UniFirst Corp (UNF) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the second quarter earnings 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 second quarter results for fiscal 2012 and to discuss our expectations going forward.

I'm Steven Sintros, UniFirst Chief Financial Officer.

Joining me 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 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 will turn the call over to Ron Croatti for his comments.

Thanks, Steve, and welcome to everyone joining us for the review of UniFirst's second quarter and half year financial results for fiscal 2012.

Steve will be providing all of the details, but here is a brief summary.

Company revenues for the second quarter of fiscal 2012 set a new record for UniFirst at $310 million, an 11.3% increase over the $278.6 million reported for the same period in 2011.

Six months year-to-date revenue were also a new UniFirst record, coming in at $623 million, a 12.9% increase over last year's mid-year mark.

Net income from both the second quarter and year-to-date were also new records for us.

Second quarter net income was $19.2 million, a 17.9% increase over the same quarter a year ago, and net income for the first half of the year was $45 million, a 12.4% increase over the same 6 months in 2011.

Our Core Laundry Operations, which make up the majority of UniFirst business, led the Company's performance during the second quarter, with revenues and operating income increasing by 12.3% and 18.9%, respectively, over 2011 second quarter.

These gains were primarily the result of continued strong new account sales, positive trends in both pricing and adds over reductions, and increased operational efficiencies in our plant.

Our Specialty Garment segment, which includes nuclear and clean room operations, reported quarterly revenues that were essentially flat and operating income lower than last year's second quarter; however, this segment's year-to-date numbers for both revenue and profit were up over 2011 as 6 months results.

In part, these gains came from the group's expanding lines of ancillary nuclear business services being provided throughout the US and Canada and also in Europe, coupled with a strong nuclear laundering activity in the Canadian nuclear market.

This specialty segment performance was also influenced by continuing additions of value-added service for the clean room industry.

Our First Aid and Safety segment reported a solid second quarter in 2011, increasing the top line results by 12.2% when compared to the same period in 2011.

The revenue growth was driven once again by its pill packaging and wholesale operations, with both areas continuing to benefit from increased consumer market demands for generic forms of OTC medications over more costly name brands.

I'd like to note, as I have before, that our Company was built on unrelenting commitment to our customers, meeting their varying business needs with consistently high levels of service and efficiency.

It's the same unwavering commitment that drives UniFirst growth and stability today and will drive our growth and stability well into the future.

Accordingly, UniFirst intends to lead our industry in consumer-focused systems, which is why we recently embarked upon a project that will overhaul our company's CRM platform and customer service systems within the next 2 to 2.5 years.

This major corporate initiative will not only improve overall operational efficiencies, but more importantly, strongly positioning UniFirst to continue to meeting and exceeding the ever changing needs and preferences of our diverse customer base over the long term.

This is the latest corporate endeavor toward achieving our goal of universal recognition as the best service provider in our industry and toward achieving the financial growth targets of our long-term strategic business plan, [VISTA] 2020.

As far as new sales go, we continue to focus on our sales organization and their prospecting technologies to improve the overall selling skills and sales productivity.

We've depended upon our sales team, both professional field sales and national accounts, to be catalysts for our ongoing organic growth in the most recent years and beyond, and we'll continue to do so in the years ahead.

And finally, in international economics and fiscal policies coming out of Washington DC remain uncertain, we will remain fiscally conservative in everything we do but never to the point of sacrificing service to our customers.

By and large, we are happy with the financial results from all our business segments year-to-date, and barring any unexpected or dramatic economic hurdles in the coming months, we maintain a positive outlook for the remainder of fiscal 2012.

And with that, I'd like to turn it back over to Steve for more details.

Thanks, Ron.

Consolidated revenues for the quarter, as Ron mentioned, were $310 million, up 11.3% from $278.6 million for the same period in the prior year.

Second quarter net income was $19.2 million or $0.96 per diluted common share, up 17.9% compared to net income for the second quarter of fiscal 2011 of $16.3 million or $0.82 per diluted common share.

Core laundry revenues grew 12.3% overall and 11.2% organically.

The calculation of organic growth excludes the impact of acquisitions, which contributed 1.2%, and a slightly weaker Canadian dollar, which negatively impacted revenues 0.1%.

Core laundry revenues continued to benefit from improved sales rep productivity.

In addition, certain annual price adjustments, as well as overall improvement in the pricing environment, contributed to the revenue growth during the quarter.

Wearer additions versus reductions hovered about even during the quarter compared to the first quarter of fiscal 2012, when they were slightly positive.

Our revenues also continued to benefit from higher charges for lost and damaged merchandise, as well as higher garment, make up, and emblem charges compared to a year ago.

During the quarter, the operating margin for the Core Laundry Operations was 9.9%, up from 9.3% a year ago.

As a reminder, our fiscal second quarter includes certain seasonal costs that cause a sequential decline in operating margins from the first quarter.

These costs include year-end sick pay payouts, January 1 annual salary adjustments, and the reset of certain payroll taxes.

The increase in operating margins from a year ago is the result of improved operating leverage created by this segment's strong revenue growth.

Overall production, SG&A, and depreciation expense were lower as a percentage of revenues compared to 2011.

Energy costs for the quarter were also lower, at 5.7% compared to 6% in the second quarter of 2011.

Higher fuel costs for our fleet of delivery vehicles was more than offset by lower natural gas and other energy and utility costs as a percentage of revenues.

The positive impact of these items more than offset the effect of merchandise amortization, which continues to be higher as a percentage of revenues.

As we've discussed in prior quarters, the increased merchandise cost is the result of strong local and nationalized account sales, as well as depleted used inventory stock at our operating plants.

The increased merchandise cost is also the result of continued strong growth in our flame resistant and high visibility product lines.

The Specialty Garment segment, which consists of nuclear decontamination and clean room operations, posted revenues of $23.5 million for both the second quarter of fiscal 2012 and 2011.

Income from operations for this segment decreased to $2.6 million in the second quarter in fiscal 2012 from $3.7 million in the second quarter of fiscal 2011, the result of higher costs of revenues.

As we have discussed previously, this segment's revenues and profits can fluctuate from quarter to quarter based on the seasonal timing of power reactor outage activity, as well as the mix of products and services that we provide to our customers.

For the 6-month period, this segment's revenues and income from operations are up 9% and 17.9%, respectively.

First Aid segment revenues increased 12.2% to $9.2 million in the quarter, compared to $8.2 million in the same quarter a year ago.

Income from operations for this segment was $0.8 million, down slightly from $0.9 million in 2011.

The comparison of net income for the quarter benefited from a decrease in net interest expense of $1.7 million compared to the second quarter of fiscal 2011.

The decrease in interest expense is due to the expiration of an interest rate swap in March 2011, as well as the payment of $75 million of private placement notes that came due in June 2011.

The effective income tax rate for the quarter was 38.3%, compared to 38.2% a year ago.

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

At the end of the second quarter, the Company had $59.3 million of cash and cash equivalents on hand, up from $48.8 million at the end of fiscal 2011.

Of the cash and cash equivalents on hand, $47 million is in Canada and intended for investments outside the United States.

As of the quarter end, total debt was $104.7 million and total debt as a percentage of capital was 11%, both down from $120.3 million and 13.1%, respectively, at the end of fiscal 2011.

During the first 6 months of the year, cash provided from operating activities was $60.4 million, up 85.3% from $32.6 million for the same period a year ago.

The increase was primarily due to higher net income, as well as lower working capital cash outflows.

We continue to expect working capital cash outflows to be lower over the remainder of the year compared to fiscal 2011.

Capital expenditures for the first half of fiscal 2012 were $34.3 million.

We are now updating our capital expenditure estimates for the full year to be approximately $75 million.

The increase in projected capital expenditures is primarily due to our initiative to update the Company's CRM and customer service systems that Ron discussed.

This project will add $30 million to $35 million of capital expenditures to our budget over the next 3 fiscal years.

Approximately $10 million to $12 million is expected during the remainder of fiscal 2012, with the balance scheduled for fiscal 2013 and the first half of 2014.

Although we did not complete any acquisitions during the second quarter, we continued to evaluate targets based on our long-term strategic objectives, as well as the appropriateness of their valuations.

Based on the strength of our results for the first half of the year, as well as our outlook for the second half, we are raising our full year fiscal 2012 guidance.

We now project fiscal 2012 revenues to be between $1.235 billion and $1.245 billion and diluted earnings per share to be between $4.10 and $4.25.

At the high end of these projections, Core Laundry revenue growth and operating margins are estimated to be approximately 8.5% and 10%, respectively, over the remaining 6 months of the year.

These results would represent a sequential decline in organic growth rates as the year progresses, primarily the result of tougher year-over-year comparisons.

With respect to our Specialty Garment segment, we are currently projecting that revenues and profits over the last 6 months of the year will be comparable to the second half of fiscal 2011.

As we have mentioned in the past, factors such as the timing and length of reactor outages and other projects, as well as the funding for projects by both government and private sources, can significantly impact this segment's revenues and profits and make forecasting the segment's results challenging.

Finally, we also want to note that this guidance excludes the impact of a settlement the Company entered into on March 27, 2012, related to environmental litigation.

This segment will result in a pre-tax gain of approximately $6.7 million in our third quarter and have a positive impact of approximately $0.21 per diluted common share.

Such gain consists of amounts previously received which were recorded to accrued liabilities because of the Company's uncertain position as to when the resolution of this contingent gain would occur, as well as amounts the Company will receive in the third quarter.

This completes our prepared remarks, and we'll now be happy to answer any questions that you may have.

(Operator Instructions).

The first question is from the line of Joe Box with KeyBanc Capital Markets.

Please go ahead.

Yes.

Hi, guys.

This is actually Andy Bevis filling in for Joe today.

Good morning.

Good morning.

Just sort of looking into the SG&A performance this quarter, obviously a positive driver.

It looks like since 2008 your sales growth has actually outpaced your SG&A growth by about 130 basis points per year, and year-to-date, it looks like it's outpaced SG&A by 720.

Can you just sort of talk about -- are there any structural changes that you guys have made that suggest further leverage from these current levels?

And also, sort of relative to your new guidance level, are you seeing SG&A more in this high teen range, or is it going to be back in the low 20% range?

Thanks.

Yes, I guess to address both parts of your questions, I think over the last few years, we've talked about the improvements in sales productivity that we've experienced.

And I think that has allowed our performance to exceed the growth in our SG&A cost, and I think that continues more recently.

As far as where we expect those levels to continue, I think we would expect a little bit of an uptick over the next 6 months to a year, back closer to that 20% range, but not too much more than that.

Okay.

And then also, just sort of thinking about the core business, you guys had mentioned sort of solid 12.3% growth.

11.2% was organic this quarter.

I'm just curious how much of that stemmed from the pricing that you mentioned.

And do you guys feel like there's more upside potential there as we move on?

We don't break out the specific pieces of that growth, but what we can tell you is that compared to prior years, and I think we've said that in the last couple calls, a little bit larger percentage has come from improved pricing, as well as the impact of some of the things we've tried to do to address, especially toward the tail end of last year.

And that impact has carried into this year, the impact of higher cotton costs and now as well higher fuel costs.

So I think those things have had a little bit of a bigger impact than historically.

I think we're reasonably optimistic that the pricing environment will continue to hold, although we may not have quite the same success we had last year, given the higher costs.

On the flip side, we should start to benefit from moderating cotton prices as well.

Got you.

Okay, great.

Nice quarter and thanks a lot.

Our next question is from the line of John Healy with Northcoast Research.

Please go ahead.

Hi, good morning.

Good morning.

Ron, I had a big picture question for you.

For as long as you've been in the industry, I wanted to get your perspective on what we're seeing today.

I've been surprised to some degree just how strong the revenue growth trends in the industry appear to have been over the last 4 quarters or so.

And I wanted to get your perspective on what you really think is driving it, because when I look at your business, I don't think employment has been that much of a help to you guys as of yet.

And the pricing sounds like it's a little bit better than it had been running, but the level of what I guess would be new customers coming on just appears to be the driving factor.

And just wanted to make sure we could get some color from you on what you think is really driving at that.

I think, John, I think you're pretty much right on.

I think pricing has stabilized a little bit.

The cotton and the poly last year, everybody moved their pricing along a little bit.

And I think what we're seeing is primarily out of the energy sector has been very successful for I think all of the companies.

And a lot of customers may have been in cotton before and had to go to FR garments now, so you get a little -- got to redress them but you get a price adjustment, so I think it's really the energy sectors really help.

We're also seeing businesses open up a little more to spending.

We see a couple points shift in the makeup of the new accounts coming from no programmers versus competitive, not significant, but just a couple of points.

So in general, I would say that the business atmosphere is a little better, and you're right on with the adds versus reductions.

They really haven't been strong one way or the other.

Okay, do you feel like there's any sort of share shift going on in the industry right now, where the larger regional or national companies are starting to be able to take more shares from the smaller guys?

Is there something like that happening, maybe more than we've seen over the last few years in your opinion, Ron?

I don't think it's any different.

Okay, great.

And then had a question for you, Steve, just when we think about the margins.

I go back and look at comments you guys made over the years.

You always thought about a $1 billion revenue Company meant about $1 billion -- about a 10% operating margin for the Company.

And now that we're kind of through some of this reinvestment phase, where do you think is a good level of aspirational margins or operating margins that you guys could strive to if you're in that $1.2 billion, $1.3 billion type revenue size Company?

Yes, I think as some of my comments alluded to, we're still dealing with some of the reinvestment on the garments.

I think when that subsides a little bit here over the next 2 or 3 quarters, I think looking at an 11% operating margin as our nearer term target to kind of sustain that, absent kind of major fuel or other issues, is realistic.

And then I think our goal, as always, is to continue to build from there and try to work with our underperforming operations and continue to move the needle.

Great.

Thank you, guys.

Thank you.

Our next question is from the line of [Justine Hick] with Robert W.

Baird.

It's Justin Hauke.

Thanks for taking my call.

I guess I was wondering if you could talk a little bit more about the CRM investment.

I think it's the first time we've heard about this, and maybe you could just elaborate a little bit on some of the initiatives that that seeks to address.

And then I guess the second part of my question is related to it.

But with the balance sheet really, really quite strong here and it looking like you're going to be moving into a net cash position by the end of the year, is this type of investment your primary focus for deploying the balance sheet?

Well, I'll take the first part.

The legacy system that we've been operating under is about a 20-year-old system, and we've updated it, modified it, and we basically came to the conclusion that we obviously want to be one of the leaders in the industry.

And with technology changing and customer portals and Facebook and all this other stuff coming on, that we think we got to move ahead on the automation side to the CRM, better communications with our customers, more access to information for them.

So this initiative basically is an Oracle platform, and then there's some proprietary software we'll be writing in addition.

It's really what we're trying to do is be the most friendly customer-orientated Company.

To just add to that a little bit, I think this new system will do a number of things to help reduce administrative burdens around the Company.

As Ron alluded to, from a customer standpoint, it's going to provide better route automation, more functionality for the customers on the route, as well as better information that they can self-manage.

That's the way things are going and the customer demands are ever changing, and so I think we're just trying to stay ahead of that.

And as Ron alluded, to we chose this as the time to undertake this initiative, and we think it's the right time that will allow us to get ahead of the current customers' market and their demands.

Do you have any type of benchmark targets for -- I guess more so on the cost side, but revenue side of what you think this could bring?

You know, there's a certain piece of it, we're going to be updating some of our eCommerce capabilities, and so I think for some smaller piece of it, there are some specific revenue targets.

I wouldn't say that we're ready to share at this point, but from an overall perspective, I think we're looking at it as more of a improve the customer experience, cut down on lost accounts or accounts that may be looking elsewhere for potential service reasons or demand.

So more from a service capabilities as opposed to new sales in particular, although I think it will help us in the sales arena as far as selling our service capabilities.

So at this point, we aren't prepared to give any specific operating targets, but we think -- we're optimistic it's going to do quite a bit for us.

Okay.

And then just on the add stops, I think you made the comment that they moved from being additive last quarter to being more neutral.

And the question is, of that 11.2% organic growth, does that mean that 0% was from add stops?

And historically, what percentage of your total growth has come from the add stop contribution?

Well, I think when you look at it, just because the current quarter was flattish on add stops, really the last 4 quarters' performance on add stops impacts the current quarter revenue performance, because it's really anything that's happened since last year's second quarter.

So what we are trying to say is even though this quarter was flattish, this quarter was positively impacted for add stops, because the last 9 to 12 months' add stops were better than the previous year's.

And that goes with sales or lost accounts or anything we're talking about.

So there was a positive impact on the quarter of lost accounts, even though for the quarter in particular in the 3 months that we're looking at, add stops were flattish, if that makes sense.

Okay.

I guess then, should -- the next question to that is, are add stops a contribution to your total growth?

Is it still below where you were maybe historically?

And what contribution historically has it been?

I think historically it's always been flattish, a little positive, a little negative.

And I think it's a little bit better than that of a contribution right now, because we're going from a period where it was a head wind in transitioning to a full year or so now that it's been either slightly positive or kind of even.

So I think it has helped us.

To the extent we go another 6 months and it stays flattish or slightly positive, the year-over-year impact is going to be really negligible at that point.

Makes sense.

Okay.

Thank you very much.

Our next question is from the line of Chris McGinnis with Sidoti & Company.

Please go ahead.

Thanks.

Good morning, Ron.

Good morning, Steve.

Good morning, Chris.

Just a question on I guess the acquisition environment.

Obviously, competitor was reported last week, and they mentioned it seemed to be improving a little bit.

I was wondering if you can comment on your thoughts in this space and maybe prices that you're seeing.

I think we've seen a little more activity, number one.

I think the pricing environment is still an issue in our mind.

I think some of the companies still got this telephone number in their mind and they live on some rumors of what another guy got and they don't piece it all back together.

But we've seen a little more activity, but we haven't seen the pricing level that we would like to see.

That's probably the best answer I can give you.

Thank you very much.

I appreciate it.

Our next question is from the line of Andrew Steinerman with JPMorgan.

Please go ahead.

Hi, it's Andrew, Ron and Steve.

I still have some questions on add stops, and I understood the points you've made so far.

But it's surprising to me that the most recent quarter, the February quarter, that add stops would have decelerated.

Surely overall, we're well aware that non-farm payroll has moved forward in the last few months.

And specifically, when I look at the end markets for uniforms within the BLS and kind of aggregate that up on a weighted average basis, that's growing about 2% year-over-year.

And that's not any worse than it was in the previous quarter, and so I'm wondering why you think add stops in the most recent quarter have flattened out.

Well, Andrew, I think when we look at it, we look at it in different areas of the country.

We kind of monitor it that way, and we have got areas of the country like New England area, it's not a positive area.

There's no new businesses or not much going on.

We go back to looking at the energy sectors of the country and we're seeing the positives, so all I could tell you is that we haven't really seen any real positive pick-up this quarter.

Right.

And then I think there was also mention, Steve that the stock rooms are starting to be depleted.

I'm a little surprised at that, since add stops haven't moved much, if I caught that comment right.

And usually stock rooms deplete when add stops move into using the used uniforms.

I think that's more of a comment, again, some pairing where we were 1.5 years to 2 years ago to today.

We worked through a lot of the benefit from the used garments that came back during the recession.

And I wouldn't say they're being depleted right now, but they are at a lower level than they were 2 years ago, and that's what's causing -- part of what's causing the higher merchandise cost.

So I don't think the issue is becoming the current add stop environment.

Right, but so how did you deplete the stock rooms over the last couple years, if add stop hasn't moved much?

Well, because you're always turning over accounts, and even though add stops may be even, when you add an account, you have more opportunity or better chance to use a used garment if you have more availability in your stock room.

And so we've burnt through that benefit.

And if you were going to describe the level of your stock room right now in terms of the benefit that you would get if add stop started to move forward from here, how would you describe the level of your stock room now?

I think, Andrew, we measure these stock rooms in numerous ways.

But basically when we get clothes back off a reduction, let's say it's a 22 piece, I'm going to get technical here with you, and 22 pieces are due back, we don't necessarily get all 22 back.

We may get 17 back and you get paid for 4 or 5.

Right.

And of the 17, they go through a grading process, and basically, it's about a 60/40 split.

And of the 17, 60% will go back into the stock room, so now you're down to about 10 pieces.

And those 10 pieces will be used for an admin or a replacement piece or a customer that's been abusive to the garment, you replace it with a used garment.

So you're always trying -- the success in this business is trying to use those used clothes as much as you can and as frequently as you can.

And what basically happens is, going over history again, and when I started it was one fabric and 5 colors, and today you got 34,000 SKUs out there because of the different variety of customers.

And as we widen the depth of our offering, so you're forced to put out a new garment.

So in essence, basically, whatever used we get we try to put it back in for a replacement piece if the guy has not gone the full length of the service life of the garment.

Great.

Thanks for taking the time.

Absolutely, Ron.

Thank you.

Our next question is from the line of Diana Rashkow with William Blair.

Please go ahead.

Hi guys.

This is Diana Rashkow calling in for Nate Brochmann.

Congrats on another nice quarter.

Thank you.

First of all, I just wanted to ask a quick question about same customer spend.

I know in the past you've said that customers were still pretty cautious.

Any change to that trend at all, and what's your outlook?

Diana, I think I tried to make reference to that, that we've seen a little bit positive attitude out of our customers and new prospects or a little more willingness to spend.

And it's not like it was in 2007, but when we're talking to customers, they're all concerned about what their competition is doing and are they in a uniform program or they change their image or so forth.

So we're able to lay a mat in here or a mop in there, where a year ago you'd have to struggle to do it.

So we've seen a little opening up of the purse strings.

Okay, great.

That's helpful.

And then in terms of where the strength is coming from in sales, national accounts versus more on the local level, is it still the national accounts that's really driving things?

I'll take that one.

I wouldn't say so.

I think we've mentioned national accounts as a contributing factor to the recent strength of the growth, but it's not the majority of it.

Our national accounts is still less than 15% of our total Company, and even though it's had some success in the last year or 2, it's not the majority by any means of our new sales.

And so I think it has been fairly widespread through local sales and national account sales where we've had success.

Great.

That makes sense.

All right, that's all I've got.

Thanks, guys.

Thank you.

(Operator Instructions).

The next question is from the line of Dale Dutile with The Boston Company.

Please go ahead.

Good morning.

In the past you've quantified the amount of merchandise amortization increase in the core laundry business.

Would you be willing to do that for this quarter?

Sure.

This quarter, it was running about 2.5% higher than the year ago.

Okay, and where would I see, if I just look at depreciation as a percent of revenue, it actually looks down year-over-year.

So what am I missing?

Yes, depreciation and amortization as it shows in the income statement is for property, plant, and equipment, as well as amortization of intangible assets from acquisitions.

The merchandise amortization is part of cost of revenues.

Okay, but then in the cash flow statement, wouldn't it be in depreciation, or where would it be?

No, the cash flow statement shows the change in our merchandising service asset --

So it's netted out of there?

Yes, that change is a combination of purchases or adds to that, net of the amortization.

Got you, great.

And then so just looking going forward, if I just kind of look at your merchandise inventory relative to revenue, it's actually higher than it has been in the past.

And I understand your mix has changed with some of the flame retardant stuff, but I guess what I'm trying to understand, have we kind of -- do you think it's kind of peaked, or should -- will the ratio of merchandise inventory to revenue continue to increase, which would drive D&A up further from where we are now?

Yes, I think our feeling is, is that we're cautiously optimistic that it has peaked.

We're starting to see kind of a slowing of the growth of that asset.

If you look, it grew more from year-end to Q1 than it did from Q1 to Q2, and our projections over the second half have that flattening even more.

So I think we're kind of at the apex, and we're hoping it moderates and ultimately comes down a little.

Great.

Thank you.

Thank you.

(Operator Instructions).

Our next question is from the line of Kevin Steinke from Barrington Research.

Please go ahead.

Hi, good morning.

Just following up on that previous question, I believe you said the merchandise amortization was a 250 basis point headwind to core laundry operating margin.

Is that the same as it was last quarter?

I believe you gave a similar number last quarter.

It was similar.

It was similar.

Like I said, we project over the next couple quarters that impact to moderate.

So I think we're kind of at the peak, and our assumptions are that it's going to moderate from here.

Okay, and in terms of the flame resistant garments being a head wind in terms of higher merchandise amortization cost, how far along do you think that process is in terms of customers upgrading to FR garments?

Are you coming up on an easier year-over-year comp on that, in that regard?

I think we should be, Kevin.

I think the one thing that's a little bit of a wild card is with oil prices continuing to go up, the activity in that part of the country continues to expand.

But as far as some of the conversions that we saw last year from one product line to the next, it's starting to slow.

Okay.

Thanks a lot for the color.

Thank you.

Sir, there's no other questions at the moment.

I will now turn the call back to you.

Very good.

We would like to thank you all again for the interest in our Company and look forward to speaking to you in June when we are reporting on Unifirst's third quarter for fiscal 2012.

I want to again say 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.