UniFirst Corp (UNF) 2011 Q3 法說會逐字稿

Ladies and Gentlemen, thank you for standing by.

Welcome to the UniFirst Corporation Third 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 with UniFirst Corporation.

Please go ahead, sir.

Thank you and welcome to the UniFirst Corporation call to review our third quarter results for fiscal 2011 and to discuss our expectations going forward.

I'm Steven Sintros, UniFirst Chief Financial Officer.

Joining me today is Ronald Croatti, UniFirst 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 risk 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 and environmental matters.

I refer you to our discussion of these points in our most recent 10-K filing with the Securities and Exchange Commission.

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

Thank you, Steve.

I'd like to welcome everyone for the financial review of UniFirst third quarter fiscal 2011.

Steve will cover the details in a moment, but let me first present a summary.

UniFirst revenues for third quarter of fiscal 2011 set a new record at $291.6 million, an 11.6% increase over the $261.2 million reported for the same period a year ago.

Net income for the quarter was $18.4 million, a decrease from the $19.3 million a year ago.

The largest contributor to our top line growth came once again from our core laundry operations, which achieved record high revenues in the third quarter, coming in with a 10.6% increase over the same quarter in 2010.

Income from laundry operations fell short of last year's quarterly results, primarily due to the continued normalization of merchandise costs, the lows 2010, coupled with increased energy costs.

Both our Specialty Garment and First Aid businesses also reported strong growth for the third quarter, which contributed to the Company's solid financial results.

Our Specialty Garment segment, which includes nuclear clean room operations, produced an outstanding 19.1% third quarter revenue improvement over the same quarter in 2010.

These gains were lead by the Unitech Nuclear Group, which achieved record highs for the quarter in both revenues and profits.

We're happy to report today both arms of our Specialty Garment units are offering more diversified safety services, specialty products to more customers than ever before.

Our First Aid segment reported a 15.1% revenue increase in the third quarter when compared to the same period last year.

This too was record setting performance lead by the private labeling pill packaging division, as well as gains associated with continued customer stabilization in the B2B Van Service group.

In our core laundry business, we continue to benefit from our Company wide focus on advanced sales and service training, as well as basic fundamentals.

We're also returning to our mandates for closer, hands-on involvement by our local managers, holding each accountable for adhering to the proven systems we have in place and for achieving targeted results.

In so doing, we maintained solid customer retention numbers and showed continuous improvement in new sales from both our local and national account teams.

And although new account pricing remains essentially flat from the previous quarter, our continued sales growth and improved customer satisfaction offers a level of proof that our team partners are doing a good follow-up, our established results are in (inaudible) programs.

It also suggest our people are successfully communicating the overall business value we deliver to our customers.

Positioning UniFirst as a cost effective single source provider for not only uniforms, but for facility services and ancillary business products as well.

Another positive indicator was reflected in revenues associated with existing customers, garments.

Adds over reductions, we were slightly positive year-to-date and marked improvement over the same period in 2010.

This metric is directly influenced by the general market conditions.

When combined with the much needed customer stabilization we've seen in 2011 signals a somewhat more secure economic environment for us than the business climate of a year ago.

Nevertheless, giving the continuing high unemployment levels, slow job growth, and spending hesitations throughout the United States and Canada, as well as the continued high commodity and fuel costs worldwide, we fully expect the economic growth will remain tepid at best in the quarters to come.

So UniFirst and its thousands of team partners will be staying the course as we head into fiscal 2012 and beyond, remaining committed to service excellence to meet the needs of our customers, staying dedicated to sales productivity to increase market share revenues, and adhering to strict cost controls to limit spending to only those efforts that directly benefit our customers and provide measurably return on investment for our shareholders.

We are very proud of our ongoing dedication and continued resilience of our entire UniFirst family.

No matter the market adversities or individual collective contributions, we're ultimately responsible for our successful third quarter and year-to-date financial performance.

And now for more details on our third quarter, I'll turn it back over to our Chief Financial Officer, Steve Sintros.

Thanks, Ron.

Consolidated revenues for the third quarter were $291.6 million up 11.6% from $261.2 million for the same period in the prior year.

Third quarter net income was $18.4 million or $0.93 per diluted common share compared to net income from the third quarter of 2010 of $19.3 million or $0.98 per diluted common share.

Core laundry revenues were $252.1 million in the third quarter, up 10.6% from those reported in the same period a year ago.

After excluding the positive effect of acquisitions, which contributed 1.4%, and a stronger Canadian dollar, which contributed 0.5%, the Company's core laundry revenues increased 8.7% organically.

Improvements in sales rep productivity and customer wearer levels contributed to the strong revenue performance of the core laundry operations during the quarter.

New sales for the third quarter and year-to-date were significantly higher than a year ago due to higher field sales rep productivity, as well as large national account wins.

Wearer additions versus reductions were marginally positive in both the quarter and year-to-date periods, but substantially ahead of last year's results through nine months.

Much of the net benefit in wearers has come from strong employment levels in Texas, the result of higher oil prices.

Similar to the first half of the year, higher makeup, emblem, and lost and damage garment charges also continued to contribute to the overall growth in the third quarter.

Customer retention levels during the quarter and year-to-date period were similar to the prior year.

As anticipated, the core laundry operating margin was lower than the prior year, declining to 8.9% in the quarter from 11.5% in the third quarter of fiscal 2010.

As expected, the margin decline primarily relates to higher merchandise amortization as a percentage of revenues.

As I have discussed in prior calls, this increase is being driven by several factors.

The largest factor is the normalization of merchandise levels needed to support our existing wearer base.

During fiscal 2009 and early fiscal 2010 our results benefited significantly from the utilization of used garments received back from our customers, who during the recession had reduced their workforces.

Over the last few quarters we have had to put significantly more new garments into service to meet the day-to-day needs of our existing wearer base.

Strong new account sales, including some large national account wins, have also required a large up front investment in merchandise.

In addition, certain OSHA regulations have mandated that many of our customers provide their employees with flame resistant garments.

This recent regulation, combined with a spike in oil prices, has positively impacted the wearer levels at certain customers, particularly in Texas, and caused us to place significantly more of these higher cost specialized garments into service.

Higher energy costs also contributed to the margin decline.

Total energy costs for our core laundry operations as a percentage of revenues increased during the quarter to 6.4% of revenues from 5.8% in the third quarter of fiscal 2010.

Overall distribution center costs, including freight costs, were also higher as a percentage of revenues due to an increase in the number of units being shipped to our plants nationwide.

In addition, the quarter included a $0.4 million charge based on the impact of discount rate fluctuations and the value of our environmental liabilities.

These increases were partially offset by lower payroll related costs and depreciation as a percentage of revenues, as well as lower bad debt expense.

The Company's Specialty Garment segment, which consists of nuclear decontamination and clean room operations, posted revenues of $30.6 million in the quarter, up 19.1% compared to the third quarter of 2010.

As a result, operating income for this segment increased to $5.7 million in the third quarter from $5.2 million in the same quarter last year.

The strong performance of this segment was primarily the result of an increase in power reactor outages compared to the same quarter a year ago, as well as significantly higher direct sales.

In addition, improved revenues and profits from its clean room operations contributed to the segment's overall performance.

First Aid segment revenues increased 15.1% to $8.9 million in the quarter compared to $7.8 million in the same quarter a year ago.

Income from operations for this segment was $0.9 million up from $0.7 million last year.

This improvement in the segment's results continues to be driven by its pill packaging and wholesale distribution operations.

Net interest expense for the quarter declined to $1 million from $1.7 million in the same quarter in fiscal 2010 due to the expiration of an interest rate swap related to our variable rate notes.

The results for the quarter were also affected by foreign exchange gains of $0.3 million compared to losses of $0.6 million a year ago.

The effective income tax rate for the quarter was 35.2%, slightly higher than the 35% for the same quarter last year.

The effective income tax rate in the third quarter was lower than normal due to the reversal of tax contingency reserves as a result of certain statute expirations.

We anticipate the income tax rate for our fourth quarter will be approximately 38.8%.

Our balance sheet and overall financial position continue to be very strong.

The end of our third quarter the Company had $109 million of cash and cash equivalents on hand.

Of the cash and cash equivalents on hand, $42.6 million is held in Canada and intended for future investments outside the United States.

Total debt outstanding remained relatively constant at approximately $181 million and total debt as a percentage of capital decreased to 18.8% from 20.4% at our fiscal 2010 year-end.

On June 15, 2011, the Company paid off $75 million of private placement notes bearing a fixed interest rate of 5.27%.

As these notes had fully matured there was no prepayment penalties associated with these pay-offs.

These notes were paid off using cash on hand, as well as some borrowings under a new revolving credit agreement that was closed during the quarter with a syndicate of banks.

This credit agreement replaced the Company's previous credit agreement that was set to expire in September of this year.

The new credit agreement generally allows for borrowings up to $250 million and up to $350 million under certain circumstances.

Depending on leverage levels, the interest rates under this agreement will range from LIBOR plus 0.75% to LIBOR plus 2%.

For the first 9 months of fiscal 2011 we generated cash flows from operations of $56 million, down from $99.8 million in the first nine months of fiscal 2010.

The decline was primarily related to increased working capital requirements.

Accounts receivable has increased by $22 million or 21% from fiscal year-end.

This increase is due primarily to increases in our core laundry and Specialty Garments revenues, as well as a slight deterioration in the overall age of our receivables.

Inventories have increased $19.2 million and merchandise and service increased $27.5 million since the end of fiscal 2010.

As I discussed earlier, the increase in merchandise and service relates to higher levels of new garments being placed in service to support our new account sales, as well as our existing wearer base.

As a result, a higher level of new inventories being manufactured and held to support this increased demand for new garments.

Capital expenditures for the first 9 months of fiscal 2011 were $49.4 million and we now expect that they will -- we will expend approximately $60 million for the full year.

We've also expended $17.3 million on several small acquisitions in our core laundry operations.

On May 31, 2011, just after our quarter end, we closed on another small acquisition that will help provide us a leading market position in Southern Georgia.

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

Based on our results through 9 months, we now project that our revenues for fiscal 2011 will be between $1.125 billion and $1.130 billion.

We also project that our income per diluted common share for fiscal 2011 will be between $3.75 and $3.85.

We look forward to speaking with you all again in October to discuss the results of our fourth quarter and our thoughts regarding fiscal 2012.

That completes our prepared remarks and, Operator, we are now ready for any questions the audience may have.

(Operator Instructions) Andrew Whitmann with Robert W.

Baird.

Hi, guys, good quarter.

Good morning.

Just wanted to get a little bit more insight, if you could, on the cost structure and how it's changed.

Obviously the margin decline wasn't unexpected, but can you give us maybe a little bit of a break down as to how much of it was the uniform amortization, energy, labor, just try to understand what's going on there a little bit greater detail?

Sure.

The merchandise amortization, Andrew, was about 2.5% for the quarter compared to the same quarter of last year.

The energy we mentioned in the call was about 0.6%, so those were the two big negatives.

I also mentioned a small change in our environmental reserves related to the discount rate was a couple tenths and then some higher distribution costs had a similar impact.

Those negatives were offset by lower payroll related costs, some lower bad debt expense, and you can see on the face of our income statement our depreciation as a percentage of revenues is down just based on the strong revenue growth.

Just a little color on the payroll related cost.

Again, the payroll related bad debt expense, depreciation, all the benefits really came from the fact that the revenue growth was so strong and those costs were either flattish or a little bit down or a little bit up, but not to the extent of our revenue growth.

So it's really the merchandise is really obviously the biggest factor, which we've been highlighting and one we continue to keep an eye on.

And just know with I think last time we talked, last quarter cotton was $2 a pound and it's about $1.20 a pound today.

How does the outlook for those merchandise cost change today versus maybe what we're hearing last quarter from you?

Well, I think we still continue to be concerned.

They're higher than the historical and higher than the costs we've been purchasing at through the end of last year.

It obviously is a positive that has come down somewhat since then.

I think our guidance for the remainder of this year really always assumed that we weren't really going to be impacted a whole lot this year from the higher cotton costs due to the time it takes it to kind of flow through our supply chain.

We are buying cotton now that's at higher cost than earlier this year, so that will work its way through the process and start to impact us late fourth quarter kind of into next year.

But at least as it relates to the current year, the reduction in cotton prices shouldn't change your thinking for this year.

It is slightly more positive for the outlook for next year.

Maybe a similar question on the top line growth.

Obviously pretty strong here.

It sounded like add stops are now positive, which is a great sign.

Can you break down -- it sounds like that no programmers are really the driver of most of the revenue growth.

It sounded like national accounts.

Is there also a pricing contribution in any of this?

Well, to this point we haven't raised our prices.

We raise them when the contract time comes up.

We have not put through a general price increase for cotton or fuel charge yet.

We're contemplating doing so, but at this point it's not.

And as for new sales, it's about 25% or 30% coming in as no programmers currently.

The remainder is coming in basically from people who have a uniform program and have some issues or we have convinced them that we have a better alternative than their current source.

It's really what's happening on the sales and as I said all along, the focus on sales and I mentioned in my presentation, strong management focus and back to basics of keeping these location managers heavily involved in the sales process.

Well that's helpful, thank you.

Nate Brochmann with William Blair & Company.

Good morning, gentlemen.

Great quarter.

Thank you, Nate.

Was wondering if you could just elaborate a little bit on that last question, Ron, in terms of how you feel about your sales force right now in terms of the levels and the hirings and how they're going about business in terms of winning this additional market share.

Obviously a great effort and you talked a little bit about how it's still sluggish environment but it's improving.

Was wondering if you could just kind of elaborate on the balance there.

Well, I think our focus is really on the location managers and involvement in sales and direction of the sales manager and the training that we give the entire group.

And we really monitor the activities and the results of the activities on a daily basis.

And this strong focus and direction using the database that we have and the tools that we use has helped us continually get our people more productive on a quarterly by quarter basis.

And hopefully we will continue to do that.

That's great.

And then two on the cost side.

When you look at as you're buying new garments and putting them into production as demand goes up, where do you kind of feel that you stand with the balance in terms of your current like kind of capacity levels?

Well, I'll go first.

The capacity levels in the plants is we always got more capacity, we always got space to throw in a washer or something to keep the plants going.

And as I mentioned before, we do not have any of the plants other than one that are two shift operation.

We're basically a shift, shift and a quarter, something like that, most operations.

Our manufacturing capacity, we're pushing.

We did spend some capital and we added to one of the buildings, so we're really pushing our manufacturing capacity.

But a big part of our merchandise has been a shift to this FR, as Steve mentioned, related to the government legislation and the price of oil, and that's kind of pushed this merchandise amortization up a little quicker or higher than we were anticipating.

We think that will continue for a little while longer.

Very helpful.

Thank you very much.

Andrew Steinerman with JPMorgan.

Hi, I'd like you to jump into add stops or wearers a little bit more.

You sort of presented it as a year-to-date slight positive compared to a year ago, but when I look at the wording of what you're using now on add stops versus a quarter ago, kind of second quarter was stabilizing wearers and this is improving wearers.

How much better was the third quarter in terms of wearers and is it coming really from kind of specific uniform wearers or is that also including additions of any ancillary services at a current client?

Yes, Andrew, the third quarter was definitely better than the second quarter with respect to adds versus reductions.

Second quarter was a little sluggish, some positive, some negative weeks.

And I'm talking primarily garments and I'll make a comment about the ancillary products next.

The third quarter was more consistently positive.

I don't want to get carried away in the level that it was positive.

I think I used the term marginally in the call and again I'd like to highlight.

We also look at this region by region in the country and we're really getting most of that bump from kind of the south, in the Texas regions where we are very strong in the wearer base, has really grown based on the price of oil and some of this legislation putting people who previously didn't even have uniform programs into these FR garments.

So we're definitely getting a bump there.

There are definitely pockets of the country that are still more what I'd call stable and not really markedly positive at this point.

As far as the ancillary services, I'd say those are more kind of a net stable right now.

We're probably getting a little bit of a bump from them, but not -- nothing too -- not making a significant impact right now.

Right, that's helpful.

And could you just give us a sense on kind of just generally Texas or oil?

I never remember that being a notable percentage of your end wearers.

Is this more than 5% of end wearers?

Our Texas regions are definitely more than that.

I think that the difference is, is that right now because oil prices went from such a low to such a high, we lost so much business during the recession in that region because of the price of oil that it's really coming back strong now.

So there's never really been a point in the past.

One I think we have grown down there, but two, I think there's never been such a swing in a year period or a year and a half period from such a lull on the wearer side to such a high.

So, I think that's part of the reason we're talking about it.

The legislation on the FR garments is a factor and those FR garments are much more expensive than the standard garments.

And you're talking directly in the oil industry?

I know you are going to say Texas is more than 5% to wearers, but directly in the oil industry is also more than 5% of wearers?

I think it's a trickle down impact from the oil industry to the support services and just businesses in that market in general.

That's fair and then if you'll let me throw in one more.

Can you talk more about this FR kind of regulations, when did it come into pass and how much potential for new business do you think that has?

I think, Andrew, that came in just about a year ago now and what it did is it affected a lot of customers that -- let's say you have a manufacturing plant, you're processing turkeys.

Well the maintenance people were probably in a cotton or poly cotton type garment and this legislation required anybody who deals with electricity or so forth to be in some type of flame retarded protective apparel and that caused a lot of redressing.

You were able to raise the price, obviously, for the newer merchandise.

But a lot of redressing of these type of people, plus there were companies out there that did not have their people in protective apparel and that created this opportunity to get what we would call virgin accounts.

And that's all helped us, the difficulty of all that is it's a higher priced garment, it goes in in the amortization and really bumps up that amortization.

It will flatten out eventually.

And just to add to that, I think that's important, Andrew.

I've been kind of tying together the price of oil in Texas and this legislation, but it has effected other parts of the country, people that work near high voltage electricity, so it's not just the oil patch that's being impacted by that legislation.

Okay, perfect.

Thank you, Steve and Ron.

Michael Kim with Imperial Capital.

First off on new sales, you talked a little about some large national account wins.

How much of the new sales was driven by national versus local and field sales?

I think it's important, there are some large national accounts that helped, but our local field sales were up significantly from last year, over 20% year-over-year, local sales.

So we don't want to paint the picture that it's really all national accounts.

Its really been a across-the-board effort.

I think a little bit higher percent compared to our normal mix with national accounts, but both sides had significant year-over-year gains.

And then in terms of pricing I think you talked about new sales being relatively flat.

Was that consistent across national and field?

Yes, it was.

And is it your sense that that should continue to persist or how are you seeing the pricing environment?

I think as I tried to say, I think we've seen it stabilize.

It's at a slightly lower level than before the recession, but it's stabilized.

There's not the craziness going on.

And I think with oil prices and the cost of cotton, we're all forcing ourselves to work that new account pricing up, because you're going to be paying the cost on the inputs.

And then switching gears to specialty garments, earlier in the year you guys took a little bit more of a conservative view and obviously year-to-date has been a pretty strong performer.

Do you start to see more normalization in that business relative to how you were thinking about that business earlier in the year or is there a fair visibility on elevated specialty garment revenues for the balance into the next several quarters?

I think the unfortunate incident that happened in Japan has caused some of the power reactors that would normally be a six week outage go to a nine week outage or a 10 week outage because they're making some safety changes or maybe updating some piping or something, so that's really helped this year.

Will that continue?

We don't know the internal mechanism of each power plant, their status.

Hopefully it will -- they will do more upgrading and it will continue, but we can only tell you what outages are coming and how we forecast based on each outage and the normal duration.

So, I've got to give you, we really can't predict that.

I think at this point we're not ready to kind of look into next year on that side.

We have to sit down with that management team, which we do in the next couple of months, and really map out the outage schedule and certain projects in that segment.

Okay, great.

And then just lastly on CapEx, it looks to be a little bit higher for the year than I think you had modeled in or guided earlier.

Is it your sense that CapEx spending starts to moderate as you complete some projects or how do you see that tracking through the next several quarters?

I think we see that basically at that $60 million level.

Okay.

We have some (multiple speakers) projects going on.

Okay, great.

Thank you.

Thank you.

Chris McGinnis with Sidoti & Company.

Just to follow-up on the merchandise amortization.

How long, I guess, it seems like you're bearing some costs now, but does that flatten out that margin consideration?

At what point does that flatten out and it sounds like, and maybe correct me if I'm wrong, but the RF into Texas is fueling that and some of this OSHA changes.

Is that almost like a one-time impact to some degree that may last a little longer.

Could you just talk about how that plays out over the next 12 months?

Sure.

I think that the merchandise trend is a very difficult thing to predict.

You really only have visibility to kind of what's gone in service and it's difficult to say what's going to go in service over the next 12 months, especially with respect to replacement garments for existing accounts.

Our early indication is that we'll continue to see some year-over-year margin headwind from the merchandise as we move through 2012.

It will definitely be at a reduced year-over-year impact compared to this year.

I think your comment is correct.

On the FR garments, since they have a longer amortization, it takes a little longer for the impact of those to normalize.

But we should see a reducing impact as we move through 2012, but not necessarily an impact that starts to reverse yet.

And then just maybe, Ron, I think usually talks about this, but maybe just the acquisition environment.

The referenced you made a small one after the quarter, can you just talk about the environment?

We're always out there looking.

I will say there's a little more interest out there, but it has to make sense for us and some of them we've looked at don't necessarily fit into our game plan.

Nothing on the large sizes working along, but there are some smaller ones out there right now.

And I guess just to follow-up on that, on the larger side there's nothing out there because the prices or can you go into that a little bit more?

No, I don't think the desire is there on the larger ones at this point.

Got you.

Thank you very much.

I appreciate it.

(Operator Instructions) Andrew Whitmann.

I just wanted to understand a little bit more about some of the things that can be lumpy.

One of the things that you mentioned I think, Steve, in your script was lost and damage was a contributor to the quarter.

Was that just people were losing and damaging or was there pricing contribution on the fees that you're charging for those replacements?

It can be lumpy, but I think it's more of a trend that we've talked about over the last nine months.

The more turnover you have in accounts and the more adds you have in accounts and the more you're putting in new garments replacing old sets of garments, whether it's replacing FR garments for a Company that was in cotton, there are more opportunities with those accounts to kind of -- more situations that give rise to loss and damage.

So those are our areas that have over the course of this year helped.

It's not something that's all that volatile from quarter to quarter, but from year to year you can go through trends where they go up and go down and it should kind of match your merchandise cost.

So the fact that we're having higher merchandise costs right now makes sense and matches my comments about the higher loss and damage.

Interesting.

And then just on the direct sales, sounded like that was a contributor as well.

Maybe I missed it, but did you quantify how much of the direct sale specifically was up on a year-over-year basis or could you?

The comment on direct sales was more addressed to the nuclear segment, the Specialty Garment segment.

That segment's revenues were up quite a bit, just getting the data in front of me here.

For year-over-year that was up $25.5 million to $30.5 million and there was a $2 million bump from direct sales in that segment.

Related to our general core business, we also did get some bump from direct sales, not as significant as a percentage though.

The comment was more focused toward the Specialty Garments.

Okay, got it.

Thank you.

Thank you.

Rick D'Auteuil with Columbia Management.

Just on a follow-up to the Specialty Garments and I'm sorry if you covered this already, but on a 19% increase in sales, operating income up roughly a little less than 10%, so half the growth in sales.

Is that the same issues that are impacting the core laundry business on margin or what's going on there?

I think part of it is some additional amortization.

Part of it is the comment I made on the direct sales.

That business there's a lot of fixed costs and when you add incremental processing work, there's a high incremental margin.

The additional sales a decent piece of it coming from direct sales, there's a little bit less of a margin bump.

So I wouldn't say that you can really draw the comparison to the laundry business.

That segment we've had issues kind of tracking the margins quarter to quarter because I think it's a project based businesses and different projects carry different operating margins with them and so that can be lumpy.

I think in general the merchandise cost is up a little bit and the mix has impacted that as well.

Has the competitive environment changed there or is there anything on the pricing side that's causing you to, I guess, price things at a more competitive rate?

Well, I think the answer on the competitive side, as we stated from 10 years ago with the incident in New York, that we had a competitor come in what they call basically a disposable type garment and we did lose some business to them and we slowly taking it back, but I really think it really -- we have more wins than we do losses, so I think we're doing well in that.

Keep in mind that we went into the mobile safety store business in that group and that's part of the direct sale and that is at a lower margin, it is a little more competitive.

But as far as the what we call the rental and cleaning and decontaminating of apparel or tools, that's really had no pricing impact.

So maybe there was some things in this quarter that are one-off kind of things, that -- so we ought to see better margin -- with a high fixed cost business if you've got the revenues, the margin should be improving.

I understand there's some mix issues, as you just pointed out, Ron, but--

Well, we hope that will be the case.

We constantly are pushing our boys on that and like we say, the margins improve with the volume normally, at least on the laundry side.

The idea is we hope it will go in that direction.

And I think it has over the last couple years in general.

I think just quarter to quarter it's difficult to look at it based on the mix.

Just go back to when we had the one in Rocky Flats.

The margins were very good.

It was very profitable, but some of the projects we can't get that margin.

That single source garment is out there and make (inaudible) honest.

Would the industry now implementing some safety changes and having longer outages, how much -- I guess you didn't really say that you'd had a lot of visibility into 2012, but how much visibility do you have in the business on these?

Is it a quarter at a time or is it -- do you have better visibility than that?

I think the only visibility we have is an outage schedule that the power reactors are basically telling us every 24 months when they are going to do the refueling.

As for the length of the outages, we have no visibility.

It all depends when they go in there and whatever they're doing whether they are doing fuel rods or just pipe changes, we have no visibility to that.

And similarly if they're doing a project decommissioning or restarting a reactor, they can miss the projections on the length of those projects by a year.

I mean we've seen that happen because issues that come up.

But do you know what you're going to be doing next month in that business today?

I'd say, yes, up to a month we have a pretty good idea and maybe a quarter is fair, but beyond that it gets a little bit difficult.

Okay, thank you.

Dale Dutile with The Boston Company.

Just looking at margins in the core laundry business at 8.9% or so, it looks like the lowest they've been at least as far back as I can see directionally headed down and I'm just wondering in light of your comments about merchandise amortization continuing to grow next year, would it be premature to think that those are bottoming?

Yes, I think it would.

I mean, if you go back over our last couple of years, Ron kind of mentioned to some extent the timing of some of our price adjustments.

Most of our price adjustments that we work with our customers come toward the end of our fiscal year into our first quarter, so typically we get a little bit bump in revenues during that time.

Through the remainder of the year what ends up happening is due to competitive situations you end up conceding a little bit of price.

So Ron also mentioned that we had not yet addressed the increases in cotton or energy prices with our customers, but would be working to do so over the next couple quarters.

So I think you'll see some bump from that that will stabilize the margins a little bit.

So I think you have to look at it a little bit more for the full year picture and I think that margins will recover somewhat, but we are still concerned about the trend of the merchandise and the energy.

I'm not sure you understood.

When I asked if it was premature to expect that they stabilized you said, yes, it's premature.

And then your answer to the question suggested that they would improve.

I'm sorry, I misunderstood, but I think the answer to your question would be yes then.

Yes, it's premature to expect that they've stabilized?

No, it is not premature to expect they will stabilize.

We believe they will stabilize.

Okay, at about the 9% level or something better than that?

I think again we don't want to get into too much of where we think next year will be, but we would like to think they would be better than that.

On a year-over-year basis should they be better next year than 2011 for the full year?

No.

No, my comments with respect to the merchandise were meant to imply that, everything else being equal, we believe that we'll still have some margin pressure from the merchandise.

So year-over-year -- this year we are going to end up with core laundry operating margin close to 11%.

We believe that will be pressured next year further, but we do not believe that it will be 9%.

I got you, that's helpful.

Just more specifically looking at the quarter, just the liability, excuse me, the environmental liability reserve seems to bounce around a lot.

If I look back last quarter it helped you, this quarter it hurt you.

Is it always being adjusted like that or was there something unusual going on in the last couple of quarters with the environmental liability?

Just to clarify there, some of our environmental liabilities are costs we expect to expend over several years, some ongoing obligations under -- related to some old sites.

Those liabilities are discounted using a risk free interest rate and so because of the volatility of interest rates recently, as interest rates go down, the liability, the discounting causes that liability to go up.

So over the years it hasn't been a significant impact, but over the last couple years with the way the interest rates have been moving it's caused these blips and so we've called them out because they are kind of out of the ordinary.

So whenever we see volatility in rates we should expect something like that?

Exactly.

Then last question I had just looking at your interest income, it looks like you're earning about 2.5% on your $100 million or so in cash.

Maybe that changes because you paid off some debt, but that's a lot better than what I'm seeing out of a lot of other companies.

What's your cash invested in and have there been any gains taken through the interest income line?

Yes, that interest income isn't entirely interest earned on cash in the bank.

It also relates to receivable charges, late receivable charges with our customers.

So we are not earning 2% on the cash in the bank.

It's more probably what you're used to seeing.

But that level is sustainable because people pay late?

Exactly.

The level is more or less sustainable because most of it is coming from the AR.

Right.

And I'm sorry, then last question just on tax rate.

Understanding what impacted this quarter, what helped this quarter, just on a go forward basis 37.5% on an annualized basis, is that about right?

Yes, I think for the next, for the foreseeable future.

I think the more normalized rate is more like 38%, 38.5%.

For the next year or so we'll continue, knock on wood, to have some of these reserve adjustments in the third quarter, so that will cause the year-over-year rate to be a little lower.

But if you're modeling longer term a 38%, 38.5% rate is really more appropriate.

That's all I had.

Thank you.

Thank you.

There are no further questions from the phone lines at this time.

Very good.

Well, we would like to thank you all again for the interest in our Company and we look forward to speaking to you within a few months when we'll be reporting on Unifirst Corp fourth quarter and year-end results, as well as discussing our outlook for fiscal 2012.

Thank you 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.