UniFirst Corp (UNF) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the first quarter earnings results 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.

Thank you, and welcome to the UniFirst Corporation conference call to review our first quarter results for fiscal 2010, and to discuss our expectations going forward.

I am 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 future 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 Capital Markets, the performance of acquisitions, fluctuations in the cost of materials, fuel, and labor, and the outcome of pending and future litigation in environmental matters.

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

Now I turn the call over to Ronald Croatti for his comments.

Thank you, Steve.

I would like to welcome all of you who are joining us for the review of our first quarter financial results, a fiscal period that produced record profit levels for our Company.

Steve will be covering the details in a few minutes, but let me start with a brief recap.

Revenues for the first quarter of fiscal 2010 were $256.2 million, a 2.4% decrease when compared with the same period a year ago.

However, compared to our previous quarter, the fourth quarter of fiscal 2009, revenues were up 6.1%.

With all our business segments contributing to the strong sequential growth, our core laundries, specialty garment, first aid businesses, all produced revenue increases over last quarter.

Specialty garments and first aid also delivered positive year to year first quarter revenue results.

Net income for the quarter was a UniFirst record, totaling $23.6 million or $1.21 per diluted common share, a notable 25% increase compared with the first quarter of 2009.

These results were largely attributed to the execution of our ongoing recessionary recovery plan by all our UniFirst team partners.

Steve will be covering the additional factors that are contributing to the quality income growth in a moment.

Our core laundry operations, although still feeling the negative effects of recessionary losses from fiscal 2009, continue to drive the Company's performance, particularly in the sales area.

We saw favorable results from both our field and national account sales teams, with new sales for the first quarter increasing over the same period last year.

As a primary focus of our ongoing recessionary recovery plan, we place considerable importance on our sales and service organizations to help achieve UniFirst's long-term growth goals.

That's why we continue to make significant investments in both these areas.

During the quarter our professional sales reps, sales managers, continue to benefit from our newest training in sales certification program, which have been rising the bar on the professional skill levels for our entire salesforce.

We saw consistently better contact to close ratios, weekly average continue to trend slightly up, and our overall sales cost ratios to determine customer acquisition expenses held steady.

All clear reflections of the general efficiency improvements we made in our sales process.

We also saw good product balance in new business, with facilities service ancillary product sales increasing year-over-year, and continuing to grow in importance as a unique revenue category.

And as always mindful of our Company charge, to keep customers the focus of everything we do, and recognize that it costs considerably less to retain existing customers versus acquiring new ones.

We continue to devote considerable resources in our service systems, service staff, as such, we recently instituted certification mandates of all UniFirst locations for each and every ground representative, service manager, and Customer Service rep.

These mandatory skill training measures help to ensure that our service staff continually provide each of our valued customers with only the highest and most consistent level of service.

Meanwhile, both our sales and service teams throughout North America began reaping the many benefits associated with our newly implemented video conferencing network that was launched this quarter.

This advanced technology brings all our primary operational facilities together, face-to-face in realtime.

There are many paybacks this sophisticated technology offers our Company.

Among them, video conferencing allows for improved efficiencies, increased quantity and greater number of participants panning from our corporate and regional training centers.

This of course pays big dividends in the sales and service arena.

Our teams' skills and productivity levels will now advance at a much more rapid pace, while eliminating many of the high travel costs and down times associated with traditional education programs.

As a whole, our salesforce is selling smarter, more strategically than ever, targeting those businesses most likely to buy during tough economic times, and doing a better job of communicating our value based offering to customer prospects.

And our service teams are building stronger bonds of loyalty with customers by completely satisfying their diverse business needs.

They're more effectively identifying new product placements, other growth opportunities within our existing client base, primarily through our year long (inaudible) service sales programs.

While most economists believe the recessionary fallout will linger with us for several years, there are several positive indicators during the quarter that may be signals the worst may be behind us.

The latest report from November from the Bureau of Labor statistics shows unemployment rate edge down to 10%.

The consumer price index increased 0.4% after rising 0.3% in October, reflecting some return of confidence in consumer spending, plus real GDP is expected to trend up as much as 4% in the next reported quarter.

We have also seen positive trending in employment in usages within our customer base relating to adds over reduction metric.

The dramatic increase of wearer loss have plagued us throughout fiscal 2009, gradually decreased from week to week as our first quarter progressed.

And they appear to be doing some leveling off here in the second quarter, although still negative.

We're hopeful these signs that the negative effects of the economy may be lessening, and the national economic environment may indeed prepare itself for eventual rebound.

Make no mistake, the downturn, high unemployment, continues to take its toll on both our prospective and existing customers, all of whom continue to keep lids on spending, which of course affects our bottom line.

So going forward, to ensure ongoing profitability, we will be remaining as careful as ever, every aspect of our operation, and maintaining stringent cost controls implemented in 2009.

As I have said in previous webcasts, we're committed to being frugal during these difficult times, but never to the point of compromising our operational needs that could negatively impact service levels to our customers.

Consistently exceeding customer expectations has always been and will always be our top priority at UniFirst.

We know the economic recovery in our industry tends to lag behind national rebounds, so we remain flexible and focused on helping our existing customers better compete and exceed in their own markets.

UniFirst offers proven products and services with real business benefits, and we consistently deliver bottom line value to the end-user, no matter what the economic landscape looks like.

It remains unclear exactly how many years it will take us to fully recover 2009 dip in uniform wearers and ancillary service sales, but we remain committed to maximizing earnings and shareholder value at all times, and will achieve these aims with our continued focus on constantly strengthening customer loyalties, continually growing our service base.

Furthermore, we maintain consistently strong cash flow, and are well positioned to pursue any smart business acquisitions that may become available.

Overall, we placed our first quarter results with encouraging economic signals in the market.

Typical conditions continue to prevail, and we feel all our business units are well-positioned to sustain positive momentum.

We remain optimistic, look forward to reporting our progress to you in the quarters ahead.

And now for more financial details for the first quarter, I turn it over to Chief Financial Officer and Vice President, Steven Sintros.

Thanks, Ron.

As Ron mentioned, the first quarter revenues were down 2.4% compared to the first quarter of fiscal 2009.

However, sequentially our consolidated revenues grew 6.1% from the fourth quarter.

Net income for the first quarter was $23.6 million or $1.21 per share, a 25% increase from the first quarter of fiscal 2009 when net income was $18.9 million or $0.97 per share.

Revenues from our core laundry operations decreased 4.9% in the first quarter as compared to 2009.

The year-over-year decline in our core laundry revenues is due to the significant reduction of wearers in our customer base over the last year.

Sequentially, however, our core laundry revenues grew 3.7% from the fourth quarter of fiscal 2009.

Of this sequential growth, 2.9% was organic with the remaining growth coming from acquisitions and the impact of a stronger Canadian dollar.

Our strong sequential growth was due to several factors.

Strong new sales in the first quarter, as Ron discussed, a bump in volume from seasonal school and mat related business, continued improvement in the net adds versus reductions metric, annual contract price adjustments that have become more concentrated in our first quarter, and strong facilities services additions from our route sales network with a focus on hand soap and sanitizers to combat the H1N1 virus.

The strong top line performance along with favorable cost comparisons in a number of areas resulted in an increase in income from operations of 8.6% for our core laundry operations, from $32.6 million in the first quarter of 2009 to $35.4 million in 2010.

Overall operating expenses in the core laundry operations were down $14.5 million compared to the same quarter a year ago, which resulted in an increase in operating margins from 13.7% to 15.7%.

The decline in expenses was the result of lower energy, payroll and merchandise costs.

Total energy and utility costs for the core laundry operations as a percentage of revenues were 5.0% in the first quarter of fiscal 2010 compared to 6.2% a year ago.

This expense comparison also benefited from a $1.6 million accounting charge recorded in the first quarter of fiscal 2009, related to a decline in the interest rates used in valuing certain environmental obligations.

Other general and administrative expenses including travel costs were also lower in fiscal 2010.

These benefits were partially offset by higher healthcare costs, as well as an increase in depreciation expense.

The Company's specialty garment segment increased its revenues $5.1 million or 29% compared to the first quarter of 2009.

This increase in revenues was the result of a larger number of power reactor outages falling in the first quarter of fiscal 2010 compared to the same period a year ago.

It is during these outages that our customers look to us for specialized garment processing, as well as other services.

As a result of this increase in revenues, operating income for this segment increased from $1.7 million in the first quarter of 2009 to $4.6 million in the first quarter of 2010.

This segment has always had a higher percentage of fixed costs in our core laundry operations.

Therefore, spikes and lulls in revenues due to the seasonality of its nuclear power reactor business can cause significant fluctuations in its profitability.

We want to caution that the revenues and profit results from this segment in the first quarter are not indicative of the results we expect for the remaining quarters of the year.

First quarter revenues for the first aid segment increased 2.8% from $7.3 million in 2009 to $7.5 million in the current quarter.

Income from operations for this segment increased to $0.4 million in the first quarter from break-even a year ago.

In addition, two non-operating items also contributed to the overall improvement in profitability compared to the prior year.

Due to the strengthening of the euro and pound against the US dollar, we recognized a $0.2 million currency gain during the first quarter compared to a $0.9 million loss a year ago.

In addition, net interest expense decreased from $2.1 million in the first quarter of 2009 to $1.7 million in the current quarter, which was the result of lower debt balances outstanding.

The effective income tax rate for the quarter was 39.5%, down slightly from 39.7% for the same period last year.

Due to projected statute expirations related to tax contingency reserves recorded under FIN 48 during the remainder of our fiscal year, we project our effective tax rate for the full year will be approximately 38.5%.

Our balance sheet continues to be very strong.

At the end of the first quarter, the Company had $79.7 million of cash and cash equivalents on hand compared to $60.2 million at year end.

Total debt outstanding remained constant at $182 million, and total debt as a percentage of capital decreased to 21.8% from 22.5% at year end.

Of the $79.7 million of total cash and cash equivalents, $30 million is held in Canada and intended for future investments outside the United States.

Accounts receivable increased by $12.8 million or 13.1% from year end due primarily to the significant increase in billings in our specialty garment segment during the first quarter.

The core laundry operations sequential increase in revenues also contributed to the increase in receivables compared to August.

Merchandise and service increased $2.8 million or 3.8% since the end of fiscal 2009.

The increase in merchandise in the balance sheet was partially acquisition related, however, non-acquisition related merchandise also increased for the first time in over a year.

This increase is a signal to us that the trend of sequential decline in merchandise amortization expense that we have experienced throughout fiscal 2009 and into the first quarter of 2010, is likely to reverse in the upcoming quarters.

We generated significant cash flows from operations in the quarter of $47.5 million, up 83% from $26 million in the first quarter of fiscal 2009.

Capital expenditures were $15.8 million for the first quarter, and we continue to expect that they will range from $55 million to $65 million for the full year.

Free cash flows from the first quarter of fiscal 2010 were $31.7 million, up from $5.4 million a year ago.

During the quarter, free cash flows were primarily used to increase the Company's cash balances by $19.6 million, as well as to fund $12.2 million in acquisitions.

The largest acquisition was Yale Uniform in Tulsa, Oklahoma.

This acquisition complements our existing operations in Tulsa and Oklahoma City markets by providing increased root density.

We continue to evaluate acquisition targets based on our long-term strategic objectives, as well as the appropriateness of their valuations.

We currently have $186.2 million of current borrowing capacity under our existing line of credit, and our debt to EBITDA ratio for the last twelve months is less than one.

Based on our financial strength, borrowing capacity and ability to generate significant cash flows from operations, we are well positioned to take advantage of strategic opportunities as they arise.

Looking ahead over the remainder of the year, we expect that the first quarter revenues and profits may be the highest of any quarter during the fiscal year.

The results of both our core laundry operations as well as our specialty garment segment are typically strong in our first fiscal quarter.

Our specialty garment segment in particular had a very strong top line quarter.

Due to numerous holidays and holiday shutdowns that many of our customers employ, our second quarter is also generally the weakest of our fiscal year for our core laundry operations.

We are still experiencing higher than normal net wearer reductions in our accounts, and the pricing environment remains extremely competitive.

As a result, we believe that our core laundry revenues may show some level of sequential decline over the remainder of fiscal 2010.

Our forecast for the core laundry operations is based on some general assumptions regarding the weakness of the economy and the overall job market.

Improvements in further stabilization in these areas, however, would certainly create some upside to our current revenue expectations for the remainder of the year.

We also expect that several items on the expense side will also cause margin in the upcoming quarters to be lower than the first quarter.

For example, overall payroll and related costs will be higher the remainder of the year due to annual salary increases and the increased ramp of our salesforce.

We also expect the rising price and increased seasonal usage of natural gas, as well as the increased price of gasoline, to cause our overall energy costs to rise in subsequent quarters.

Earlier I also spoke about rising merchandise costs.

Although it is difficult to predict the timing and magnitude of increases in merchandise amortization, we are already seeing signs of an upward trend.

In addition, the resetting of unemployment taxes as well as the timing of certain sick day payouts have always had a negative impact on our second quarter in particular.

Healthcare costs have also been steadily rising and clearly provide some additional headwinds as we move throughout the year.

We want to also reiterate again that our specialty garment segments profits typically are much lower in the second and fourth quarters of our fiscal year.

In addition, the first quarter of this year was unique in that it contained significant nuclear power reactor outage work that in other years has been more disbursed between the first and third quarters.

Based on these facts and assumptions, as well as the strength of our first quarter results, we are raising our previous revenues and earnings estimates for the full year.

We currently project that our revenues for the fiscal 2010 will be between $975 million and $995 million.

Based on these revenue assumptions, we project that our income per diluted common share for the fiscal 2010 will be between $3.20 and $3.50.

We acknowledge that this guidance represents a decline in our operating margins for the remainder of the year compared to the first quarter.

Our assumption is that some of this will come in the form of increased costs, and some will come in the form of sequentially declining revenues.

Stronger revenue results would consequently have a positive impact on the earnings we are currently projecting.

We would now like to open the call up for questions.

(Operator Instructions).

Our first question comes from the line of John Healy with Northcoast Research.

Please go ahead.

Good morning, guys.

Good morning.

Question for you, Steve, on the operating margins.

You guys have done a fabulous job for the last four or five quarters, showing improvements there despite the challenging environment.

I was hoping to get your thoughts, though, for how you think about sustainable kind of long-term margins for the business, maybe where you believe margins can go over, say the next two to three years, for a goal for you guys.

And maybe if you look at UniFirst and say, hey, probably for the next year or so, or year or two, we're a billion to maybe a billion two type of revenue type Company, what's a sustainable level of margins for the Company?

I think you can tell from our comments that the one area we're really concerned about is merchandise costs, and that concern comes with the fact that as things get better and as we burn through a lot of the merchandise that we recovered from customers over the last year, that we expect that cost to really rise as a percentage of the revenues.

We're really at a historical low with that cost from an historical basis, and we see losing a couple points there to get us back to more of I guess normalized operating margin, obviously our margins have spiked up in the last year for a couple of reasons.

I think that that 11% margin range that we were operating in in 2008 is something that we see when we come through this recessionary period, and kind of burn through some of the benefits we have gotten from energy and merchandise that will be back down towards.

And we'll look to build off of that.

Obviously some of these unique expense benefits aside, we're always looking to build that margin and improve some of our underperforming operations.

But I think that's closer to a baseline of what we can expect.

Okay, great, that's helpful.

And then I was hoping you could discuss the competitive environment a little bit.

Your thoughts there, if you see price competition intensifying, if it appears like it is getting worse or are you starting to see some signs of stabilization there?

John, this is Ron.

I think the competition has been aggressive both on the smaller account and on the national account.

I think it is no one company.

I think we're all a little aggressive on the pricing side to not only keep our business but to try to keep that revenue line moving, so it is about as competitive as I have seen it.

Great.

And then last question, kind of a big picture question for you, Ron.

You obviously have been involved with this industry for a long time, and I wanted to get your perspective on what you think this industry, from a competitive and maybe a go to market strategy looks like over the next three or four years.

I know you guys mentioned looking at some acquisition opportunities and having the ability and flexibility to do so.

I was hoping to get your thoughts regarding competitively and going to market, how you think about things longer term for the industry?

We're always looking at acquisitions, and I still think there will be continued consolidation within the industry, and I also, there is still a lot of businesses out there that do not use a uniform program, whether it is a full program or val-u-lease type program, and we're all -- I won't say we're all, but we're all looking at these last recession-proof industries, so that we can get into those.

And they're more growth type industries, the medical fields, transportation, distribution, there is a lot of industries that were traditionally purchase type environments that we're now chasing, so I think there is some opportunity out there.

We just have to convince the prospect that we have a better alternative.

Okay.

Thank you, guys.

Thanks, John.

Our next question comes from the line of Andrea Wirth from Robert W Baird.

Please go ahead.

Good morning, guys.

Good morning.

Wondering first if you can just dig a little bit more into the quarter because obviously it was a stellar performance.

I think you posted about 40% of your expected guidance for the year in the quarter.

Just want to understand a little bit more, what was better versus your original expectations, essentially where did the surprises come in for you in the quarter?

I think, Andrea, you can start with specialty garments.

I think we do not expect quite that large of a first quarter.

They were projecting a strong quarter and exceeded I think even our management's expectations.

I think with that business, although we can predict when the outages are going to occur, we typically have difficulty predicting how long they're going to occur for and how much volume are going to come through in those outages, so that was clearly one area of a surprise.

We talked about some of the reasons why we had sequential revenue improvement in the core laundries.

I think clearly our expectation with respect to our core laundry revenue results for the first quarter definitely exceeded our expectations that we had a couple of months ago.

I think just with stronger new sales and some of the route sales initiatives that we pushed through, we were able to really move the line from our August quarter more than we expected.

And when we gave our guidance a couple of months ago, we had talked about a number of these expense creeps that we were projecting for the year, and some of them really just haven't happened yet.

I think energy has started to but still provided us a pretty good benefit for the quarter.

And merchandise was still sequentially down in the first quarter, albeit it is getting close to flat, and that turn I think is coming, but it did not come in the first quarter.

Our Canadian business was benefited by some exchange rate benefit and they had a strong quarter as well.

I think the beef came in a number of places that really all added up.

But I think when you look at our projections for the full year, and we don't give quarterly guidance, but I think we did expect some, in our original guidance, some front end loading of the profits compared to maybe what the street had out there for quarterly guidance.

I see.

And maybe if you could specifically address the operating income, I guess in the core laundry business because really what it looks like to me sequentially, you essentially got 100% benefit or simply all the revenue that you saw increase sequentially flowed directly to the operating income line.

So essentially you have 100% incremental margin on that revenue, I guess I am just trying to understand sequentially, I understand that merchandise cost is still at a historic low, but I am still just trying to understand the cost cuts that happened sequentially in order for you to see that kind of a benefit.

The last round of cost cutting that we really did under, as Ron refers to our profit protection plan, occurred in the fourth quarter, and there were a number of corporate level as well as other field related headcount cuts that happened in the August timeframe that did benefit the first quarter, so that's one piece of it.

When you talk about the revenue sequential increase, over the short-term, if we're able to move the revenues like that, the costs tend to remain fixed over the short-term and kind of lag it a little bit when you talk about merchandise and some of the other costs.

So really those two things I think contributed to what we're seeing here.

Okay.

And then I guess in terms of the cost cutting, is it fair to say you really didn't do too much then during the first quarter in terms of incremental headcounts and headcount cuts?

I would say that's correct.

And we probably added to the sales a little bit as well during the quarter.

Okay, and I guess just final question on how we do think about merchandise costs.

I know it is a little bit challenging, but based on where your revenue projections are now for the year, where does -- how do you project what the merchandise cost is, what is embedded in your guidance for the EPS for merchandise costs?

I guess all I can tell you is embedded in our guidance is that we do see it going up sequentially from here.

I think the balance sheet is the first sign of that, and it is turned and started to increase on the balance sheet side, and the sequential drop from the fourth quarter to the first quarter was almost break-even or flat.

And so we assume an increase from here throughout the year, and we don't want to get into quantifying that, but that's clearly one of the factors that's causing our margin projections to decline over the rest of the year.

And some of that is just not as much a factor of demand as it is a factor of what we have available now for used garments that we burned through and gotten the benefit for during last year.

Right.

Makes sense.

Great.

Thank you.

Excellent quarter.

Thank you.

Our next question comes from the line of Alec Gazelle with Barrington Resource.

Please go ahead.

Alec Gazelle sitting in for Alex Paris.

Most of my questions were asked but I do have a couple.

I know you commented on the currency benefit on Canada.

Can you provide further details on what that was also coming from?

Was it just strictly Canada?

As far as currency?

Right.

Canada is the only amount that significantly impacts us from a foreign currency standpoint.

We have some smaller operations in Europe that are in our specialty garments division, but Canada is really the only currency on the core laundry side you need to worry about as far as currency impact.

Okay.

And wondering if you can comment on the acquisition environment?

I think there is still the old problem just like in the housing market, people still have high expectations.

They haven't accepted reality that the values aren't as great as they once were.

There are some opportunities out there, but again it is getting that value judgment in there probably is the most key component.

All right.

That's it.

Thank you, guys, so much.

Thank you.

(Operator Instructions).

Our next question comes from the line of Andrew Steinerman with JP Morgan.

Please go ahead.

Hi.

Could you go over what the organic rental or total organic growth or obviously decline was year-over-year?

I know you talked about it on a sequential basis, and could you also tell us what's implied in your full year revenue guidance in terms of organic change?

Andrew, this is Steve.

For the year-over-year first quarter, the organic decline for the core laundry is 6%.

Okay.

What's implied in the full year guidance?

I don't have that number, Andrew.

You can kind of back into it.

We're not projecting any additional acquisitions in our numbers obviously at this point.

And our assumption is that from a foreign currency standpoint that the Canadian impact rates, stays at the current rate.

I don't have that number currently for you.

Okay.

Also, you gave us some analysis on margins year-over-year.

If it is okay, Steve, I was hoping to ask you sequentially, gross margins went up sequentially 180 basis points, this is overall gross margin.

I was hoping you could tell us how that gross margin went up, how much of that is from merchandise cost, which I think you said was small, sequentially at this point, energy at 5%, I actually think might be up slightly.

And then I am thinking specialty garment might have had a overall contribution to gross margin.

What other item might have changed gross margins sequentially?

Am I thinking about it correctly?

I think when you're talking fourth quarter to first quarter.

That's right.

The margin benefit, as Andrea mentioned, primarily came in the form of the stronger top line.

From an expense standpoint, on the merchandise side we talked about how the dollars were only down slightly.

You're right on the energy.

They were up slightly from the fourth quarter to the first quarter.

Payroll was probably down slightly based on some of the cuts that we talked about in the fourth quarter.

And there is not a lot of other significant drivers, and you're right that the specialty garment impact was significant.

So from a sequential standpoint it really came, the improvement in margin really came from the top line.

How much did specialty garment influence that overall 180 basis points sequential move in gross margins?

We don't -- when you talk about just from the gross margin standpoint, we don't give out that detail with respect to by segment.

We just have the operating income, but it would be fairly significant based on their revenue numbers and where you see their profits are.

Because from their standpoint, I would imagine that their SG&A, and like I said, their costs remain relatively fixed over the short-term, and when they have strong volume on the billing side, their profits really jump.

So I think you did get a decent amount of benefit from there, but I don't have that quantified for you.

Right.

And when you do the same thing, going into the next quarter, the February quarter, I think you said merchandise costs no longer are benefit, energy I assume you assume is stable, and so really what's going to cause a gross margin decline into next quarter really comes down to the direction of top line, right?

It is the direction of top line, and it is the things I mentioned in the call.

You hit on a couple of them.

I think our assumption is is that energy will be higher, natural gas prices have gone up consistently over the last few months, plus we have some seasonal usage spikes in the winter.

The resetting of unemployment taxes, our raises, our annual raises that have been frozen for over a year now are going to come back into play, and so there are a number of factors that always cause our second quarter to be sequentially lower.

You didn't see that last year because so many of the other costs, like energy and merchandise, were falling dramatically at the time.

But if you go back and look historically, we always have a number of costs that come in in the second quarter that cause the decline in the profits, in the margins.

Thank you very much.

Thanks, Andrew.

Our next question comes from the line of Chris McGinnis from Sidoti and Company.

Please go ahead.

Good morning, guys.

Just one follow-up.

On the energy, how quickly can you pass that along to the customers through the contracts?

We basically have in our contract, we can adjust the pricing annually to CPI or negotiate a rate, so we're always looking at adjusting prices on an annual basis.

We do have a surcharge in place, and I would say we probably lag it by three to six months if the surcharge is going to change.

All right.

Thank you.

Great quarter, and good luck next quarter.

Thank you.

(Operator Instructions).

We have a follow-up question from John Healy.

Please go ahead.

One quick follow-up.

I was hoping you could give us a little bit of color what you saw over the holiday season in terms of plant shutdowns and maybe facilities beginning to come back online, and how that might compare to what you saw last year if things were at the margin better, meaning that shutdowns weren't as severe and lasting as long or maybe they're a little bit worse.

Any color would be great.

Thanks.

I think at this point, John, we're only a week out of the holidays.

We really can't tell you, take another few days, I haven't got the reports.

They come in Friday.

I would be just guessing if I gave you any answer right now.

Okay.

Fair enough.

Thanks.

There are no further questions at this time.

All right.

We would like to thank you all again for the interest in our Company.

Like the rest of the business community, we are hopeful the recent indicators in the marketplace are evident of some strong economic stabilization and eventual recovery.

And we're confident that when the Country returns back to full strength, UniFirst will be situated to capitalize on these opportunities.

We look forward to talking to you in our next quarter.

We will be reporting on our second quarter performance.

Thank you for the interest in our Company.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation and ask that you please disconnect your line.