UniFirst Corp (UNF) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the second-quarter earnings results.

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

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

(Operator Instructions).

Now, I would like to turn the conference over to Steve Sintros, Chief Financial Officer.

Please go ahead.

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

I am Steven Sintros, UniFirst's Chief Financial officer.

Joining me 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 continued availability of credit and the performance of the capital market, 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 you to our discussion of these points in our most recent filings with the Securities and Exchange Commission.

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

Thank you, Steve.

I'd like to welcome all of you who are joining us for the review of UniFirst financial results for the second quarter and first half of fiscal 2010.

Steve will be covering the details in a few minutes.

Let me start with a brief summary.

Revenues for the second quarter of fiscal 2010 were $253.6 million, a 1.4% decrease when compared to the same period a year ago.

Six months year-to-date revenues total $509.7 million, a 1.9% decrease from the same period in 2009.

Net income for the second quarter was $16.2 million, a 11.2% decrease when compared to the second quarter of fiscal 2009.

However, net income for the first six months of the year was a record $39.8 million, a 7.2% increase over the first half of last year.

As we forecasted, Core Laundry operations saw a decrease in profits for the second quarter when compared to the same quarter of 2009.

But year-to-date, Core Laundry profits were still ahead of last year.

Steve will speak more on this in a few minutes.

Our Specialty Garments segment, which provides uniforms and ancillary services for the nuclear cleanroom industries, showed solid profit increases both for the quarter and year-to-date.

We expect this segment to soften somewhat throughout the balance of the year.

Meanwhile, profits from our First Aid group continue to be particularly affected by the recessionary market conditions.

We expect demand for our First Aid and safety products to continue to be negatively impacted as we progress towards year end.

It should be noted that our second quarter is traditionally our most challenging period due to holiday closures and a reduced number of workdays by our customers.

Although still feeling the effects from the high number of uniform wearer losses suffered in 2009 and throughout the first half of 2010, our Core Laundry operations maintained a sales staff headcount and drove overall Company performance in the second quarter with new sales coming in slightly ahead of the same period last year.

Our national accounts sales team in particular had a productive second quarter, closing several new large-sized customers.

In our second-quarter route service sales, where route sales represented selling new and increased existing ancillary products and services to our current customers, delivered significant revenue increases over 2009, helping to stabilize our top line.

I should also mention that, during the quarter, new accounts and customer retention pricing continued to be negatively impacted by competitive pressures and by the many business buyers who remain overly cautious when it comes to long-term purchase commitments.

We are pleased with the results for the first half of 2010, but we remain watchful going forward to the ongoing market uncertainties demonstrated by national unemployment trends.

Unemployment levels which have a direct relation to market demand for uniforms and other business services held steady in February at 9.7% in the US and 8.2% in Canada.

On the flip side, however, customer spending -- consumer spending rose in February for the fifth straight month despite flat incomes, reflecting an increased consumer comfort level that will be required to begin the eventual economic rebound.

We've also witnessed positive indicators in usage by our customer base relating to our adds over reductions in lost business metrics.

The dramatic rate of sequential losses in uniform wearers and customers has persisted throughout last year, slowed through the first quarter, as we previously reported, and continued to decrease on a week-to-week basis throughout the second quarter.

Although not yet returning to pre-recessionary levels, we are hopeful this, too, may be a sign of the market stabilization and precludes economic reset.

Now, with the actual timing of the rebound remaining unclear, there's still plenty of reason for vigilance.

We know our industry lags behind general market recoveries, and it will ultimately take years for us to get back all of the uniform wearers we lost during the recession.

With increase in our operational costs expected throughout the balance of the year, we expect to see some reduction in operating margin as the year progresses.

Our ongoing recessionary recovery plan positions us to maximize our opportunities in today's marketplace and to take best advantage of a revitalized economy.

In addition to maintaining our stringent, companywide cost controls, our plan places critical importance on the success of our sales and service organizations to help UniFirst achieve its long-term goals.

New sale and customer retention are vital for us to meet our revenue and profit targets.

We firmly believe we have the systems and people in place to succeed.

During the second quarter, our sales and service teams continued to benefit from our latest training and job certification programs which increasingly utilized our newly implemented coast-to-coast videoconferencing network.

All our sales and service teams, skills and efficiency levels are now advancing much more rapidly while we are eliminating many of the high travel related costs and downtimes associated with more traditional national-scale education programs.

Our sales force continues to be more productive with their time, selling more strategically and doing a better job of communicating our value-based offer to customer prospects.

Meanwhile, our service teams are building strong bonds from loyalty with existing customers by providing the high-quality service levels in the industry.

Accordingly, we continue to [remain] very high customer satisfaction rates.

As I said before, consistently exceeding customer expectations will always be our top priority at UniFirst.

Despite the ongoing subpar market conditions, we know all UniFirst Team partners will continue to work very hard, efficiently executing our recessionary recovery plan to help overcome the external challenges.

We feel all our business units are posed to productively work through a slow upturn cycle and sustain long-term growth.

We [maintain] a consistently strong cash flow to allow for competitive acquisitions that makes sound business sense.

We look forward to reporting our continuing progress in the quarters ahead.

Now, to fill you in on all the financial details, I will turn it back over to Steve Sintros, Chief Financial Officer.

Thanks, Ron.

As Ron mentioned, revenues for the second quarter of fiscal 2010 were $253.6 million, a 1.4% decrease from the previous year's $257.3 million.

Second-quarter net income was $16.2 million or $0.83 per diluted common share, an 11.2% decrease from the second quarter of fiscal 2009 when net income was $18.3 million or $0.94 per diluted common share.

The Company's Core Laundry revenues in the second quarter of 2010 declined 2.8% compared to the same period in fiscal 2009.

Organically, Core Laundry revenues were down 5% when excluding the 1% benefit from acquisitions and the 1.2% benefit from the stronger Canadian dollar.

The year-over-year decline in our Core Laundry revenues continues to be due to the significant reduction of wearers in our customer base during fiscal 2009.

Sequentially, however, our Core Laundry revenues grew 0.7% overall and were up slightly on an organic basis from the first quarter of fiscal 2010.

We are encouraged that, for the second quarter in a row, these operations revenues grew sequentially.

This indicates to us that our customer base is beginning to stabilize.

New sales during the quarter were slightly up from the prior year, and sales of new products to existing customers, or service sales as we call them, were significantly higher than the prior year.

Although our rate of net wearer reductions has significantly declined since the prior year, they remain negative at elevated levels.

In addition, it continues to be a very competitive pricing environment both with respect to new business as well as renewal business.

Therefore, although we are encouraged by recent trends, we still believe that significant top line improvement is going to be challenging in the near term.

Income from operations from the Core Laundry business was $26.8 million in the quarter compared to $32.1 million a year ago.

During fiscal 2009, we discussed how our proactive cost-cutting increased profits last year.

Early in the second quarter of fiscal 2009, the Company engaged in several steps to control costs, such as wage and hiring freezes, travel restrictions and headcount reductions.

Many of these cost-cutting measures were implemented before the full impact of the wearer reductions was realized in our revenues, which caused our margins to expand.

We have continued to be frugal with respect to travel and other more discretionary costs.

However, due to the Core Laundry's year-over-year revenue decline, as expected, certain costs have increased as a percentage of revenues despite an overall reduction in operating costs compared to the second quarter of 2009.

Payroll and payroll-related costs, energy, and other production costs, as well as depreciation, were all up as a percentage of revenues.

Increased salesforce headcount, as well as January 1 wage increases, contributed to the higher costs as a percentage of revenues.

Total energy costs as a percentage of revenues increased from 5.4% in the second quarter of fiscal 2009 to 5.9% during the current quarter.

Overall merchandise costs as a percentage of revenues continue to be lower than the prior year despite a small sequential increase from the first quarter.

As a result, the operating margin of our Core Laundry business declined from 13.7% in the second quarter of 2009 to 11.8% in the second quarter of 2010.

Despite the decline in margin, the results of this segment for the quarter met our internal expectations.

The Company's Specialty Garments segment increased its revenues $2.5 million, or 14.7%, compared to the second quarter of 2009.

This increase in revenues was the result of a larger number of power reactor outages falling in the second quarter of 2010, compared to the same period a year ago, as well as an increase in other specialized decontamination work we are beginning to perform for certain customers.

As a result of this increase in revenues, operating income for this segment increased from $1.7 million in the second quarter of 2009 to $2.1 million in the second quarter of 2010.

Second-quarter revenues for the First Aid segment increased 3.3% from $6.6 million in the second quarter of 2009 to $6.9 million in the current quarter.

Income from operations for this segment was approximately $0.2 million in the second quarters of both fiscal 2010 and 2009.

Net interest expense for the quarter was $1.6 million, down slightly from $1.8 million a year ago as a result of lower debt balances outstanding.

Due to the weakening of the euro and pound against the US dollar, we recognized a $0.8 million currency loss during the second quarter compared to a $0.2 million loss a year ago.

The effective income tax rate for the quarter was 39.1%, down from 42.7% in the same period last year.

The higher rate in fiscal 2009 was the result of increase to the Company's reserves for tax contingencies, as required by FIN 48.

As a result of expected reductions of tax contingency reserves due to statute expiration, we project our effective income tax rate for our third quarter will be lower than the first two quarters of fiscal 2010 and then return to a more normalized rate in the fourth quarter.

We expect our full-year income tax rate will be approximately 38.5%.

Our balance sheet continues to be very strong.

At the end of the second quarter, the Company had $84.2 million of cash and cash equivalents on hand compared to $60.2 million at our most recent year-end.

Total debt outstanding remained constant at approximately $182 million.

Total debt as a percentage of capital decreased to 21.3% from 22.5% at year-end.

Of the $84.2 million of total cash and cash equivalents, $31.6 million was held in Canada and intended for future investments outside the United States.

Accounts Receivable increased by $7.8 million, or 8% from year-end, due primarily to the sequential increase in revenues of our Core Laundry operations as well as increased billings in our Specialty Garments segment.

Merchandise and service increased $2.3 million or 3.1% since the end of fiscal 2009.

We continue to see a rise in new garment additions needed to support our customer base and expect this trend will continue over the remainder of fiscal 2010.

For the first six months of fiscal 2010, we generated significant cash flows from operations totaling $65.1 million, up 8% from $60.3 million for the first six months of 2009.

Capital expenditures were $27.8 million for the first six months of this year.

We now expect they will range from $50 million to $60 million for the full year.

During the first half of the year, free cash flows were primarily used to increase the Company's cash balances by $24.1 million, as well as to fund $13.2 million in acquisitions.

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

We currently have over $180 million of borrowing capacity under our existing line of credit and could clearly take on additional leverage.

Based on our financial strength and ability to generate significant cash flows, we are well-positioned to take advantages of strategic opportunities as they arise.

As you may have noted in our earnings release, the Company also announced today that Ron Croatti, our President and CEO, will be entering into a new and long-term employment agreement that ensures he will remain in his current position for the next six years.

Those of you who have followed the Company's progress over many years know that, during his 19-year tenure as CEO, Ron has been instrumental in building a company that has surpassed $1 billion in annual revenue and deliver consistent financial results.

We believe this agreement provides the Company with long-term continuity in management that is essential for continued success.

The agreement provides Ron with the ability to earn up to 350,000 shares of restricted common stock over the six-year period Shares are earned based on the achievement of performance criteria for fiscal 2010, 2011 and 2012.

Once earned, the shares will vest 25% on each of the third, fourth, fifth, and sixth anniversaries of the grant.

Any shares not earned after fiscal 2012 would be forfeited.

In addition, the Company has also awarded Ron a restricted stock grant for his 2009 performance of 50,000 common shares which will vest over the next six years.

The non-cash compensation expense associated with the 50,000 share grant will be recognized as stock compensation expense evenly over the six-year vesting term of the grant.

Accounting rules require the stock compensation expense associated with the 350,000 share grant to be amortized on an accelerated basis due to the performance criteria included in the terms of the grant.

However, under the accounting rules, compensation expense is only recognized if it is deemed to be probable that the required performance criteria will be satisfied.

As the Company does believe that the performance criteria will be met, compensation costs will be recognized -- begin to be recognized as of the date of grant.

As a result, it is expected that the stock compensation expense related to these grants that will be recognized for the remainder of fiscal 2010 will be approximately $2 million.

The expense for fiscal 2011 and fiscal 2012 will peak at approximately $4.8 million for each year due to the accounting requirement for accelerated recognition.

The remaining years impact will trend downward towards the end of the agreement in fiscal 2016.

The expense impact on each fiscal year will be detailed in our 10-Q.

In addition, as the performance criteria are met and the shares begin to vest, the issuance of these shares will gradually increase our outstanding fully diluted shares.

The impact on the fully diluted shares in fiscal 2010 is not expected to be significant.

However, by the end of the employment agreement, we expect these shares will increase our fully diluted outstanding shares by approximately 1.4%.

The 1.4% dilution assumes that, upon vesting, a certain number of shares will be withheld from Ron by the Company to cover the associated tax impact of these grants, therefore reducing the overall dilution.

It is expected that these grants will be the only form of equity compensation paid to Ron over the term of the agreement.

It is also contemplated that Ron's current cash compensation elements will not change significantly over the terms of the agreement.

On April 8, we expect to file our 10-Q, which will include additional information regarding the employment agreement and the restricted stock grant.

Prior to approving this agreement, the independent directors of our Board engaged in a lengthy and thorough process in considering the restricted stock grant awards.

In part, the Board relied on outside advice from Pearl Meyer and Partners, a highly regarded national executive consulting and compensation firm.

If there are any questions on this aspect of today's announcement, we will be happy to address them in the question-and-answer portion of this call.

Based on the continued stabilization of our Core Laundry revenues as well as the strong performance of our Specialty Garments segment, we are raising our previous revenues and earnings estimates for the full year.

We currently project that our revenues for fiscal 2010 will be between $990 million and $1 billion.

Based on these revenue assumptions, we project that our income per diluted common share for fiscal 2010 will be between $3.45 and $3.65.

These earnings estimates include $2 million of stock-compensation expense for the last six months of the year related to the restricted stock grants previously discussed.

That completes our prepared remarks.

Operator, we are now ready for any questions that the group has.

(Operator Instructions).

Andrea Wirth, Robert W.

Baird.

Good morning, guys.

Congratulations, Ron, on your contract extension.

I wonder if you guys could first talk a little bit about kind of the trends that you have seen most recently in terms of the add (inaudible).

Are they still running negative in March or have they gotten closer to breakeven or positive?

Andrea, this is Ron.

Last year at this time, the wearer reductions were anywhere from $35,000 to $40,000 a week negative.

They are still running around that $9,000 to $10,000 a week negative.

So each quarter, they've gotten a little better, but we are still a long ways from where we used to be.

Got it, got it.

Then in terms of I guess just in the second quarter, you had mentioned that there was some impact from holiday closures, etc., even despite that revenue was still up sequentially.

I'm just wondering what the rough impact of those closures were if you kind of look at it on a sequential basis.

Yes, I would say $1 million or less, but it's not overly significant.

But it did factor into the fact that it would have been up a little bit more sequentially if it hadn't been our second quarter.

Got it, got it.

Then just in terms of merchandise costs, it was still down a little bit year-over-year this quarter.

How do we think about it next quarter?

Do we start lapping that?

Does it actually increase year-over-year next quarter, or will it still be a slight benefit year-over-year?

As a percentage -- well, next quarter, I think our revenues are going to start to get pretty close to where they were the year before, so I think it will be a little more flattish year-over-year.

I think we expect them to be up sequentially.

I would have to go back and take a look but it's getting close to annualizing the benefit.

Okay, got it.

And then (inaudible) the energy, can you remind us what the energy was as a percentage of sales in 3Q last year and kind of roughly what you think it would be in this coming 3Q, just kind of given current rates?

Well, in the current quarter, it was 5.9%.

That might come up a little bit next quarter as the gasoline and natural gas prices have gone up a little bit.

I have that number for the third quarter for our Core Laundry operations but not for the full Company.

For the Core Laundry, it was about -- it was pretty close to 5%.

Okay, okay.

Then I guess just in terms of you mentioned you're still going to be vigilant on costs.

I guess where do you still have room to continue to reduce costs in the business?

Well, we are watching our headcount constantly.

As Steve mentioned, we did have to put through pay adjustments in January, and we had to pay out all of the sick time and all of that, so we are watching our headcount very close.

The only place we look at allowing headcount increases is in sales.

We are really tough on the travel.

We spend a lot of money on travel and incentive type programs for the sales group.

We've kind of tightened down on all of that and (inaudible).

That's really the two areas.

Okay.

Then just one last question and I will get back in line.

Have you had a chance to look yet at the healthcare bill that recently passed and any potential impacts that you may see from that?

Yes.

I think, in the short term, Andrea, there is nothing that should impact for example the rest of this year but ourselves, like everyone else, are trying to digest it at this point.

We believe it probably will have some impact on us but at this point, it's difficult to determine how we might need to change our programs for our Team Partners.

But at this point, it would be very difficult to say what the overall impact will be.

Okay, great, thanks.

I will get back in queue.

John Healy, Northcoast Research.

Good morning.

I wanted to ask a little bit about headcount going forward in the sales force.

Could you give us a little update on maybe kind of what you did there maybe during the quarter and at what point and what time, what do you need to see in your business before you really start to accelerate some of that headcount?

Our headcount, we have never cut our headcount.

Even when things turned downward, we kept our headcount basically the same and then we started increasing it.

We basically increase our headcount anywhere from 5% to 7% on a yearly basis, so we will continue with that practice.

You commented a little bit about the strength that you guys are seeing in the national accounts and some competitive -- or some wins there.

I was hoping to see if that is you guys taking market share or is that the market maybe beginning to expand a little bit and maybe people who haven't utilized uniform programs on an outsourced basis are starting to do that now.

I was hoping to get a little color on what's happening on the national accounts side.

I think it's a combination of both.

As I mentioned, I think the market is very competitive.

We have found some opportunities in a competitive landscape, but we also found one or two opportunities for people who were purchasing uniforms and were able to convert over to either a Val-U-Lease program (inaudible) rental program.

So it's a little bit of both.

Okay, great.

Then just the last question -- you made some comments about the liquidity you guys have and the ability to take on some more leverage or pursue some acquisitions.

Are you seeing more activity there?

Are you seeing more properties that are of quality and size that are becoming -- are showing up on the marketplace ?

Should we view this as an indicator that we should expect more activity from you guys in the near future, or is this just kind of more you guys are just talking about kind of what could be the longer-term

Well, I think we've seen more activity from the smaller guys.

They still have that big price in their minds, so it takes a little longer to get them down to reality.

From the bigger guys, at this point, we haven't seen much activity or much interest, period.

Not to say we're not interested but there's nothing out there at that point.

It's mainly the smaller players.

Got you.

Thank you, guys.

Michael Kim, Imperial Capital.

Good morning, Ron.

Good morning, Steve.

A couple of questions -- looking at the guidance and maybe at the top end, would that imply that, by exiting the year, that we would be looking at positive year-on-year revenues as we start to swing a little bit higher?

Yes, correct.

By the end of the year, that guidance assumes that we will kind of annualize the decreases and show some growth in the fourth quarter.

I don't have the organic numbers right now, but some of that is a benefit from some of the smaller acquisitions we picked up and some exchange rate differences.

But yes, it will annualize.

On the Specialty Garments side particularly, are you looking at a similar pace of reactor outages in the second half of the year versus the prior-year period or how is that visibility?

You know, it is difficult to predict that business because not only is it the timing of outages but the length of the outages.

But based on the strength, especially in the first quarter -- and we had a pretty good second quarter, which is usually a down quarter for that segment -- we expect it to be a little softer in the second half of the year.

Okay, great.

Then again on the pricing or competitive pricing side, is that primarily from larger competitors, smaller competitors?

Is that oriented towards the smaller accounts or can you provide a little bit more color on how that starts to break out?

I think everybody, whether it's a large competitor or a small competitor, is trying to maintain volume because of their cost structures, so it's just about anybody who is out there right now is very competitive price-wise.

On the accounts side, are you starting to see more of the purchase-type customers starting to adopt uniform programs, or is that still a longer sale?

That's still a longer -- it's a tougher sale at this point because we are trying to convince them that we have a better alternative and a cost-effective program.

It takes quite a bit of selling effort to convert them at this point in time.

Companies are reluctant to change their modus operandi really.

Okay.

Then just on the OpEx side in the quarter, it looked like selling and administrative went up about $1 million versus what we've seen in previous periods, you know, with the revenues.

Can you give a little bit more detail on what drove that increase?

It's just really the raises which we talked about, the increase of the sales force, some other payroll-related costs and kind of all it tie around the headcount.

There's some small impact from things similar to like last year at this time, for example, where we reduced headcount and did not give raises.

We have a large accrual for vacation pay that did not get impacted, but this year we did have an increase in pay, so that impacts that accrual where we did not have that negative impact last year.

So it's really just the culmination of a few small things, but the biggest being the raises in the headcount in salesforce.

Okay, great.

Thank you very much.

Chris McGinnis, Sidoti.

Good morning, guys.

I guess, in terms of looking at the leverage that you would take on I guess for acquisitions going forward, what's the debt to total capital that you feel comfortable reaching?

I think we look at it more from a debt to EBITDA (multiple speakers), and I think we would go up to three times pretty easily if the right deal were to come along.

At this point, we would probably be hesitant to go more than that but it really depends on the deal.

Obviously, we've proved that the cash flow -- if you're not acquiring companies, you can rack up cash pretty quickly and then bring down that leverage.

So depending on the deal, we would be willing to go up a little bit.

All right.

I guess, in terms of the service sales that you talk about that are offsetting, what's driving that increase?

Is it just the salesforce itself pushing it and promoting it more?

Can you just talk maybe a little bit about the strength that offsets the decline in service revs?

I think the Route salespeople, we come up with a pretty good incentives for them and it has really been a focus, a little more focused than normal to push them along.

That has been the success that we have had placing more ancillary products, particularly at Bathroom Services.

Then I guess the last question -- you guys mentioned an 11% operating margin in the last call.

I guess, just looking at this quarter, are you thinking that we are at about trough on -- where we came out this quarter, or continue to see it down a little bit more for the remainder of the year?

Well, the guidance has it coming down a little bit over the remainder of the year and some of that relates to the top line.

But I think, coming off of the margins where we had last year and the Q1, I think Q2 does represent a little more normalized where we are headed.

All right, all right.

Would it be a significant decline for the remainder of the year or is it just a couple, maybe 100 basis points at most?

Yes, it doesn't assume a significant decline.

(Operator Instructions).

Andrea Wirth, Robert W.

Baird.

I'm wondering if you could just talk a little bit about what the actual performance criteria is in Ron's contract.

I'm just trying to get an idea of what kind of outlook you are looking for over the next several years.

You know, the criteria is based on revenue and operating margin targets on a multiyear basis and it also allows for Ron to earn it if, in aggregate over the period of time, we achieve those targets.

In general, the goal is to keep the top line moving in the right direction, given the current market challenges and maintaining the current operating margin levels that are commensurate with our historical levels.

At this point, we do want to defer you to the 10-K because the actual targets, we don't want these to be confused with long-term earnings guidance.

As we don't give guidance kind of beyond the current year, in this forum anyway, we don't want the targets in Ron's compensation agreement to be confused with our targets for the next couple of years from an overall Company perspective.

I guess why would they be different, though, ultimately?

(multiple speakers) theoretically, shouldn't they be relatively similar?

Well, I guess, in general, Andrea, the performance targets are meant as part of the Board's process of going through with the compensation consultings and trying to determine what proper compensation was from Ron.

All of that factored in as far as the probability of being able to achieve the goals.

Our earnings guidance over the next couple of years are -- take into a lot of different factors based on the economy.

It makes it difficult when trying to come up with an earnings, with performance criteria, looking two to three years out.

That's the same very reason, as far as earnings guidance, we don't give guidance two to three years out.

So there's a little bit different incentive in coming up with the numbers for the different purposes.

Okay, fair enough.

Then I guess just kind of circling back to the earlier gentleman's question on kind of a normalized margin, so I guess when we do look further out and we kind of get to revenues moving again.

Are margins in a 11.5% kind of range where you could be or is that a little bit too high, just still given that you're benefiting from merchandise costs?

That's a little bit high if you're looking longer-term.

You hit the nail on the head with the merchandise.

We haven't seen it.

We are starting to analyze the benefit.

We have started to see it increase, but we do expect it to continue to come up, and that's where the difference really remains.

So, I think that 11.5% is probably a little high but I think we've always said we would like to really try to hold it around that 11% range.

Okay, great.

Thank you.

Andrew Steinerman, JP Morgan.

This is [Will Lee] for Andrew Steinerman.

You gave some analysis of margins year-over-year.

I was just hoping to get some comments on a sequential basis.

So second-quarter gross margins came down 370 basis points sequentially.

Can you give us what were some of the drivers for that, I guess payroll, merchandise costs, energy?

Sure.

Clearly, you hit the first couple of things, the payroll, the raises that we did January 1.

Our second quarter has some costs in it that typically cause the margins to be down probably up to a couple of points compared to Q1.

We mentioned raises, we do sick pay payouts for our Team Partners in December, and that amount hits every Q2.

The reset of unemployment taxes in January and payroll taxes, that reset has an impact on the second quarter.

Then natural gas and energy prices overall were up a couple million dollars from the first quarter to the second quarter.

Part of that is price but part of that is the usage in the second quarter also picks up on the natural gas side.

Thank you.

We have no further questions at this time.

We'd like to thank all of you again for your interest in the Company.

While the macro economic environment remains challenging, we are hopeful the recent signs in the market based may be signaling some stabilization and an eventual turnaround.

For our part, UniFirst will remain positioned to take best advantage and to come out an even stronger, more efficient company on the other side.

We are looking forward to talking to you next quarter when we will be reporting on our third-quarter performance.

I thank you for your interest.

Have a great day.

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

We thank you very much for your participation and ask that you please disconnect your lines.