UniFirst Corp (UNF) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the UniFirst Corporation's third-quarter earnings result conference call.

During the presentation, all participants will be in a listen-only mode.

Afterwards, we will conduct a question-and-answer session.

(Operator Instructions).

I would now like to turn the conference over to Steven Sintros, Chief Financial Officer.

Please go ahead, sir.

Thank you, and welcome to the UniFirst Corporation conference call to review our third quarter and year-to-date operating results for fiscal 2009, and to discuss our expectations going forward.

I'm Steven Sintros, UniFirst's Chief Financial Officer.

Joining me today is Ronald Croatti, UniFirst's President and Chief Executive Officer.

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

Now, before I turn the call over to Ron, 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, optimistic, believe, estimate, expect, intend, and similar expressions that indicate future events and trends identify forward-looking statements.

Actual results may differ materially from those anticipated, depending on a variety of factors, including but not limited to, the continued availability of credit and the performance of the capital markets; performance of acquisitions; fluctuations in the cost of materials, fuel, and labor; and the outcome of pending and future litigation, and environmental matters.

I refer you to our discussion of these points in our most recent filings with the Securities and Exchange Commission.

Now I would like to turn over the call to Ron.

Thank you, Steve.

Steve will be covering the financial details in a few minutes.

Let me begin with an overview.

Revenues for the third quarter of fiscal 2009 were $252.1 million, a 1% decrease from the $254.6 million for the same period in 2008.

Net income was a record $21.7 million or $1.12 per diluted common share, a 28% increase for the third quarter of last year.

Like virtually the entire business community, we sustained increasing economic pressure throughout the quarter.

As a result, our Core Laundry Operations revenues slipped 1.3% as compared to the same period a year ago.

However, income from operations increased 19.2%.

Significant decreases in fuel costs, merchandise amortization, and payroll all contribute to the gains.

Our Specialty Garment and First Aid business segments also contributed to the Company's overall growth in the third quarter profits.

Specialty Garments, in particular, had a positive impact with $3 million in operating profits, nearly doubling its performance from last year's third quarter.

Based on our consistent financial performance over the years, UniFirst is now the third largest provider of rental uniforms, protective clothing, and facility services in North America.

But in recent months, like our competitors, we've been increasingly challenged by ongoing negative conditions found in today's marketplace.

In fact, today's economic environment may be the worst our Company has experienced in its 73-year history.

Despite the current market adversities, new sales from our core uniform business in the third quarter were only slightly lower than we reported for the same period last year.

Meanwhile, our national account sales team was able to secure significant preferred vendor agreements that will be producing additional revenue opportunities in the quarters and years ahead.

That being said, we are generally pleased with the quarter's results.

We recognize that our sales force is central to our topline revenue growth, and as such, continue to make significant investments in this area.

Where others may be cutting into their sales efforts during these tough times, we're ramping up our sales rep headcounts, launching additional corporate-wide sales initiatives, and as always, remain dedicated to providing our sales team with the best training and prospecting tools required for the Company's long-term success.

For example, our proprietary sales force automation software, network handheld systems are greatly enhancing each rep's prospect database management capabilities, allowing for more effective planning, maximum productivity level, and ultimately stronger sales results.

Although our new sales have held their own, the economic fallout as caused by the recession, has mounting negative effect on UniFirst revenue growth as the third quarter progressed.

Both our prospective and existing customers continue to tighten spending in large part by eliminating workers in ancillary services.

As a result, along with a slight slowdown in new customer acquisition, we experienced steady increases in account shrinkage and customer losses within our current client base.

This, unfortunately, resulted in consistent declines in our growth rate.

Bottom line is with the US unemployment rate approaching 10% and with some 7 million jobs lost since the recession began in December 2007, there are simply fewer uniform wearers in today's market, which ultimately affects our overall demand in UniFirst products and services.

Experts agree the current economic condition will be with us throughout the balance of the year and into 2010, and quite possibly beyond.

So this means going forward, we must remain as careful as ever with every facet of our operations to sustain our profitability.

As I mentioned in previous webcasts, we're in the midst of a multiphase profit protection plan that aggressively cuts spending, reduce overall costs on a companywide basis.

We're currently in Phase III of this plan, which calls for hardline and widespread spending restrictions, such as wage freezes, work furloughs for virtually all Team Partners; headcount adjustments to customer volume ratios; travel restrictions; discretionary spending limits to only those efforts to directly add value to our customers' needs; and bring in positive revenues.

We're also consolidating operational functions on a corporate-wide basis, and analyzing all assets and equipment to be certain each of our facilities is being run as productively and efficiently as possible during these tough economic times.

Despite these efforts, the continued recessionary conditions in the market are taking a toll on UniFirst.

The dreadful unemployment trends, the general lack of consumer confidence, the competitive pressures on our pricing and margins, all continue to affect our financial performance.

With the exception of our Specialty Garments segment -- which is not as physically sensitive to recessionary market conditions -- we now perceive, based on six-month trending economic forecasting, that our Core Laundry and First Aid segments will experience a further drop in revenues during the fourth quarter and into fiscal 2010.

This unfortunate growth rate reversal undoubtedly will negatively impact our year-over-year revenue growth in earnings in the next fiscal year.

Steve will speak more on this in a minute.

Therefore, we are now looking to further minimize the unavoidable long-term impact of the current trends.

We'll be instituting even deeper, tougher cost-cutting measures, including additional headcount and departmental adjustments, along with further operational and procedural changes to help protect our bottom line and future earnings.

It should be noted that all components that make up our strategic profit plan are specifically designed to protect both the near and long-term profits, and the ongoing interest of our shareholders.

We are committed to being frugal during these tough times, but never to the point of compromising our operational needs that could negatively impact service levels to our customers.

Consistently exceeding the expectations has always been and always will be the focus of everything we do at UniFirst.

Our customers really do always come first.

Our Company has been around since 1936.

Historically, our Team Partners have always rallied and persevered when faced with market adversities.

I firmly believe UniFirst will, once again, prove itself to be extremely resilient, and will come out on an even stronger, more robust company, one with strengthened, competitive advantages when the economy ultimately rebounds.

The long-term future does, indeed, remain bright for UniFirst.

And now for more financial details for the third quarter, I turn it over to Chief Financial Officer, Steve Sintros.

Thank you, Ron.

As Ron mentioned, our revenues for the third quarter of $252.1 million, a 1% decrease from our 2008 third quarter of $254.6 million.

Third quarter net income was a record $21.7 million or $1.12 per diluted common share, up from $16.9 million or $0.87 per diluted common share a year ago.

Net income for the first nine months was $58.8 million or $3.04 per share, a 20.8% increase from the first nine months of fiscal 2008.

Revenues from our Core Laundry operations decreased 1.3% in the third quarter as compared to 2008.

The strengthening of the US dollar versus the Canadian dollar reduced revenues by 1.6%, and organic growth was a negative 1%.

These decreases were offset by a positive 1.3% impact from acquisitions.

The decrease in our organic growth rate from 3.1% in the second quarter to a negative 1% in the third quarter was primarily due to the continued shrinkage of our wearer base, as customers continued to reduce their workforces.

In addition, our reduced weekly volume reflects a decline in the ancillary service revenues in our existing accounts, as customers look for additional ways to cut costs.

Our overall lost accounts also continued to run higher than historical levels, primarily as a result of more customers going out of business than in previous years.

Despite these challenges to our topline, income from operations from our Core Laundry business was up 19.2% for the third quarter when compared to the same quarter a year ago.

The Core Laundry's operating margins increased to 14.9% in the quarter from 12.3% in 2008, as total expenses were down $8.3 million.

These lower expenses were primarily the result of lower energy, payroll, and merchandise costs.

Overall, energy contributed about 2% of the Core Laundry margins improvement over the third quarter of last year.

Even though the cost of gasoline has been on the rise in recent months, prices remain well off the levels we experienced in the second half of fiscal 2008.

In addition to the favorable year-over-year comparisons from our gasoline costs, we recognize similar benefits with natural gas rates as well.

Since January 1, we've reduced the total headcount of our Core Laundry operations by approximately 8%.

As most of these reductions were completed by the end of the second quarter, the majority of the related benefit was realized during the third quarter.

Going forward, we will continue to adjust our direct labor cost to the volume being processed in each of our facilities.

One area that we have not reduced headcount is in our sales force.

We continue to invest in our sales force to ensure we maintain positive new sales momentum to help offset the shrinkage in wearers within our existing accounts.

Additionally, we continue to aggressively work to consolidate routes to maximize efficiencies.

Merchandise amortization remains historically low, primarily due to our increased utilization of higher-quality used garments received back from customers that have reduced headcounts.

In addition, the lack of new hires by our customer base similarly reduces the number and overall cost of new garments required to be placed in service.

Other administrative and production costs, including travel, were also lower than the prior-year, as the Company continues to focus on reducing its overall expenses.

Partially offsetting these cost benefits were higher healthcare and other payroll-related costs, depreciation and bad debt expense.

Depreciation and amortization expense for the third quarter in our Core Laundry operations was 5.9% of revenues as compared to 5.3% a year ago.

During the quarter, we also incurred a $1.1 million charge relating to our environmental contingencies.

This charge includes a $2 million increase to our reserves related to our former facility in Woburn, Massachusetts.

This charge was offset by a reduction of expense of $0.9 million related to an increase in the risk-free interest rate used to discount our projected liabilities from environmental remediation.

Our Specialty Garments segment also contributed to the overall growth in profits and operating income during the quarter.

Quarterly income from operations for this segment increased to $3 million from $1.8 million in 2008.

Both the nuclear decontamination and clean-room operations contributed to the improved profitability of this segment.

Earlier this year, we forecasted that the third quarter would be the strongest quarter for this division, and the high volume of planned power reactor outages came through on schedule.

Startup costs incurred from this segment's new facility in the UK, which began processing garments in March, partially offset the strong quarter of its US nuclear and clean-room operations.

Third quarter revenues for the First Aid segment decreased 3.2% from $7.5 million in 2008 to $7.3 million.

However, revenues for this segment were up 9.9% from the second quarter, due to stronger sales to customers who had depleted inventory levels earlier in the year.

This segment has also worked hard to reduce its overall cost structure in response to decreased customer demand.

A somewhat stronger topline performance, coupled with reduced costs, resulted in income from operations of $0.4 million during the quarter for this segment, compared to breakeven performances in recent quarters.

Foreign currency gains and lower interest expense also contributed to our higher overall earnings.

Due to the strengthening of the euro and pound against the US dollar, we recognized foreign currency gains during the quarter of approximately $0.8 million compared to a small loss a year ago.

In addition, net interest expense decreased from $2 million in the third quarter of 2008 to $1.8 million in 2009.

This decrease came as a result of lower interest rates that affected our variable rate debt, as well as lower average debt balances outstanding during the quarter, compared to a year ago.

Our effective tax rate was slightly higher for the quarter at 39.3% compared to 39.1% in the third quarter of 2008.

We expect our tax rate to be approximately 39.5% going forward.

Our capital structure and cash flows continue to be very strong.

Our cash flows from operations were $109.4 million for the first nine months of fiscal 2009, up from $83.6 million during the first nine months of 2008 which, I should note, also included an extra week of operations.

The improved cash flow was due to higher net income as well as reduced working capital needs.

Merchandise and services decreased 17.2% from $92.3 million at year-end to $76.4 million.

Declining merchandise and service singled to us that our merchandise costs will remain lower until customers began adding more uniform wearers back to their workforces.

Although our inventory is slightly up since year-end, it is down $4.2 million since the second quarter, as we've been actively managing the production levels in our manufacturing facility to decrease demand.

From a financial standpoint, cost control and cash generation will continue to be our top priorities until we get a better indication of when the economic environment will stabilize.

For the first nine months of the year, we spent $55.5 million on capital expenditures, and we expect the full year spend to be approximately $65 million.

Because of the economic landscape, we continue to be very selective with respect to acquisition targets as well.

As a result, we have not completed any significant acquisitions thus far in 2009; however, based on the continued strength of our balance sheet, we're well-positioned to do so as opportunities arise.

Due to our strong operating cash flows and limited acquisition activity, we were able to reduce our total debt outstanding by $41.6 million since the beginning of the year, and $25.3 million in the third quarter alone.

Total debt was $193.5 million as of the end of the third quarter, and has decreased as a percentage of total capital to 24.1% from 29.7% at the end of fiscal 2008.

Although we are pleased with the overall results of our third quarter, especially from a profitability perspective, the negative impact of reductions in our weekly revenue volume will continue to put significant pressure on the topline.

As a result, we now project that our fourth quarter revenues will be between $235 million and $240 million.

This revenue guidance assumes a decline in consolidated revenues of approximately 4% to 6% compared to the fourth quarter of fiscal 2008.

Based on these revenue assumptions, we project that our income for diluted common share for the fourth quarter will be between $0.65 and $0.75.

Our profitability in the fourth quarter historically has been less than that in our third quarter, due to a number of factors, including lower profits from our Specialty Garments segment as a result of seasonality, as well as the timing of certain supply purchases made by our Core Laundry Operations, field operations.

These factors, along with the sequential decline in our overall revenues and increasing gasoline prices, are embedded in our fourth quarter guidance.

We have mentioned on our previous two earnings calls that our weekly revenues volume has been consistently declining since November.

And this trend has continued through the end of our third quarter.

We expect that based on the weekly revenue volume that we've lost thus far this year, that our fiscal 2010 revenues will be less than those in fiscal 2009.

Even when the economy does begin to grow again, we expect it will take longer for our customers to hire back their employees than it did to cut them.

Therefore, we expect the eventual recovery of our weekly volume levels to occur over a longer period of time [and to] decline.

Although the volatility that remains in the current economic condition makes it increasingly difficult to forecast our future results, we expect that the anticipated decline in our revenues will push operating margins in fiscal 2010 significantly lower than the historically high levels achieved thus far this year.

Costs associated with our selling effort, energy, depreciation, and other fixed facility costs, are prime examples of expenses we anticipate will rise as a percentage of our revenue during fiscal 2010.

We will provide additional insight regarding our outlook for fiscal 2010 projections during our fourth quarter conference call at the end of October.

Despite these external pressures, we will continue to aggressively manage the costs that are within our control, and take whatever steps are necessary for the Company to stay on target with our short-term and longer-term objectives.

This concludes our prepared remarks, and Operator, we are now pleased to answer any questions that may be had.

Thank you.

(Operator Instructions).

Andrew Steinerman, JPMorgan.

Hi, Ron and Steve.

Good job on the margins.

Steve, could you just go over -- I know you said 200 basis points of benefit year-over-year in the third quarter for energy.

Could you give us the exact percentage of energy as a percentage of total revenues in this quarter and the year-ago quarter?

Sure, Andrew.

The year-ago in the third quarter -- and this number is 5.9% in the third quarter of last year.

And it's about 4% in the third quarter of this year.

Now, the one thing I will tell you, Andrew, is numbers we've given on previous calls have just been for natural gas, gasoline, and electricity.

And that number that I gave you was also considered -- included other utilities, water, sewage, so that's more of a full energy cost number.

Right.

So then maybe -- I think you said 5.3 in the second quarter of '09.

What would be the comparable number second quarter '09 compared to the 4.0 that you just gave us then?

Steve said 4.3?

5.3.

(multiple speakers)

Yes, I want to know sequentially now.

So you're saying (multiple speakers) you would put in --

Are you there?

Yes.

I wanted to know sequentially how last quarter was compared to this quarter, if you're re-characterizing energy.

Yes.

No, I've got you.

5.3 last quarter; 4.9 this quarter.

Okay.

And what's your assumption for energy as a percentage of revenues in the fourth quarter?

I don't have that number as a percentage of revenues, Andrew, but we're kind of -- we're assuming that gasoline goes to about $2.60 a share, which is kind of the national -- excuse me, $2.60 a gallon, which is the national average now.

We were running closer to $2 a gallon in the third quarter.

Okay.

That sounds good.

Thank you so much.

Andrea Wirth, Robert Baird.

Wondering if you guys could first just talk a little bit about what you're seeing on the ad stops, just kind of trying to give us an idea directionally what you're seeing throughout the quarter, and even during this last month?

Are things starting to stabilize?

Is the rate of decline at least slowing?

Just trying to get some kind of sense of what you're seeing out there, just because the BLS numbers -- obviously still down, but are a little bit less worse on the decline side.

Andrea, this is Ron.

Compared to, I would say March/April, we're running at about half the shrinkage rate that we were.

So it has slowed, but it is still significant to us.

And I would forecast it will continue to shrink the remainder of the year.

I think I tried to say it in my comments, that the unemployment rate is nearing 10%, probably go to 10.5%, and we're going to have that shrinkage all the rest of the year -- the calendar year.

So, we're kind of anticipating that next year, we will have some shrinkage, not as severe as this year.

So that's kind of why we got that forecast and we're trying to send a signal on the revenues.

Right.

And then, just trying to dissect your organic growth in rent, which I believe you -- I think you said was down 1%, correctly, in rental?

That's correct.

Correct.

So if your ad stops were negative, your new account wins were down slightly as well.

I'm assuming pricing was a positive?

No --

Well, it --

(multiple speakers) I guess then try to walk through how to get that math to work.

(multiple speakers) No, the lost accounts are running probably nearly 3% higher than our normal run rate.

And then the pricing has been deteriorating all along with the competitive pressures out there.

Okay.

And then maybe just kind of give me a sense on the national account wins.

Sounds like you made some great progress there; but did it come at a substantially lower price than what you're used to seeing?

Or is there something else going on there that's helping you win those accounts?

Well, they're a preferred provider and I would say the pricing is competitive.

Okay.

And then on your national -- your sales headcount in general sounds like you're still investing there.

(multiple speakers) Could you give us an idea of how much that headcount is up in percentage terms?

We plan to take the headcount up in 2010 another 8%.

And what is it up in 2009 thus far?

We're up about 6, I think -- what?

It's 6 right now, I think.

Wow.

And then just on your margins on the rental side, extremely impressive numbers there.

Just wondering if you could comment a little bit.

I guess it's starting to get a little bit concerned that are you possibly cutting too deep at this point, just given how strong the numbers are.

And also your expectation to continue to cut further, just again, that the performance has been some of the best we've seen in the last 20 years.

Just comment a little bit on where you feel like you are on that cost-cutting side versus how good the margins are.

Well, I think we've been cutting the labor basically to the volume, and that's the plant production and the deliveries organizations.

We've kept the sales up.

We've made some cuts in the corporate levels.

I think the next cuts will be more on that type of level.

And we will continually cut at the individual plants based on the volume, where the volume goes.

(multiple speakers) We're not cutting into muscle that will affect the Company long-term.

But that being said, Andrea, I think that the cuts have been proactive in nature and probably a little bit ahead of the true volume decline.

It's more of on the anticipated volume decline.

So I think that is bumping our margins here in the short-term, and is why we continue to caution that we do anticipate we're going to lose that margin because at some point, Ron says, we're going to be getting closer to the muscle, and we do want to avoid cuts that are too deep and sacrifice service in any way.

Right, right.

And I guess along those same lines, just given how strong the margins have been holding up thus far, is it fair to say that facility closures are not on the table yet?

Or is that still something you're considering?

We -- in the upcoming round, we will consolidate a few branches.

Okay.

And then I guess, just a couple of final questions.

On the Specialty Garments side, obviously great margin performance there.

Your revenue was actually in line with what I was looking for, but the margins were substantially better.

Was there something else kind of fundamentally going on, that that helped that margin improvement?

Maybe lower UK costs than what we had had the prior year?

Or what's actually driving that better performance?

I think what it really just is, is quarter-to-quarter, based on the different projects and the mix of direct sales versus laundry volume, the laundry volume is on balance more profitable than some of the direct sales.

We had a very high outage quarter, and similarly, the profits can vary between direct sales and laundry.

Different reactor outages can be more or less profitable, based on the customer and the type of work, and the period of time we're doing the work over.

And so, in short, there was a lot of laundry process revenues in the quarter that was at higher profits than in the past, based on the customer mix.

Okay, that's helpful.

And then just last question.

I know you've internally been trying to see what type of margin impact you could ultimately see from kind of sustained levels of declines in revenue in your core business.

Just wondering if you can provide us a little bit more color on your thoughts as to kind of what a detrimental margin could ultimately end up looking like; because again, we really haven't seen this type of scenario at your Company.

It's a little difficult to try to model.

Well, Andrea, I think our feeling looking out to next year, where we think the margins may land, it really is a function of the revenues.

And what makes it difficult, as we've been talking on a week-to-week basis how the volume has been declining and, as Ron mentioned, the rate of decline has slowed a little bit, but we expect it to continue through year-end.

When we get to year-end, if that volume flattens or continues to drop, or consequently increases a little bit, you know the timing of that change is going to greatly determine obviously the topline and the level of margins that we can hold.

The guidance for the fourth quarter of $240 million, as I mentioned, if that weekly volume flattens out or continues to decline a little bit, we may be hard-pressed to do much better than four times that number next year.

Alternatively, if it stabilizes a little bit and we start to grow, we could do better than that.

But in those ranges of revenues, that's where the margins are going to end up because, as we just talked about, the cuts that we've made have been somewhat proactive, and there's probably less leverage to pull next year than we have this year from a cost-cutting prospective.

So we think that, absent a stabilization here in the near-term, that our margins could retreat back to where they were a couple of years ago.

Got it.

That's very helpful.

Great quarter.

(Operator Instructions).

John Healy, North Coast Research.

Question for you on the cost side again.

Not trying to beat a dead horse here, but I'm just trying to think about the efforts you guys have made.

Obviously, some of it's due to just lower energy, but the costs that you've removed for the business, are these costs, in your eyes, kind of permanent -- I hate to use the word permanent cost reductions, but will some of these things come back?

Or are these items that we should think about that are gone from the cost structure for awhile now and we won't see those coming back?

Even when things start to get a little bit better out there in the business?

Yes, I think it's a combination, John.

When you look at the benefit we've made in the margins this quarter, like you mentioned, a lot of it was from energy merchandise.

On the payroll side, as Ron mentioned, we're really -- especially on the production labor and our delivery costs, are really just marking the labor to the levels of revenue volume going through our facilities.

And again, maybe we're a little bit ahead of the curve, as far as the decline we're anticipating.

We have eliminated some functions in other costs and programs that will come back over time.

And how quickly we bring them back really depends on the economy and how quickly our topline comes back.

But there's some things that we can do without for a period of time, and we will continue to keep the belt tight until the topline comes back.

But I'm not sure there are significant reductions we have made that will be permanent benefits.

I mean, we continue on a year-to-year basis to become more efficient, automate more things, eliminate labor, but in the context of the economy and the cuts we've made, there are things that will come back and we'll manage that.

I guess I -- I think I might have asked that question poorly.

A lot of companies right now are talking about cost reduction efforts.

And I'm -- what I'm trying to understand, though, is, say we pause here in the economy and things start getting better for you guys in, say, six months from now.

How are you going to handle -- or plan on, I guess, running the business going forward?

Will you just turn on the spigot in terms of investing?

Or do you believe that you guys will manage the business, I guess, over the next cycle maybe a little bit more -- I don't want to say tight, but a little bit more -- a little differently than you did over the last few years?

Hi, John.

This is Ron.

I think we'll try to run it tight.

I think we've always tried to run it tight.

Like Steve mentioned, we cut back on some programs and some are incentive programs and so forth, and we will gradually be putting things back in place.

Will they all go back?

The answer is no.

I think there's some things we can eliminate and stay without; but we've always been frugal and always will be.

It's that generation, that we're frugal.

Okay.

No, that's helpful.

And speaking about your results and the progress you guys have made, obviously, pretty impressive.

How do you feel your competition is doing out there?

And I don't mean the public guys, but the independents and the mom-and-pop's.

Are you seeing anything in the industry or hearing anything in the industry?

Are you seeing guys go away?

Are you seeing the for-sale signs with their businesses pop up more frequently?

Anything you can provide at that level would be really helpful.

This is Ron again, John.

I have not seen any more acquisition activity than usual.

Matter of fact, probably a little less.

The only thing I can tell you, whether it's one of our lead competitors or a mom-and-pop to pricing, out in the marketplace is deteriorated.

Is that deteriorated at an accelerated rate more recently in this quarter or --?

Yes.

It has?

I have seen more free service offers for a lengthier period than I have probably in my 20 years as the CEO of this Company.

Okay, wow.

Thank you, guys.

Thanks, John.

(Operator Instructions).

Josh Rosen, Freshford Capital.

Quick question -- just trying to understand -- at what point do you have to start investing in your uniform merchandise again?

With respect to the uniform merchandise, it's really going to be driven by our customers and when they start adding back wearers.

From a new sale side, as Ron has mentioned, we've been able to maintain new sales momentum at roughly the same levels that we have in prior years.

So when you think about our commitment to buying new garments and putting new garments into service, all new customers get new garments.

So we're investing the same amount into merchandise with respect to our new sales as we have in prior years.

The wild card is the adds versus reductions.

The reductions continue to be higher, so we get used garments back from customers, and we're able to use those for day-to-day turnover needs from our customers when they do have to add employees.

But until the growth comes back within our customers, and they start adding back employees and start reducing them at lower levels, our merchandise will remain low.

And when it does turn, it will turn over time; so we expect to get some benefit from our merchandise over the next couple of quarters.

And then beyond that, it really depends on when that -- when those customers start adding back people and/or stop reducing them at the current rate.

Okay, thank you.

(Operator Instructions).

[Chris McGinnis], Sidoti and Company.

Just to follow up on Josh's call about the merchandising.

I guess, can you quantify how much of a benefit that was in the quarter?

And then going forward, you sound like a few quarters left and you could get that benefit?

Well, I don't think we want to get into too much of the quantification.

It was -- one thing that I should note that somewhat offset the benefit of the merchandise is we have had to, on the production side, take some period costs related to the excess capacity in our manufacturing operations, as our manufacturing operations are not operating at full capacity.

That being said, we still -- and I'll give you more of a dollar range.

I mean, the merchandise is run lower than in last year's third quarter about $1.5 million.

It was probably about the same on a sequential decline.

Now, how long that decline continues, again, I can see it over the next couple of quarters, and that's in line with our revenue projections.

We're not anticipating those adds will be coming back that quickly, but if I had to look to 2010, I would say our 2010 merchandise will probably be lower than 2009, but it all depends on when that trigger point is and the economy starts to rebound.

All right.

Thank you.

(Operator Instructions).

There are no further questions at this time.

I will now turn the call back to you.

Please continue with your presentation or closing remarks.

Well, we'd like to thank all of you again for your interest in our Company.

And I'd like to reiterate that we'll be continuing to make all the necessary tough adjustments required to effectively combat the recessionary times and to protect our earnings.

And when the market finally bounces back, UniFirst will be ideally positioned to capitalize on the economic and employment gains that will accompany the inevitable rebound.

We look forward to talking to you next quarter when we'll be reporting on our year-end performance.

I thank you for the interest 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 lines.