, let's say.

So rather than, they call it walking time, they, they don't want to walk a guy every day down to the infirmary to get 4 aspirin.

So they want -- they want certain packaging, so that they only got to pull the guy out of his cell for every three days.

Okay, thank you.

I think Steve has one question.

Yes.

You mentioned that there were more -- you're getting more location manager involvement in the sales process.

Could you elaborate on that, how that works?

Is this a new thing for UniFirst, and is this unique to the industry?

No, no.

It's really not a new thing.

It's something that we've been pushing all along.

And just about every location has a sales manager and a sales force.

And -- and they got a location manager, what we call a general branch manager.

And we're trying to get them more sales oriented somebody's branch, general managers have come out of production or service and sales, it's a little foreign to them.

They're uncomfortable.

And we're working with them constantly to get them more sales friendly.

Got you.

Thank you.

Our next question comes from the line of Jeff [Bourke] of Robert W. Baird, please proceed with your question.

Good afternoon, guys.

Hi, Jeff.

First question, on energy costs.

You made a couple of statements.

First that you don't expect them to retreat back to I think you said pre-2003 levels.

But then you said you're optimistic about the comparisons looking ahead.

Can you give us a little bit more clarification an what you've assumed in the guidance?

Is it flat energy, up, down?

I think we've assumed a modest year-over-year decrease at this point.

Okay.

Second thing I wanted to hit on.

You just talked about the pill packaging.

You also mentioned the consolidation of the Madeek operations.

Are there up-front costs to that that hit at the beginning of fiscal '07, you'll see the longer term benefits, but is there an up-front cost we should expect?

There's going to be some modest costs in the -- probably the November-December timeframe.

What we're really doing is closing a distribution center, the lease is up I think December 31 in Chicago.

And we're physically having to move the the product to Florida.

We'll probably have a little uptick in extra inventory, and have to -- we don't anticipate it's going to be big numbers.

But it will be a few hundred thousand dollars that will be in there.

Okay.

And to clarify, the pill packaging, is there more heavy lifting to do there, or is it ramping up the facility you've already got in place?

That's in Florida, and that's -- that was really ramped up last year.

Okay.

And this is a fairly modest thing.

This isn't a real -- I mean, I think three -- three machines and it's one or two operators a machine or something.

So we're not talking about a major factory here.

Okay.

Great.

Thank you.

Our next question is a follow-up question from the line of Terry O'Connor of Cedar Creek.

Please proceed with your question.

Could you just expand a little bit on what exactly is the issue with these flame-retardant fabrics.

Why are the costs running ahead?

Are you getting more customers who are requiring them?

Are they changing the requirements?

Is the stuff just tougher to work with in longer lead time?

What exactly is the problem?

Well -- I think the main issue is -- the garments are much more expensive.

The garment's called Nomex also last for an extended period.

So they'll hopefully last five or six years, and we amortize them over a shorter period.

So as we've gotten into this business and then push to get additional sales, we have had to made a fairly significant investments in the garments.

Hopefully three or four years down the road the garments will still be good garments, and it'll be generating some revenues with fairly small costs associated with it.

I think it's kind of the up-front costs we're dealing with to kind of expand in this business.

And we think it's a good business to be in.

But for a new account you're not pricing it differently than standard garments, or are you?

We're trying to price a little higher because the garments cost quite a bit more.

Okay.

And Ron, you mentioned specifically that you had some accounts out there that are underpriced.

Was there a change in the type of garments that they're using that they're underpriced, or is it just when you're replacing the ones that are wearing out or disappearing that you're paying more?

Well, I think you go back to the first issue, the -- the fire merchandise.

When we dress a man in Nomex, it's basically around $800 a man.

And when you dress a man in our normal product, 6535, it's maybe $175 a man.

The amortization of the FR is 36 months, as we get into this business, the last two, three years, is more heavily, we've been building the amortization schedule.

And the investment has been going up, like John said.

Hopefully as time moves along, we'll balance out.

The -- the life of our normal stuff, we write it off faster than our competitors.

We're writing it off over a 15-month life.

So that's -- that's fairly flat for us.

But what we've seen, the uptick in our standard merchandise is that we have more feet on the street.

We're selling more new business.

So we've seen an uptick in the merchandise cost to go along with it.

And when you grow, it costs you money to grow in this business.

That's simple on the standard stuff.

I think we're -- we're telling you we've got a concern on this FR as we move forward, and we're working to get it under control.

It sounds like all of us being equal at the back end of this thing you'll have much higher margins than you do now if this stuff actually lasts five years.

Well --

We hope so.

That's the hope.

Okay.

It really is a -- it really was a new venture for us about three years ago, starting three years ago.

In our first year we were a little slow, we're into it pretty heavy now.

We've got some very nice customers from it.

Do you think you're getting adversely selected against here, are your competitors not bidding as aggressively for this business for the reason that this stuff costs a lot more?

I think -- I think our competitors, one of our competitors has done a very good job in this area.

And is the leader.

And I think we -- we've come come into it.

We've been pushed into it somewhat by this 70-E proposition that's out there.

Maintenance people, basically, should be in some type of flame-resistant fabric garment.

We're trying to be in a competitive market.

That's all I can basically say.

Are we being more aggressive than the next guy?

I think we're just being equal to.

If you talk to our salespeople they suggest that we're pricing it the way we have to to get the business.

That the competition is very close to where we are.

Okay.

Thank you very much.

Mr. Bartlett, there are no further questions at this time.

I will now turn the call back to you.

This is Ron Croatti.

I want to thank you for spending your afternoon with us.

We are certainly optimistic for '07.

We think the revenue numbers are really obtainable and are fairly comfortable with that target on the earnings per share, and we look forward to reporting out to you next quarter.

Thank you for your time.

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.