UniFirst Management Discusses Q2 2013 Results - Earnings Call Transcript

Mar.28.13 | About: Unifirst Corporation (UNF)

UniFirst (NYSE:UNF)

Q2 2013 Earnings Call

March 27, 2013 10:00 am ET

Executives

Steven S. Sintros - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance

Ronald D. Croatti - Chairman, Chief Executive Officer and President

Analysts

Justin P. Hauke - Robert W. Baird & Co. Incorporated, Research Division

Christopher McGinnis - Sidoti & Company, LLC

John M. Healy - Northcoast Research

Andy Debes - KeyBanc Capital Markets Inc., Research Division

Diana Rashkow

Molly R. McGarrett - JP Morgan Chase & Co, Research Division

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Steve Sintros, Chief Financial Officer. Please go ahead.

Steven S. Sintros

Thank you, and welcome to the UniFirst Corporation conference call to review our second quarter results for fiscal 2013 and to discuss our expectations going forward. I'm Steven Sintros, UniFirst's Chief Financial Officer. Joining me is Ronald Croatti, UniFirst's President and Chief Executive Officer. This call will be on a listen-only mode until we complete our prepared remarks.

Now before I turn the call over to Ron, I would like to give a brief disclaimer. This conference call may contain forward-looking statements that reflect the company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties. The words anticipate, optimistic, believe, estimate, expect, intend and similar expressions that indicate future events and trends identify forward-looking statements.

Actual 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 costs of materials, fuel and labor and the outcome of pending and future legal and environmental matters. I refer you to our discussion of these points in our most recent 10-K and 10-Q filings with the Securities and Exchange Commission. Now I will turn the call over to Ron Croatti for his comments.

Ronald D. Croatti

Thanks, Steve, and welcome everyone for joining us for the review of UniFirst's second quarter and 6-month financial results for fiscal 2013. I'll be providing a brief overview of our performance, then I'll turn it back to Steve who will go over it in all the details.

I'm happy to report the company revenue for the second quarter of fiscal 2013 set another new record for UniFirst at $334.3 million, a 7.9% increase over the $310 million reported for the same period in 2012. 6 months year-to-date revenue were also a new UniFirst record, coming in at $666.9 million, a 7% increase over last year's midyear mark. Net income for the second quarter and year-to-date were also new UniFirst records. Second quarter net income was $26.6 million, a 38.8% increase over the same quarter 1 year ago. And net income for half a year was $57.4 million, a 27.6% increase for the same 6-month period in fiscal 2012.

Our Core Laundry Operations, as the name suggests, is UniFirst's core business. As such, this segment led the company's performance during the second quarter, with revenues and operating income increasing by 8.8% and 46.9%, respectively, over the 2012 second quarter. These gains were primarily the result of solid new account sales and customer retention, the positive impact of pricing and collection of extra charges and ongoing improvements in operational efficiencies at our processing plants.

Our Specialty Garments segment, which includes specialized nuclear and cleanroom operations, reported a 3.9% dip in revenue, a 50.5% decline in operating income when comparing to the second quarter to the same period in 2012. But as mentioned in previous webcasts, much of this drop back was anticipated due to the cyclical nature of the nuclear-related business. This segment's European operation was also negatively impacted year-over-year as a result of the German government shutting down several of their nuclear power reactors. That said, we expect this segment to be further challenged throughout the remainder of the fiscal year. We also expect some improvements in the spring when a greater number reactor shutdown projects are scheduled to begin in the U.S. The cleanroom division of Specialty Garments is supporting this segment's effort by continuing to make gains within their [ph] businesses having now solidified their service presence in most major markets for the industries they serve, including their new West Coast operation.

Our First Aid & Safety once again reported solid growth for the second quarter, increasing their top line by 9.5% and improving operational income by 58.8% when compared with the same quarter in 2012. This segment has continued with sequential growth trends, primarily driven by the industrial distributor partnerships, which are now offering more of the segment's product lines to more business customers than ever before. Traditionally, the First Aid group's broad-based business continues to rebound from the economic downturn. And the pharmaceutical packaging and wholesale operations continue to grow by providing private label OTC medications to an increased number of retail chain stores and specialty distributors.

I am pleased with UniFirst's to-date performance and proud of our lengthy track record of annual growth, consistent company growth that continues even through the volatile market conditions of the past 6 years. And as we look ahead, we expect UniFirst to report another solid year growth in 2013. We do, however, anticipate our growth rate to slow down some, down to mid-single digits for the remainder of the year. But again, we do fully expect 2013 to be another successful year for UniFirst and its shareholders.

But it's no secret, our success continues to be accomplished. Our success has always been and remains about our dedicated family of Team Partners throughout North America and abroad all working for their customers and doing so with absolute and real commitment to delivering the highest level of service satisfaction. So for the balance of the year and coming years, we know our thousands of Team Partners will continue to bring their best to work each and everyday and they'll continue doing so following our founding core business values that are the heart of UniFirst's corporate culture.

These core business values are maintaining a customer focus at all times, maintaining a respect to others, both internally and externally and maintaining a commitment to quality in everything that we do. And consistent with our core commitment to providing customers with the highest quality business service available is our Unity 20/20 development project that we mentioned in previous webcasts. This important initiative is currently overhauling our company's entire CRM and service IT systems. Ultimately, Unity 20/20 will improve our overall efficiencies and capabilities in all our service operations, technologically and operational improvements that promise to further differentiate UniFirst from competitors when it comes to service excellence and will help us become the universal, recognized true service leader in the uniform and textile industry.

As far as new sales go, we have historically counted on both our professional field and national account sales organization to drive organic growth and will continue to do so moving forward. We'll continue investing in our sales teams to further sharpen their perspective -- prospecting and selling skills in order for them to target the right prospects in the right consultive manner and more effectively communicate what we call the UniFirst difference. This is what differentiates us and our service from our competition. So by remaining committed to our customers, by continuing to do business based on our founding core values by our sales and service teams effectively communicating UniFirst's differentiation in the markets we serve and by establishing cost control programs, we assured short- and long-term gains for our customers, our employees, and of course, our shareholders. And with that, I'll turn it back to over to Chief Financial Officer, Steve Sintros, for more details.

Steven S. Sintros

Thank you, Ron. As Ron mentioned, second quarter revenues were $334.3 million, up 7.9% from $310 million 1 year ago. Net income for the quarter was $26.6 million or $1.33 per diluted share, up 38.8% compared to $19.2 million or $0.96 per diluted share reported in the second quarter of fiscal 2012.

Revenues in the Core Laundry Operations were $301.6 million, up 8.8% from those reported in the prior year second quarter. Excluding the effect of acquisitions and a stronger Canadian dollar, revenues grew 8.3%. Revenues in this segment were positively affected by the impact of a customer-related specialty market merchandise buyout that added approximately 0.8% to the organic growth. The company's revenues continue to benefit from solid new account sales. In addition, certain annual price adjustments, as well as higher collections of merchandise recovery charges also contributes to the revenue growth during the quarter.

Wearer additions versus reductions were negative in the second quarter, as well as year-to-date. This segment's income from operations increased 46.9% year-to-year and its operating and margin expanded to 13.4% from 9.9% 1 year earlier. Excluding the impact of the merchandise buyout, this segment's operating margin would have been 12.9% in the second quarter and diluted earnings per share would have been $1.27.

Increased profitability was primarily the result of improved operating leverage that came with our strong revenue growth. Expenses related to merchandise, payroll and other costs related to our plan operations were all lower as a percentage of revenue compared to the prior year. Better operating results from some of our historically underperforming locations also contributed to the segment's improved operating margins for the quarter. It continues to be a primary focus of ours to improve the results of these underperforming locations.

Lower energy cost as a percentage of revenues also contributed to the segment's improved operating margin. Energy costs for the quarter were 5.2% compared to 5.7% 1 year ago. Both fuel for our fleet of delivery vehicles, as well as natural gas costs for our facilities were lower compared to the same quarter 1 year ago as a percentage of revenues.

Revenues for the Specialty Garments segment, which consists of nuclear decontamination and cleanroom operations, were $22.6 million for the quarter, down 3.9% from $23.5 million in the second quarter of fiscal 2012. This segment had income from operations for the quarter of $1.3 million, down from $2.6 million in the same quarter 1 year ago. Year-to-date, this segment's revenues and operating income are down 6.1% and 34.6%, respectively. This decline is primarily due to weaker results from this segment's European operations due to the shutdown of several nuclear power reactors in Germany. In addition, the completion of 2 major projects in the latter part of fiscal 2012 has also negatively impacted comparisons for this segment's U.S. operations.

First Aid segment revenues increased 9.5% to $10.1 million in the quarter compared to $9.2 million in the same quarter 1 year ago. Income from operations for this segment increased to $1.3 million from $0.8 million in 2012. In our last earnings call, we mentioned how the result of this segment were negatively impacted by the timing of certain orders from its pill packaging operations. The fulfillment of these orders during the second quarter also contributed to the strong results. The effective income tax rate for the quarter was 38.4% compared to 38.3% for the second quarter of fiscal 2012. We expect our full year fiscal 2013 effective income tax rate to be approximately 38%.

Our balance sheet and overall financial position continue to be very strong. At the end of the second quarter, the company had $163.3 million of cash and cash equivalents on hand, up from $120.1 million at the end of fiscal 2012. Of this amount, $58.1 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 $110.8 million and total debt as a percentage of capital was 10.4%. For the first 6 months of the year, cash provided from operating activities was $92.5 million, up 53.1% from $60.4 million for the same period 1 year ago. The increase was primarily due to higher net income, as well as lower cash outflows related to working capital, primarily driven by the impact of moderating merchandising service investments.

Capital expenditures for the first half of fiscal 2013 were $50.8 million. The higher capital expenditure level is partially result of costs related to our Unity 20/20 CRM systems project. Year-to-date, we have capitalized $11.2 million related to this project. In addition, this year's expenditures to-date include the purchase of a building for a new laundry plant in the first quarter, as well as costs related to 2 plant reconstruction projects. We continue to 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 achieve our long-term strategic objectives. We also continue to look for acquisition targets as acquisitions remain an integral part of our overall growth strategy.

Due to the strength of our second quarter and year-to-date results, as well as our current outlook, we are raising our full year guidance. We currently project that our revenues for fiscal 2013 will be between $1.344 billion and $1.354 billion. We also project that our income per diluted common share for fiscal 2013 will be between $5.65 and $5.80. We'd like to remind you that fiscal 2013 will be a 53-week year compared to 52 weeks in fiscal 2012. This nuance in our fiscal calendar will have the impact of increasing revenues and operating income for the full year, approximately 2%, compared to fiscal 2012. The extra week will fall in our fourth fiscal quarter.

As we have previously discussed, our operating results have benefited from significant improvements in our historically -- some of our historically underperforming laundry plants. These gains, as well as strong execution in our plant operations, as well as in the collection of merchandise recovery charges, have helped our overall margins. In addition, our need to infuse new merchandising to our customer base has continued to moderate, which has also contributed to our stronger results and outlook for the remainder of the year. However, lower merchandise needs is also a sign that growth is moderating. We expect our Core Laundry Operations to grow approximately 5% over the second half of the year. We are still seeing businesses reluctant to add new costs, including headcounts. Our quarterly and year-to-date ads versus reductions metric were negative. In addition, difficult year-over-year comparisons, with respect to growth in the protective garment market, national accounts, as well as pricing and higher collections of merchandise recovery charges, are all contributing to the projected decline in growth rates. As we look past this fiscal year, we anticipate mid-single-digit top line growth to be a reality absent further improvement in the overall economic landscape or more significant acquisition activity. In addition, deployment and other transitional costs, as well as the eventual depreciation of our Unity 20/20 investment, will pressure margins going forward. We also continue to evaluate the impact of the Affordable Care Act we'll have on our overall cost structure in future years. We look forward to updating you regarding these items in upcoming quarters.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Justin Hauke with Robert W. Baird.

Justin P. Hauke - Robert W. Baird & Co. Incorporated, Research Division

So I guess I just wanted to ask on the guidance. I understand the difficult comps you're highlighting for the back half of the year. But did you say that you're expecting 5% growth for the core laundry segment in the second half? And I guess, if that is the case, does that include with the benefit of the extra work week?

Steven S. Sintros

That 5%, and maybe I didn't clarify this, Justin, is organic growth over the second half of the year. So it does not include the impact of the extra week.

Justin P. Hauke - Robert W. Baird & Co. Incorporated, Research Division

Okay. And that -- so on a total basis, I guess, is that -- 7% to 8% is what the expectation is with the 2% benefit from the extra week?

Steven S. Sintros

Exactly. Because the 2% is really about a 4% benefit over the second half. So it's a little more than that, including the extra week.

Justin P. Hauke - Robert W. Baird & Co. Incorporated, Research Division

Got it. Okay. Okay. And then, I guess, on the merchandise cost benefit, you mentioned that there was little bit of a benefit this quarter. I think last quarter it was flat. Can you quantify what the impact was in the margin from lower merchandise costs?

Steven S. Sintros

Yes, Justin, you're right. It was flat last quarter. It was in that 0.6%, 0.7% this quarter, so it really started to accelerate a little bit faster than we anticipated, the benefit, as those inputs of merchandise have moderated.

Justin P. Hauke - Robert W. Baird & Co. Incorporated, Research Division

And would you expect a similar run rate for the balance of the year? Or is that going to continue to improve?

Steven S. Sintros

I think that's probably similar to what we can expect over the next quarter or 2. It may improve a little bit.

Justin P. Hauke - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then, I guess, just one more. Last quarter -- actually, for the last couple of quarters, I think, you've been talking more about doing some of these kind of test runs with new products on kind of a trial basis to see if customers want it. And then, if they do, you can add it to their invoice. I guess, just an update on maybe the adoption rate of some of those test runs and how that's contributing to the top line today.

Ronald D. Croatti

Well, I guess, Justin, this is Ron, we're still in the test phase with the chemical at this point. So it really has no significant impact at this point, but we certainly do like the product.

Operator

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

Christopher McGinnis - Sidoti & Company, LLC

Just on the gross margin improvement. How much of it is the merchandise recovery that you've talked about?

Steven S. Sintros

Well, the merchandise recovery charges are part of our revenue growth. So it would be hard to say how much impact that's really had. But we called it out because we've done a better job executing it over the last year, 1.5 years, and it is impacting it. But in response to the prior question, I kind of had noted that, that in that 0.6%, 0.7% range is the benefit of our overall merchandise costs. The recovery is really more a function of pricing and overall growth.

Christopher McGinnis - Sidoti & Company, LLC

All right. I guess, just in terms of the add-stop and the addition of current customers adding employees. Can you maybe just talk about kind of what you're seeing? Are they just scared about the economy at this point? Obviously, a competitor came out a couple of weeks ago and mentioned that it's the first time they saw a pickup and saw some strength exiting the quarter. Can you maybe just comment against that?

Ronald D. Croatti

This is Ron again. We haven't seen that. We expected to see it with the housing improvement. But the wall board people and electricians and the plumbers and so forth really haven't jumped backed in. I think a lot of the jobs are in that service-type environment, food industry, which we do not play much in those markets. We haven't seen it in manufacturing or dealership. So we're kind of hoping and waiting here. We'd love to see it positive, that's all I could tell you.

Christopher McGinnis - Sidoti & Company, LLC

Sure. And then just lastly, obviously, a small acquisition in the quarter. But has the acquisition market opened up at all?

Steven S. Sintros

I think we're starting to see a little bit more activity. So I think we're optimistic that we'll hopefully be able to shake some things loose going forward here, but we're out there looking for sure.

Operator

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

John M. Healy - Northcoast Research

Wanted to ask a little bit, Steve, about the margin trajectory of the company's going forward. It sounded like kind of -- given some expectations, that there are some headwinds that'll present themselves in 2014 and just wanted to talk a little bit about the -- how do you expect the Unity 20/20 investment to kind of hit the P&L for next year. Could you kind of remind us in terms of the overall spend and how that layers into the cost structure and at what point?

Steven S. Sintros

Sure. No problem, John. The Unity 20/20 progress -- project, we had sent a signal. It's approximately a $40 million investment. We're probably about halfway through at this point of the project plan. Ultimate deployment of the system, the timing isn't completely nailed and stoned yet, but we're probably looking more toward the second half of next year. So when that project and that investment ultimately starts to the depreciate, they'll be in the neighborhood of $6 million of depreciation related to that investment, depending on useful lives and so on and so forth that all haven't been quite nailed down yet, but I think you can expect something in that range. But again, that's more likely not to hit until the second half of next year. And then there will be some, and to be honest, we haven't fully quantified them yet, but some transition costs as we go out to deploy this across the country and train our workforce on the new system. That'll be more onetime costs that are in the later part of next year. So hopefully, that gives you a little bit of color. As we move toward year end and have a little bit more visibility than that, we can probably clarify it.

John M. Healy - Northcoast Research

Now that's helpful. And I wanted to ask a bigger picture question, though, regarding the margins. When you and Ron think about the business kind of zooming up to about $1.3 billion, $1.4 billion revenue company today, let's call yourselves $1.5 billion of revenue company, 1 year or 2 from now, what sort of operating margin level do you think that you guys can aspire to, given the state of the business today?

Steven S. Sintros

It's a good question, John. I think we've made a lot of improvements over the last couple of years in some of the areas that we've talked about, and not to say there aren't other opportunities available to us, and as we add market share and route density in certain markets, we will have improvements. That being said, I think when you look at the margins that we're going to end the year at, the guidance assumes that the year will end up in 13.5% to 14% margin range. I mean, that's a pretty healthy margin for this business. There are competitors that do better than that and have more scale than us. And so I think, there are still things to aspire to, but I think we do have concerns about some of the reinvestment that needs to happen in technology that we're talking about, some of the health care headwinds, as well as just some of the other ability to kind of continue the improvements that we've made over the last couple of years. And so I know that's somewhat punting on the question, but I think we've gotten the margin up very quickly here. And we'll continue to try to move it along, but it's going to be incrementally harder to make the improvements we made over the last 2 or 3 years.

John M. Healy - Northcoast Research

Fair enough. And just one final question. On the competitive environment, any update in terms of how the competitive environment feels? Are you seeing more intensity out there or does it seem pretty normal compared to what you always encounter?

Ronald D. Croatti

I think we're seeing more competitive -- particularly in the national account arena. I think the pricing structure -- I'm sure you're going to ask that the next question. I think the pricing on the smaller business has come up a little bit, but I think it's as competitive as it has always has been in the national account arena.

Operator

Our next question comes from the line of Andy Debes with KeyBanc Capital Markets.

Andy Debes - KeyBanc Capital Markets Inc., Research Division

Steve, first, I just wanted to kind of dig into the SG&A really quick. We actually saw it tick up a bit year-over-year last quarter. This quarter, it looks relatively flat. Can you maybe just comment on some of the moving pieces there? And maybe update us on your expectations for the SG&A leverage in the remainder of the year, given you expect the slowdown in top line.

Steven S. Sintros

Yes. That's probably going to come up a little bit over the remainder of the year. There were some moving pieces up and down in the first couple of quarters, but nothing from a real trending perspective that's worth noting. We do expect it to come up a little bit over the course of the year. One thing that we're focused on is continuing to staff up our sales force. It's something that's always a focus to continue to recruit and grow the sales force. And I think this year, to be honest, we've lagged that effort a little bit, and we're trying to recover and get that headcount up to where we need it to be. But also, we want to make sure we make the right hires. So I think we can expect that line to come up a little bit over the course of the second half of the year.

Andy Debes - KeyBanc Capital Markets Inc., Research Division

Okay, great. And maybe just to dig in, we've talked about the core business, but on the Specialty business side, down about 6% this year so far. I think your initial guide was being down roughly 10% on the top line. And I know Ron mentioned some moving pieces here. Just kind of curious what the net shakes out or how your new outlook maybe looks for the rest of the year in the Specialty business?

Steven S. Sintros

Yes. I think, to be honest, I think, the top line has probably done a little bit better than we expected coming into the year. But due to the mix, we've always talked about how this business has a number of different pieces. They have a much smaller customer base and different projects can have different profitability levels. They do a number of direct sales, which tend to be a little bit lower margin than the core processing business. And so I think that's some of what you're seeing. I think for the year, I think our estimates probably from the beginning of the year, we expect probably to come in line pretty close by the end of the year, maybe a little bit better on the top line perspective, but somewhat similar on the profit perspective. So no real changes. I think they're expecting a fairly healthy spring outage season so the third quarter should be pretty decent for that segment. And I think they have some good stuff coming along looking into next year, some of what we've seen on the weakness has just been projects pushing out, which happens from time to time with this segment.

Andy Debes - KeyBanc Capital Markets Inc., Research Division

Okay. And just wanted to -- I apologize if I missed this in the beginning, I actually got cut off. But with this Specialty merchandise buyout in the quarter roughly $0.06, pretty significant, can you maybe just give us a little color there on what was going on and if we're to assume that that's truly onetime in nature?

Steven S. Sintros

Yes. That really related to a single account, which was a, what I'll call a smaller national account, that it -- contract was up. We had a segment of the company as opposed to the whole business, and they decided to move that segment of the business into a direct-purchase program with another company. And so as a result, they had specialty merchandise, which means it was garments that were unique to them that were required to be bought out as part of the -- their kind of leaving the program. And so that's what that buyout related to. And we have those from time-to-time but usually on a smaller scale. This was one we felt worth -- it was worth calling out.

Operator

[Operator Instructions] Our next question comes from the line of Nate Brochmann with William Blair.

Diana Rashkow

This is Diana Rashkow in for Nate Brochmann. Wanted to ask about the underperforming plans and where you are in the process of working on those. It seems like you've made decent progress and you now have seen some really nice benefits from that in terms of margin. How much more do you think there is to go on that front?

Ronald D. Croatti

Well, I think it -- as we mentioned numerous times, the plants operate on a bell curve. And there's -- we'll continue to see improvement, maybe not at the pace we saw this last quarter. We did put little more automation in than normal and it helped us along. But I guess, the answer to you, we think there's still a lot of opportunity and a lot of room for us to continue to move those operations along.

Steven S. Sintros

And I guess just to add to that and balance it out a little bit, as Ron said, they do operate on a bell curve. And so although you do make improvements in the underperforming locations, the ones that are on the higher end of that, it does continue to be challenging to, at times, maintain that high level of profitability because those are typically in areas that we have high market share but also that we get more significant competitive threats. So there is a balance to that. But I think I agree, as Ron said, there's still this opportunity in the weaker performers to move the whole scale a little bit to the right.

Diana Rashkow

Okay. Makes sense. And then in terms of the mix of no programmers and programmers, has that continued to be fairly balanced this past quarter?

Ronald D. Croatti

Yes, it's been fairly balanced, about 60/40 split right now.

Diana Rashkow

Okay. And then also just kind of in terms of the mix, how's the balance been with national accounts?

Steven S. Sintros

I think the balance has leveled off a little bit. I think over the last couple of years, we've mentioned we've done a little bit better in national accounts and we still continue to sell some nice accounts, but I think the balance is probably a little more stabilized at this point. We're still in about that 12% of our overall business in what we categorize, anyway, is national accounts.

Operator

Our next question comes from the line of Molly McGarrett with JPMorgan.

Molly R. McGarrett - JP Morgan Chase & Co, Research Division

I was just hoping you could elaborate a bit more on the add-stop metric. What do you think needs to happen in terms of the job, the job environment, the labor market for that to move back into the positive territory? Is there a benchmark level of headcount adds? Or how do you all think of that?

Ronald D. Croatti

That's a good question. I guess, we really look at business segments more than anything. The automobile segments, the manufacturing, the home construction industries, the drivers of the economy. And we haven't really seen a lot of pickup in those areas. So I think a lot of the jobs coming in, as I mentioned earlier, are service-related, hospitality, food, and we're not really in those markets. So we really haven't seen much of it. And a lot of the jobs that are being created are government jobs. Now with the government financial cuts, there will be some of those going up the door. We're really looking for a stronger housing market and I would guess a little stronger in the manufacturing side.

Steven S. Sintros

I think what's also impacting right now -- our recent weakness in the add reductions is we had quite a bit of strength in the last few years in certain parts of the country. We talked about oil and gas exploration. Even though we've run kind of flattish or negative throughout the last couple of years and on adds reductions, part of that was some strength in that part of the country offsetting maybe further negative activity in other regions. And so we are seeing, I think, some moderation of the wearer levels in other regions, but we're not getting as much strength as maybe we did 1 year ago in those Texas markets. So there's kind of a mix issue there too. But I agree with Ron, I think we're looking for more definitive growth in some of the markets that we do business in.

Operator

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

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

So you talked about the expected deceleration in core laundry organic growth to 5% in the second half of this year although you did do a 7.5% in the second quarter, excluding the specialty merchandise buyout and also raised your revenue guidance. So I'm assuming that the organic growth in the quarter was a bit ahead of your expectations. And if so, what, in particular, drove that?

Steven S. Sintros

I think it's really -- in my prepared remarks is the number of areas that we've talked about, doing a little bit better job from a pricing perspective in collection of some of our merchandise recovery charges. The FR strength has still been there. But you look at the areas we've talked about over the last 5 or 6 quarters that have helped our growth rates be what they are, we're starting to annualize some of those periods of real strength. And so it was really almost 1 year ago now that we've talked about whether it's national accounts or the protective garment market or some of these better pricing and better collection of extra charges that have helped our top line. And we're just starting in the third quarter to kind of annualize some of those strong periods. And so that's really -- it's really a year-over-year timing issue with respect to those areas. So hopefully, that helps kind of understand a little bit what we're seeing. That doesn't mean we're not seeing still solid results in those areas. We're just starting to annualize some pretty strong periods.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Okay. No, that makes sense. So it sounds like the expected deceleration perhaps is more related to these difficult comparisons as opposed to new account sales. I mean, do you feel -- still feel good about your ability to generate solid new account sales in this environment as you have been doing?

Ronald D. Croatti

Yes. I think, we're fairly comfortable on the sales organization. And I think Steve put it right on the head there. It's really a comp comparison.

Operator

And there are no further questions on the phone lines at this time.

Ronald D. Croatti

We'd like to thank you, all, again, for your interest in our company, and look forward to speaking with you in June when we're reporting the UniFirst's third quarter results for fiscal 2013. Thank you, and have a great day.

Operator

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.

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