UniFirst Corp (UNF) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the UniFirst Corporation first-quarter earnings 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 Mr. Steve Sintros, Chief Financial Officer for UniFirst Corporation.

Please go ahead, sir.

Thank you and welcome to the UniFirst Corporation conference call to review our first quarter results for fiscal 2013 and to discuss our expectations going forward.

I'm Steven Sintros, UniFirst Chief Financial Officer.

Joining me is Ron 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 in capital markets, the performance of acquisitions and fluctuations in the cost of materials, fuel and labor and the outcome of pending and future litigation and environmental matters.

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

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

Thank you, Steve.

I would like to welcome everyone joining us for the financial review of UniFirst's first quarter of fiscal 2013.

Steve will cover all the details in a moment, but I will first provide a recap.

UniFirst revenues for the first quarter of fiscal 2013 set a new record at $332.6 million, a 6.2% increase over the $313 million reported for the same period in 2012.

Net income for the quarter was also a new UniFirst high at $30.8 million, a 19.2% increase over $25.8 million recorded a year ago.

These new financial records were obtained primarily quality organic growth from our Core Laundry Operations, which include solid new account sales and were achieved despite the ongoing economic challenges in each of the markets we serve.

Our Core Laundry Operations, which account for the majority of UniFirst business, improved quarterly revenues by 8.2% and operating income by 27.3% over 2012.

Meanwhile, our Specialty Garments segment, which includes specialized nuclear and cleanroom laundry and ancillary services reported a 7.9% revenue dip, a 28.3% drop-off in operating income for the quarter when compared to the same period in 2012.

As mentioned in our last webcast, we are anticipating a down year for this business unit, partially due to the completion of a sizable nuclear reactor project in the fourth quarter of fiscal 2012.

Cyclical by nature, long-term nuclear projects such as these traditionally produce significant revenues, but only for a limited period of time.

Finally, our First Aid and Safety segment also reported a slight revenue and operating income dip when compared to the record-setting results for the same quarter a year ago.

Overall, we are pleased with our first-quarter numbers for 2013 and we stay confident that UniFirst is strategically positioned to be both our fiscal year and long-term fiscal goals -- financial goals.

As we look ahead to the balance of 2013, we expect our Core Laundry Operations to continue finding new ways and innovative ways to maintain continuous improvement in delivery of our core services.

This should turn help our route sales reps install additional product lines in our customer base so that we consistently add the type of UniFirst value that differentiates us from competitors.

Likewise, we foresee our Specialty Garment segment expanding upon its product and service offering to nuclear cleanroom communities while focusing on increasing market share in Canada and in Europe to replace the revenue stream that I mentioned were lost in fiscal 2012.

And, we expect our First Aid group to capitalize on the great momentum they established over last year, providing first aid cabinets, medication, safety supplies to companies, wholesalers, suppliers and our own and private-label markets and offering new value-added safety training classes to businesses of all types.

What is common to all our operations and serves as a springboard for UniFirst's ongoing financial success is our customer focus, our fiscally conservative business philosophy which are shared among our more than 200 Company locations throughout the US, Canada and Europe.

When all is said and done, it's our 11,000 Team Partners who implement these operational philosophies and represent key drivers of UniFirst's ongoing success.

Their dedication to delivery, proactive, responsive customer service, and value-rich product offering to our clients is second to none in the industry.

I would like to thank them for all their collective efforts in helping pave our path to success in fiscal 2013 and also our path to becoming a $2 billion company.

And as our managers continue to effectively execute our long-term future business plan, Unity 2020, what promises to be ongoing unsettled economic and political environment, UniFirst will continue to provide returns to our shareholders.

And with that, I will turn it back over to Chief Financial Officer Steve Sintros for more details.

Thanks, Ron.

First quarter revenues were $332.6 million, up 6.2% from $313 million a year ago.

Net income for the quarter was $30.8 million or $1.54 per diluted share, up 19.2% compared to $25.8 million or $1.30 per diluted share.

First quarter revenues in the Core Laundry Operations were $294.6 million, up 8.2% from those recorded in fiscal 2012 first quarter.

Excluding the effect of the stronger Canadian dollar, revenues grew 8% organically.

The Company's revenues continue to benefit from solid new account sales.

In addition, certain annual price adjustments also contributed to the revenue growth during the quarter.

Our revenues also continue to benefit from higher charges for lost and damaged merchandise as well as higher garment and makeup and emblem charges compared to a year ago.

Wear additions versus reductions were flat in the first quarter, which was not very encouraging since historically the first quarter is typically our best quarter for wear growth.

This segment's income from operations increased 27.3% quarter to quarter.

The operating margin expanded to 15.1% from 12.8% in the first quarter of fiscal 2012.

Increased profitability resulted from overall improved operating margin leverage that came with our strong revenue growth.

Expenses related to plant operations, depreciation and overall selling and administrative outlays were all lower as a percentage of revenue compared to the prior year.

Better operating results from some of our under-performing locations also contributed to the segment's improved operating margin for the quarter.

It continues to be a primary focus of ours to improve the results of these underperforming locations and the impact of these efforts are beginning to materialize in our overall results.

Lower energy costs as a percentage of revenues also contributed to this segment's improved operating margin.

Energy costs for the quarter were 5.1% compared to 5.5% a year ago.

Both fuel for our fleet of delivery vehicles as well as natural gas costs were lower compared to the same quarter a year ago as a percentage of revenues.

Last quarter, we discussed how overall merchandise amortization has begun to moderate and that for fiscal 2013 we expected that merchandise amortization would have a neutral impact on operating margins compared to fiscal 2012.

During the first quarter, merchandise amortization was flat as a percentage of revenues compared to the same quarter a year ago.

This better-than-expected trend in the first quarter now has us anticipating a small overall margin benefit related to merchandise for the remainder of the year.

Revenues for the Specialty Garments segment, which consists of nuclear decontamination and cleanroom operations, were $27.9 million for the first quarter of fiscal 2013, down 7.9% from $30.3 million in the first quarter of fiscal 2012.

This segment had income from operations for the quarter of $4.7 million, down from $6.6 million in the same quarter a year ago.

As we discussed last quarter, we expect a down year for this segment, due partially to the completion of two large power reactor rebuild projects during the fourth quarter of fiscal 2012.

Also contributing to the first quarter decline was a slower start to the year for this segment's European and cleanroom operations.

First Aid segment revenues decreased 3.4% to $10.1 million in the quarter compared to $10.5 million in the same quarter a year ago.

Income from operations for this segment decreased slightly to $0.7 million from $0.8 million in 2012.

The decrease in revenues and profits for this segment are primarily the result of the timing of certain orders for a spill packaging operation.

The comparison of net income quarter to quarter also benefited from exchange rate gains of $0.2 million in the first quarter of fiscal 2013 compared to exchange rate losses of $0.6 million a year ago.

The effective income tax rate for the first quarter was 39% compared to 38.3% for the first quarter of fiscal 2012.

We expect our full-year effective income cash rate to be approximately 38% for fiscal 2013.

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

At the end of the first quarter, the Company had $152.7 million of cash and cash equivalents on hand, up from $120.1 million at the end of fiscal 2012.

Of this amount, $59.7 million has been accumulated by our foreign subsidiaries and is intended for future investments outside the United States.

As of the quarter end, total debt was $109 million and total debt as a percentage of capital was 10.5%.

For the first quarter, cash provided from operating activities was $56.2 million, up 83.2% from $30.7 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, as anticipated.

Capital expenditures for the first quarter of fiscal 2013 were $25.1 million.

The higher capital expenditure level is partially the result of costs related to our Unity 2020 CRM systems project.

During the quarter, we capitalized $5.5 million related to this project.

In addition, this quarter's expenditures included the purchase of a building for a new laundry plant as well as costs related to two plant reconstruction projects.

We expect capital expenditures for fiscal 2013 to be approximately $90 million.

We continue to invest in plant updates, expansions and automation that will allow us to complete our long-term strategic objectives.

Although we did not complete any acquisitions during the first quarter, we continue to evaluate targets as acquisitions remain an integral part of our plans to grow market share as well as expand our overall operating margin.

Due to the strength of our first-quarter and current outlook, we are raising our full-year guidance.

We currently project that our revenues for fiscal 2013 will be between $1.335 billion and $1.348 billion.

We also project that our income per diluted common share for fiscal 2013 will be between $5.10 and $5.25.

The stronger-than-expected start to the year on the top line as well as moderating merchandising energy costs all contribute to our improved outlook, as did improved results from some of our historically underperforming laundry plants.

We do want to note that our revised guidance assumes slowing organic growth rates that average approximate 5.5% at the midpoint of our guidance for the remainder of the year.

We also would like to remind you that fiscal 2013 will be a 53-week year compared to a 52-week year in fiscal 2012.

This nuance in our fiscal calendar will have the impact of increasing revenues and operating income approximately 2% compared to fiscal 2012.

The extra week will fall in our fourth fiscal quarter.

Finally, we want to mention a matter that will be included in our 10-Q to be filed later today.

As you know, we have provided various services to a number of cleanroom customers for many years.

One of our customers was New England Compounding Center of Massachusetts, which is the compounding pharmacy involved in the sale of tainted medicine allegedly resulting in the highly publicized fungal meningitis outbreak.

On December 31, 2012 we received a letter from counsel form NECC demanding, among other things, that we indemnify NECC regarding claims made against it, including those related to the tainted medicine.

This demand relates to a limited once-a-month cleaning service we provided to portions of NECC's cleanroom facilities.

We have notified our insurer of this claim.

Based on the information currently available, we were unable to reasonably assess the ultimate outcome of this matter.

We can say that we were not in any way responsible for NECC's day-to-day operations, its overall facility cleanliness or the integrity of the products they produce.

Therefore, based on our review to date of this matter, we believe NECC's claims are unfounded and without merit.

Although this is in the very early stages of this matter, we felt in the spirit of transparency that it would be prudent to share this information with you at this time.

This completes our prepared remarks and we would now be happy to answer any questions you may have.

(Operator instructions) Andrew Steinerman, JPMorgan.

Good morning, gentlemen.

I just wanted to verify, and you were very specific about what drove the margin expansion here, but 15.0% operating margin is the highest margin UniFirst has experienced in a long time.

And I know first quarter is a seasonably favored quarter versus fourth, sequentially.

But I wanted to make sure that there wasn't any one-time items, particularly on the gross margin line, that are not sustainable.

And given the start to the year at 15%, what do you see as a new normal operating margin in terms of an annual target?

Just to address a couple of parts of your question, the guidance assumes about 12.5% at the midpoint for fiscal 2012.

There are no real -- excuse me, 2013.

There are no real one-time items, Andrew, to the positive in the first quarter that are artificially driving up the margin.

Energy costs have been lower.

I didn't mention, but healthcare claims were fairly moderate in the first quarter, and those tend to fluctuate.

And so those are some of the things that could continue to pressure margins as we go forward.

As far as the new norm, I think we have made progress to increasing that norm above what we had said previously as being closer to 11% to now maybe closer to 12%.

We still have some more to do with these underperforming locations.

And with the slowing growth that we are anticipating, we expect that to kind of pressure things as well.

I think, as we look into years beyond 2013, particularly 2014 and 2015, related to the Unity CRM project we have discussed, when we go live with that project some of the transition cost as well as ultimately the depreciation of the system itself will pressure the margins in the near-term during that period of time during implementation.

So that's just something to keep an eye on.

That makes total sense.

And then also the assumption for modest deceleration through the year -- is that conservatism or something that you have already observed?

As far as the organic growth you're talking about?

Right.

So why assume moderate deceleration in organic growth at 5.5% for the remainder of the year?

Is that management conservatism after a strong first quarter, or is that something you have already observed as we have entered the second quarter?

I think we're starting to see a little weakness in the wear levels.

Although our sales remained fairly strong, I think we're starting to annualize some really strong periods, not only from a sales perspective but from a pricing perspective based on the tail end of the impact of the higher cotton prices.

We have done well with pricing over the course of the last year.

We expect that to moderate and are seeing it start to moderate as cotton prices have come down and energy prices have come down.

It usually takes a little while for that to fully impact us, but we do expect and are starting to see some of the impact.

And, Steve, when you say pricing moderate as you anniversary, you mean up less; you don't mean down, right?

That's correct.

Okay, I appreciate all of that, thank you.

Andrew Wittmann, Robert W. Baird.

Good quarter.

I wanted to dig a little bit more into the margin profile.

Steve, just to be clear on the Unity system going live -- it sounds like, at least in the initial few years, the depreciation charges you will be taking against that should be more than the operational benefit that you get in it, at least in the first couple years.

Is that correct?

Yes, I think that's probably fair.

It will be a phased implementation as well.

Right now, our plan is second half of fiscal 2014 to be in that deployment, and I think that is fair to say based on some of the deployment training costs and transition costs plus the depreciation going live, that will precede the benefits that we will get out of the system as it becomes fully implemented and adopted across the country.

And then 2014 will also be bringing more health-care-related costs.

Can you give us where you guys are, both from a strategic thought process on that one, Ron?

And then as a financial, kind of give us some guidelines about how we should be thinking about that as we move into 2014?

Well, as we're looking at the healthcare impact, Andrew, we are following the Wal-Marts of the world.

We have the exemption we put in place until September 2014 and we are looking at the other fellas, what they're going to be doing, to give us a good direction at this point.

Just to add to that, because of the timing of our fiscal year and our benefit plan year, we are a little bit on the tail end of the adoption of the new regulations, so we have a little more time than calendar year companies to fully adopt.

At this point, as Ron alluded to, we really don't have something we can share with you financially.

I think there will be a number of alternatives available to us and modifications we'll need to make.

I think we will need to balance those from a financial standpoint and what is right from our employees, and we are still in the early stages of evaluating that.

So basically status quo for a little bit longer than some of your peers so that really from a strategic point of view, you have a little bit longer to basically react to see what they are doing competitively so that you are not at a disadvantage.

Is that a fair way to think about it?

I think so, yes.

Yes.

Okay.

And then just in terms of some of the -- just trying to break down the organic growth rate here, I am curious as to -- clearly, pricing was part of it, but no programmers versus competitive wins.

I know, Ron, in the past, you said you have been having some success with national accounts.

Does that continue to be an outsized portion of your wins, or can you just give us some texture?

I think we're basically running at about a 50-50 split right now -- have no programmers versus programmers.

National accounts -- you win some, you lose some.

I would say it's no more than usual.

I think it's probably a little less than it was a year ago.

I think when we made some of those comments over the last year or two, it had become proportionately a larger percentage of our wins, and our percentage of national accounts had increased.

I think now we continue to have wins, as Ron alludes to, but in the current period -- and that's part of the reason I think some of the deceleration of the organic growth is maybe not as many big wins as a year ago.

Got it.

Does that mean sales productivity was higher this year than last year?

It seems like it has been at a pretty high rate for a while, but is it accelerating further?

Sales productivity goes up basically almost every year, maybe $1 a man, or how we measure it.

We always look for it to go up.

It goes up very gradual.

And then just retention rates, Ron, how has retention been?

Can you give us some --

About the same.

About the same.

Okay.

I'll jump back in queue; maybe I'll have a little bit more for you later.

Thanks, guys.

John Healy, Northcoast Research.

I wanted to ask about the underperforming locations a little bit more.

I was wondering if you could give us some further color there in terms of how you think about the tiers of the locations, maybe where your A-plus locations are in terms of margin size and maybe how many locations you guys are focused on.

And what's a realistic level that some of these underperforming locations could get to over maybe a year or two?

Yes, John, this is Steve.

On that question, the locations really fit on a bell curve of profitability.

We are not going to define what that range is, but we have 75 laundry plants and over 100 branches that are associated with those plants.

But, when you look at the 75 plants, I think, like any other bell curve, you have 10 or 15 on the higher end, 10 or 15 on the low end, then a bunch in the middle.

And the ones in the lower end can be on the lower end for a number of different reasons -- lack of market share, maybe the mix of business that had been sold over the years hasn't been the most profitable, management issues from time to time.

So those are all the things we look at to push the needle on the lower end.

And we always talk about acquisitions.

Those are really areas that we are focused to try to build that market share as well, but there are things you can do from a management and execution perspective as well as trying to improve the pricing profile in those markets to improve those operations, and we have really started to see some traction, particularly in the quarter when looking at the year-over-year impact.

It had more than an insignificant impact on the profit growth of the core laundry business during the quarter, which is why we mentioned it.

(multiple speakers) So, it's a continual process.

When you look at where we are going in the future, those ones that are at the higher margin are always pressured as well from competition and so on.

So it's a continued give-and-take.

So I guess when you look at those under-performing locations, are there more issues with what I would say operations, or is it that, hey, we just need to get these routes bigger, we need to get more revenue through the laundry facility?

Where does the emphasis need to be for those underperforming locations?

It's primarily market share, route density and book of business, as Ron said, our mix of business, pricing profile of the business.

And part of that depends on our status in that market and how -- what our share is.

And so those are the primary things.

There's always management and execution issues that we need to follow up on.

But those are the primary things.

I wanted to ask a question about competition a bit.

With seeing some moderation and some of your input costs and maybe the wear levels and growth within existing customer start to stabilize a bit, are you seeing any visible signs of increased competition either from similar sized peers or larger peers?

Or, are some of the smaller guys out there?

I don't think it has changed, John, over the last six months.

It's a competitive business, always will be.

There is always a pocket of a rogue general manager some place, but it really hasn't changed.

Okay, great, thank you, guys.

Chris McGinnis, Sidoti & Company.

Good morning.

First off, I know the market hasn't changed too much, or at least the outlook, but you did mention that I think the add-stops or the increased wears were a little bit weaker than you typically see.

Can you give a little bit more feedback on what you think is driving that?

Yes, I'll start, and then Ron can add to it.

I think part of it, Chris, is that we have been getting tremendous strength from a couple of regions in the country from a wearer perspective over the last year.

On the protective garment wearers and energy impact of oil and natural gas exploration and things related to that, which we have talked quite a bit about in the last years; I think in the last year, that strength has masked some general weakness in the overall markets.

And some of that business is starting to flatten out a little bit after its real strong growth.

It still continues to go strong, but maybe not on as sequentially as great level.

And I think that is showing that there is still some weakness out there, so I think that is part of what we're seeing come through.

All right, thank you.

And then, second, I think, Ron, you mentioned that you're considering adding more products.

Can you maybe just expand on that, what is out there to continue to grow the product offering?

I think we're looking stronger at the bathroom service line, the paper, the soap, the air freshener, maybe some chemical dispensing, to add those ancillary products into our existing accounts.

We are a garment company.

We are 65% garment, and most of the industry is 50-50.

So we have not done as good a job as we should do getting the ancillary products into our customers.

Great.

And then maybe you can just touch on the acquisition environment, if anything has changed or just the level that's out there?

Well, we have looked at eight acquisitions in the last six months.

Obviously, some of them didn't make sense, some of them did make sense.

But pricing is still an issue.

The seller has got expectations that are in the telephone number range when they shouldn't be.

That's number one.

You would think that with the tax change, it would have drove more guys to make the decision, but it did not.

So all I can say is expectations have got to come down to the true value of the business.

Thank you very much.

Joe Box, KeyBanc Capital Markets.

Steve, despite SG&A kicking up a bit in the quarter, it looks like incremental operating margins came in at about 39%, which, based on my model, that's pretty much the highest number going back to 2005.

I guess, with merchandise amortization not a head wind anymore, is it reasonable to see a 30% plus incremental over the next couple of quarters as maybe you go up against some easier margin comps?

I think our overall guidance assumes a little bit less than that, Joe.

I think that merchandise, although just to clarify my comment, we do anticipate it being a year-over-year small benefit in the quarters remaining for the year, it still is sequentially ticking slightly higher, just not at the rate of a year ago.

So I think our guidance assumes not quite that level of growth quarter to quarter as the year progresses based on some of the things we've said, but maybe not that far off.

Okay, great.

And I think you also talked about making some investments in plant updates, and that includes some automation.

Can you just elaborate on what some of those investments are and maybe give us a sense for what inning you are at in terms of just rolling these investments out across the system?

Well, the automation -- obviously, the first one we are dealing with is this Unity 2020 program CRM system that's going to automate the route sales group.

The second thing is the plants.

All the plants are computerized washroom, one attendant, maybe two attendants at the most.

So they are pretty well-established.

We have no equipment in the wash alleys under 20 years old.

In other words, everything is modern, computerized.

Some of our competitors are running stuff 30, 40 years old.

The sortation systems we continually automate.

We have over 45 plants now with automated sortation systems.

Our stockroom system, what we call SMS, is unique to us.

That's in every one of the plants and benefit the used garments.

So we just continually roll from plant to plant, updating and getting efficiencies.

I was just going to say, it sounds like it's mostly on the sorting side, then.

No, not really.

It's across the board, but --

Not really.

The sorting is the garment side.

The flat goods side, there's a lot of -- what do you want to call it -- labor involved we have worked to eliminate with certain types of new equipment coming in and shipping the mats.

I hear that you earlier just said that there is some benefit from improving some of these underperforming locations.

Can you maybe just talk to what the gross margin improvement was, just as a function of some of these new investments as opposed to just the typical operating leverage that you might have had in the quarter?

I guess related specifically to the underperforming operations, more of it was operating leverage than specific improvements in the technology or automation.

We really don't have the growth, I guess, in the quarter broken out in that manner, and I think it's just a continual process where we continue to make these investments and look to make improvements in the operating profile of these plants based on the technology that's available and -- as we are deploying the capital.

I probably don't have a more granular answer than that for you.

Management changes.

Okay, that's fine.

One last question and I'll turn it over.

Can you maybe just talk to where you stand on the capacity front, both at the plant and delivery level, and maybe how much more operating leverage there could be there before you need to make some more investments?

Well capacity -- we are basically a shift-and-a-half operation, so we certainly have that additional capacity hour-wise.

That's number one.

On the route side, we are constantly putting new routes on.

As the business grows, you have to put new routes on.

That just goes with it.

We use that Roadnet UPS software to route our routes, and our customers find that very effective.

Part of that underperforming location plan to improve those locations is to -- those locations typically have a lot of capacity on the routes, and those are the locations we need to try to fill in business and improve the density and capacity of those locations.

In general, Ron is right.

I think we continue to run a shift-and-a-half at most plants.

You will notice, I mentioned in my comments about capital expenditures that there are a couple of plants that we are rebuilding and enlarging because they are in strong markets where it makes sense to make that investment for the future.

It's really a plant-by-plant evaluation.

Great, that's helpful.

Thanks, and nice quarter.

Nate Brochmann, William Blair.

Hi, this is Diana Rashkow filling in for Nate today.

Just wanted to ask a question in terms of your growth with existing customers.

Are you seeing success there with the ancillary product lines that you mentioned earlier that -- kind of the bathroom services ones that you're looking at adding, or is that success in other products?

Just hoping you could elaborate there a little bit.

Well, we run what we call power groups, and it's run three or four times a year where we focus on a product line and use the puppy dog theory of sales -- try it, you like it, it's free.

And then if you like it, we will put it on your invoice.

We have increased our bathroom service position a little bit, and we want to continue to do that.

Okay, thanks.

And then one -- a little more just housekeeping question -- I think on the last call, the guidance that you guys have laid out assumed somewhere between 10% or 20% decline in Specialty Garments revenue.

Is that still what you are expecting?

Yes, I think it was 10% on the revenue and 20% of the profit.

I think we're still feeling like that's an appropriate outlook for the rest of the year.

Okay, and is there anything in terms of the cadence of the revenue in that segment that we should know of?

Is it stronger in any particular quarter in terms of the outlook for outages?

Yes.

Historically, it has always been the first and third quarter are the strongest quarters, and we don't anticipate that changing this year.

I guess I would probably also add that the second quarter might be a little bit better than the fourth, but those are the two weaker quarters of the four.

Okay, great, that's helpful.

Nice quarter, guys, and I appreciate you taking my questions.

(Operator instructions) Andrew Wittmann, Robert Baird.

I just wanted to dig a little bit into the cash.

Steve, in the quarter, working capital, I think, was a big success.

Inventory, it looks like down a day, payables up a few days here.

Are we operating at new levels here in terms of what's possible in terms of working capital, or was there some just timing that really benefited this quarter?

Yes, I think when you look at the accruals and the payables, Andrew, that there is definitely some timing in there that's not a sustainable new level.

I think the merchandise you saw for the first time actually was a benefit in the quarter, amortization exceeding new garments infused into the process, and that helped the cash flow.

So I think on inventory and merchandise side, we may expect some continued benefits as the year goes on.

But on the payables and accruals, it will normalize.

Okay, sounds good.

And then Ron, strategically do this cash balance that you have been able to burn here, I think we saw -- broadly, as you look at the market, you saw a lot of companies that had excess cash come out with special dividends, even more common in some more closely held companies.

You guys elected to not do that.

You've talked about share repurchase, but we don't have one yet.

Just kind of curious as to where you're thinking the capital could go, if it needs to go anywhere, and where your priorities rest today as you think about that.

Our priorities are still on the acquisition side.

We certainly discuss a stock buyback from time to time.

It may be in our future.

That's probably the best way to answer you.

When you look at the acquisition environment today, you kind of mentioned the pricing.

Are there any material trades that are out there that you could use to understand what the level of pricing is today, where things are trading?

And who is setting those prices?

Is it strategic buyers, or are we looking at financial buyers out there in the market?

I think it's just ownership living in the past.

Yes, I think the sellers -- they look at some transactions that were done historically in the industry and try to hang their hat on multiples that were paid in certain situations that don't apply to every business based on not only the mix of their business, but the quality of the contracts, the pricing, the market, all the things we look at when we look at an acquisition.

I think a lot of these family-owned businesses, like I said, hang their hat on historical transactions at the high end of what was maybe paid over the years by whether it be us or other competitors.

And when it comes to the point in their life that they are ready to investigate a sale, that's their starting point.

And it usually takes a while to bring them down off of that.

As Ron said, we were surprised that the tax situation didn't force their hand a little bit more, but we will say that a lot of these the sellers didn't end up selling.

And so I think there's still an opportunity out there and one we continue to pursue.

When investors look at the size and scale of some of those opportunities that are out there, it appears that there's several hundred millions of dollars of capacity on your balance sheet today.

Is that a realistic amount of capital that could be deployed in acquisitions that are even being contemplated?

Or is there enough capital for acquisitions, and even if you could do what you reasonably would like to do or expect to do that there's still even excess capital after that?

I think that's a difficult question in that there's a handful of a fairly sizable regional players out there that from time to time could come into play and that would likely be interested in.

So I think that really -- the question, or the answer, really hinges on the availability of some of those potential players that we from time to time to look at.

Short of that, a lot of the smaller one or two, three-location operations -- the answer to your question is that there probably is room for some of those and other deployment of capital opportunities.

Okay, great, I'll leave it there.

Thank you, guys.

I am showing no further questions at this time.

Okay.

We would like to thank everyone for joining us this morning to review our UniFirst first-quarter results for fiscal 2013.

We look forward to speaking with you again in March when we'll be reporting on our second quarter and six-month numbers.

Have a great rest of your day and a happy, healthy new year.

Thank you.

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

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