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Executives

Ronald Croatti – President, Chief Executive Officer

Steven Sintros – Chief Financial Officer

Analysts

John Healy – Northcoast Research

Molly McGarrett – JPMorgan

Andrew Whitman – Robert W. Baird

Chris McGinnis – Sidoti & Company

Michael Kim – Imperial Capital

Unifirst Corporation (UNF) F1Q2011 Earnings Call January 5, 2011 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Unifirst Corporation First Quarter Earnings Results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press the star followed by the zero.

I would now like to turn the conference over to Mr. Steve Sintros, Chief Financial Officer at Unifirst Corporation. Please go ahead, sir.

Steven Sintros

Thank you and welcome to the Unifirst Corporation conference call to review our first quarter results for fiscal 2011 and to discuss our expectations going forward. I’m Steven Sintros, Unifirst’s Chief Financial Officer. Joining me today 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 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 and litigation and environmental matters. I refer you to our discussion of these points in our most recent Form 10-K filing with the Securities and Exchange Commission.

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

Ronald Croatti

Thank you, Steve. I’d like to welcome all of you who are joining us for the review of our first quarter fiscal 2011, a period that once again produced record revenues and profits for our Company. Steve will cover the details in a few minutes, but let me start with a short summary.

Revenues for the first quarter of fiscal 2011 were a record 273.1 million, a 6.6% increase over the 256.2 million reported for the same period a year ago. A major upside influence came from better than expected growth in our core laundry business with operations showing an increase of 5.7% over last year’s first quarter. These results were complimented by a record-setting revenue for both our specialty garments and our first aid business as well. Specialty garments, which is made up of our nuclear and clean-room operations, showed a 12.8% revenue increase on a quarter to quarter basis this year compared to last. This improvement reflects strong activities with U.S. and Canadian customers and continued positive results from our European expansion efforts and improved safety supply sales.

Our first aid business reported a 14.3% revenue increase over the same period in fiscal 2010. The record-setting performance was primarily the result of private label wholesale distribution in pharmaceutical packaging areas continuing to develop and capitalize on the respective niche markets.

Unifirst net income for the first quarter of 2011 was up slightly over last year’s comparable period, reporting 23.8 million versus 23.6 million a year ago. At the most basic level, Unifirst is a service company. In our core laundry operations, we continue to reap benefits from our ongoing commitment to provide consistently high service levels and product quality to our customers. We are also seeing positive results from our internal training certification programs for all our service staff. Although facing tough market conditions, our team partners have consistently stepped up to make solid improvements in company-wide customer retention rates, which makes significant contributions to revenue and profits.

But we recognize there is always room for improvement, so we remain tightly focused on doing all we can do to best service our customers. We are firmly dedicated to sustaining Company growth and adding to our existing customer base, despite the economic and market challenges. So as of the case with our service organization, we continue to invest in our sales staff and sales productivity tools and sales training programs; and these efforts continue to generate return on investment.

Led by our national account group, first quarter new business sales for our core laundry operations were up 6% over the first quarter of last year. Although new account pricing remains overly aggressive in the marketplace as competitors often use price alone as a strategy to gain new business, our sales teams are scoring consistent wins by effectively demonstrating Unifirst’s overall value proposition to the prospective buyers, versus simply quoting lowball line item pricing; and notably, our sales are coming from both competitive accounts seeking improvement in their current programs and from no-programmer accounts realizing the range of business benefits associated with a managed rental program from Unifirst.

Lastly, in our laundries, facility service and ancillary product sales continue to show positive gains as well, improving year-over-year in both our professional sales and our service organization. These increases are a direct result of our unwavering focus on selling total business solution packages over selling just uniform programs alone.

Going forward, the ongoing recessionary conditions will continue to challenge our entire industry. As I’ve said before, employment levels directly relate to demand for Unifirst’s uniforms and ancillary business service, and unfortunately national unemployment remains near 10%. At the current pace of job creation, it will take many years to regain all the jobs lost during the recession. Add to that the ever-escalating cost of doing business and the impact on margins with respect to line items like merchandise, energy and healthcare and it’s safe to predict current economic leadership will challenge us long beyond the short term.

So we remain committed to our sales and service organizations as our primary vehicle for organic growth. We remain frugal with every dollar – not just our executives, but all our managers who continue to scrutinize and control all spending, limiting expenditures to only those that yield a return on investment or improve overall service to our customers.

As a quick wrap-up, I’d like to reiterate that we’re pleased with our first quarter results as we continue progress in market outlook for all our business units; and we are managing all aspects of our operations, both creatively and smartly to ensure long-term opportunities for our shareholders.

Now to give you additional financial details, once again here’s the Chief Financial Officer, Steve.

Steven Sintros

Thanks, Ron. As Ron mentioned, first quarter revenues were up 6.6% compared to the first quarter of fiscal 2010. Net income for the first quarter was 23.8 million or $1.20 per diluted common share, a slight increase from the first quarter of fiscal 2010 when net income was 23.6 million or $1.21 per share.

The earnings per diluted common share for the current quarter were negatively impacted by approximately $0.02 per share due to the dilutive effect of the restricted stock issued to our CEO in April 2010.

Our core laundry revenues were 238.7 million in the first quarter, up 5.7% from those reported in the same period a year ago. After excluding the positive effect of acquisitions, which contributed 1.2%, as well as a stronger Canadian dollar which contributed 0.3%, the Company’s core laundry revenues increased 4.2% organically.

Our year-over-year growth was the result of improvements in our key growth metrics. New sales and customer retention improved modestly in the first quarter compared to a year ago. In addition, our measure of the change in wearers at our existing accounts, which we call additions versus reductions, significantly improved compared to the same quarter last year. Higher makeup, emblem and lost garment charges also contributed to the overall growth. These charges had declined in the past two years as there was less turnover of wearers at our customers.

Our core laundry revenues also increased sequentially 5.2% from the fourth quarter of fiscal 2010, of which 4.8% was organic. Our core laundry revenues typically show the biggest sequential increase between our fourth and first quarters due to several factors. Our first quarter is generally our strongest quarter for new sales. Our first quarter experience is a bump in volume from seasonal school and mat-related business, and our annual contract price adjustments are more concentrated in our first quarter. This year was no exception with all of these factors contributing, as well as a sequential improvement in additions versus reductions as we continue to see stabilization in the wearer base.

Core laundry operating income declined to 34.4 million in the first quarter of 2010 from 35.4 million for the same quarter last year. The operating margin also fell to 14.4% from 15.7% in the first quarter of fiscal 2010. The margin decline primarily relates to higher cost of revenues including merchandise, energy and payroll costs. As anticipated, higher merchandise amortization was the largest driver in the decline of our core laundry operating margin during the quarter. We have discussed in prior calls the benefit we experienced during fiscal 2009 and early 2010 from the increased utilization of high-quality used garments to meet the needs of our existing customers. A depletion of this used stock, as well as elevated wearer additions, have resulted in a higher level of new garments being placed into service and consequently higher merchandise expense.

Total energy costs for the core laundry operations as a percentage of revenues also increased in the quarter to 5.3% of revenues from 5% of revenues in the first quarter of fiscal 2010. Also contributing to the decline in operating margin was a higher share-based compensation expense as a result of the restricted stock grants issued to our CEO in April 2010. During the quarter, we recognized approximately 1.2 million of non-cash share-based compensation expense related to these grants.

Partially offsetting these items were lower overall costs associated with healthcare and other insurance. In addition, during the quarter we recognized a reduction of expense of $0.8 million related to an increase in the risk-free interest rate used to discount our projected liabilities for environmental remediation.

The Company’s specialty garment segment, which consists of nuclear decontamination and clean-room operations, posted revenues of 25.8 million, up 12.8% compared to the first quarter of 2010. Operating income for this segment decreased, however, to $4 million in the first quarter of fiscal 2011 from 4.6 million in the first quarter of last year. The decline in operating margin was primarily the result of a larger percentage of higher margin project and ancillary service revenues in the first quarter of 2010. In addition, the results of the quarter included a charge of $0.3 million related to the write-off of obsolete inventory. As we have discussed in the past, the results of this segment tend to be less predictable as the timing and profitability of this segment’s service offerings can vary significantly from quarter to quarter.

Revenues from our first aid segment increased 14.3% to 8.6 million in the first quarter of 2011, compared to 7.5 million in the same quarter a year ago. Income from operations for this segment also increased to 0.7 million in the quarter from 0.4 million last year. The increase in revenues and profits were the result of better performance from this segment’s wholesale distribution and pill packaging operations, as Ron mentioned.

The Company’s results for the first quarter also benefited from a lower effective income tax rate compared to a year ago. The effective income tax rate for the quarter was 37% compared to 39.5% for the first quarter of fiscal 2010. The decrease in rate was primarily due to the reversal of tax contingency reserves related to the resolution of certain state tax audits as well as a lower overall provision for state income taxes. We now expect our full-year tax rate to be between 37.5% and 38%.

Our balance sheet continues to be very strong. At the end of the first quarter, the Company had 133.3 million of cash and cash equivalents on hand compared to 121.3 million at August 2010. Total debt outstanding remained relatively constant at approximately 181 million, and total debt as a percentage of capital decreased to 19.7% from 20.4% at year-end.

Accounts receivable increased by 17.7 million or 16.8% from year-end. This increase is primarily due to the increase in core laundry and specialty garment revenues as well as a slight deterioration in the overall age of the receivables. This type of seasonal increase in our receivable balance is not unusual and we expect it will moderate over the course of the year.

Inventories increased 4.9 million or 10.2% since the end of fiscal 2010, and merchandise and service increased 5.6 million or 6.4% since the end of fiscal 2010. The increase in inventories as well as merchandise and service was anticipated as we continue to replenish our inventory levels to account for increased demand. We expect merchandise and service levels to continue to build throughout the fiscal year.

During the quarter, we generated cash flow from operations of 27.2 million, down from 47.5 million in the first quarter of fiscal 2010 primarily due to increased working capital requirements. Capital expenditures were 12.2 million for the first quarter and we continue to expect they will range from 50 to 60 million for the full year.

Free cash flows for the first quarter of fiscal 2011 were 14.9 million, down from 31.7 million a year ago. During the quarter, free cash flows were primarily used to increase the Company’s cash balances by $12 million as well as to fund 2.2 million in acquisitions in our core laundry business. We continue to evaluate acquisition targets based on our long-term strategic objectives as well as the appropriateness of their valuations.

In addition to our cash on hand, we currently have 186.2 million of current borrowing capacity under our existing line, and our debt to EBITDA ratio for the last 12 months is slightly over 1. Based on our financial strength, borrowing capacity, and ability to generate significant cash flows, we are well positioned to take advantage of strategic opportunities as they arise.

Looking ahead over the remainder of the year, we want to remind you that the results of both our core laundry operations as well as our specialty garment segment are typically strong in our first quarter. We expect that several items on the expense side will cause margins in the upcoming quarters to be lower than the first quarter; for example, overall payroll and related costs will be higher the remainder of the year due to annual salary increases which go into effect on January 1. We anticipate we will experience sequential increase in merchandise costs as a percentage of revenues throughout the remainder of the year, as we discussed. We also anticipate the recently higher price of gasoline as well as the increased seasonal usage of natural gas will cause our overall energy costs to rise in subsequent quarters. In addition, the resetting of unemployment taxes as well as the timing of certain unused sick day payouts have always had a negative impact on our second quarter in particular.

We also want to remind you again that our specialty garment segment’s revenues and profits typically are also much lower in the second and fourth quarters of our fiscal year due to the seasonality of the power reactor outages.

Based on these assumptions as well as the strength of our first quarter, we currently project that our revenues for fiscal 2011 will be between 1.6 billion and 1.75 billion. Based on these revenue assumptions, we project our income per diluted common share for fiscal 2011 will be between $3.40 and $3.70. This current guidance now assumes full-year revenues in our core laundry operations will grow between 4.5 and 5.5%. At the guidance midpoint, it also assumes core laundry operating margin of approximately 11%, which is consistent with the guidance we provided in October.

We look forward to speaking with you again in late March to discuss the results of our second quarter and to update you on the thoughts for the remainder of the fiscal year.

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

Question and Answer Session

Operator

Thank you. Ladies and gentlemen, if you would like to register a question please press the one followed by the four on your keypad. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. If you are using a speakerphone, please lift your handset before entering your request.

Our first question is from the line of John Healy with Northcoast Research. Please proceed with your question.

John Healy – Northcoast Research

Good morning guys and happy new year. I wanted to ask a little bit about the cost side of the business, Steve. You mentioned that we should be on the lookout for higher merchandise costs as a percentage of sales. Is there any way you could talk about how much merchandise costs are as a percentage of sales, and maybe where they got to, maybe where they are in a normal environment, and maybe where they go back to?

Steven Sintros

Yeah, I guess I can give you a little color there, John. In October I mentioned that I thought during the year, that our merchandise costs would be 1.5% higher in fiscal 2011 than fiscal 2010. In the first quarter as part of the margin decline, the merchandise cost was about eight-tenths higher than the prior year, so with more sequential deterioration of that merchandise, we expect that we’ll approach that original number that I quoted in October. That will not quite get us back to where merchandise was at its peak in, say, 2006 or 2007; but it will get it relatively close. So I don’t want to get into too much of what we think about 2012, but there might be a little bit more headwind for merchandise as we move into 2012, but then it should kind of annualize and stabilize at a more historical level. You know, we’ve never given out the actual percentage of revenues that merchandise is, but that should give you some color as to how much further we have to go.

John Healy – Northcoast Research

Okay, that’s helpful. And a question for you, Ron, just about what you’re seeing out there in the economy. I was curious to get your thoughts with maybe what you’ve seen over the past three or four weeks with the holiday season, if you’ve seen your industrial customers shutting plants down and idling them longer than normal. Are they—is activity level on that side of the business good? Just any color you could provide with kind of typical holiday shutdowns and maybe how it compares to what you’ve seen in the past or what you saw last year.

Ronald Croatti

John, I think basically what we’ve seen is the layoffs have basically slowed way, way down. We’re not seeing anybody really adding people but we’re just about at a breakeven basis on the add-reduction side. And as far as the holidays, I think they fell back to being more 2007 level where guys just closed—the basic companies just closed one week. We didn’t see any extended layoffs for a month or shutdowns for a month like we did in ’09 and ’10. So we think things are coming back slowly.

John Healy – Northcoast Research

That’s encouraging. And then just last question for you, Ron – it seems like you gave a little more commentary about the pricing environment on this call than maybe you’ve said in the past. I was curious to get your thoughts on where we are today from a wearer level on a daily basis, for what it costs to wear a uniform. And I’m curious to get your thoughts if you think we’re at a new normal, or do you think that over the next two or three years you guys can begin to have price increases as a normal part of your organic growth strategy?

Ronald Croatti

Oh, I think the answer to your first question – I think we could all do a better job getting price increases, and I think that we’re going to be forced to do it because of labor costs and material costs and so forth. I think the basic pricing of the street business has probably deteriorated probably in the 5 to 8% range. The national account pricing has deteriorated substantially more, maybe in the 10 to 12% range. But I think like anything else, inflation will be coming back and we’ll all be forced to get price increases.

John Healy – Northcoast Research

Okay, thank you.

Operator

Thank you. Our next question is from the line of Andrew Steinerman with JPMorgan. Please proceed with your question.

Molly McGarrett – JPMorgan

Hi, this is Molly McGarrett for Andrew. Just one more quick question about pricing. You noted that annual contract price increases kicked in this quarter. Can you just talk about what kind of boost you saw this quarter versus past years?

Steven Sintros

Yeah, I think that we went through a similar process as we had in prior years. Over the last few years it’s been more challenging to hold any sort of price adjustments that we put through, and this year was no exception. So I would say similar to the last couple of years.

Molly McGarrett – JPMorgan

Okay, great. Thanks.

Operator

Thank you. Our next question is from the line of Andrew Whitman with Robert W. Baird. Please proceed with your question.

Andrew Whitman – Robert W. Baird

Good morning, guys. I wanted to dig a little bit more into kind of the new business that you’ve signed. You said that it’s a mix of no-programmers and some add-stops. Can you give us a sense about which one was greater – maybe break up the percentage of new business that you had between those two groups?

Ronald Croatti

Well, I think the new business, we’ve seen a little more success on the national accounts side. We really don’t break it out as what comes from the street sales force and national accounts side. We don’t give those numbers out; but we’ve seen a little more success on the national accounts side. Our sales crew, the street force has continued to—you know, we measure it on a weekly productivity basis by rep, per dollar per rep, and that’s improved every year over the last four or five years; so we continue to monitor that productivity number. But answering you vaguely, we’ve done a better job on the national accounts side, I guess.

Steven Sintros

Yeah, I guess just a little follow-up there, Andrew – over the last few years we’ve talked about how a larger percentage of the wins have come from competitive situations. I think that’s still probably the case but it’s starting to turn a little bit. We’re seeing more no-programmer interest, more interest from people who maybe were in a direct sale program that are converting to a rental. So I don’t have the numbers for you, but we have seen some improvements there.

Andrew Whitman – Robert W. Baird

Okay, that sounds good. And then just a little bit more, kind of just wanted to dig on the cost structure a little bit. As you kind of look to the future, you mentioned some energy costs. You mentioned merchandise costs. Anything else that you’re focused on that maybe we aren’t thinking about? I saw a lot of people have kind of cited insurance premiums in the past as an area of concern, whether it would be legislation or just general increases that we’ve seen over the last couple of years. Is that an area that this is an anomaly kind of this quarter, that you see as a risk going forward; or are there any other kind of risks that you’re looking at on the cost structure side?

Steven Sintros

Yeah, I think you hit the nail on the head with the health insurance. I think this quarter was an anomaly. Over the last few years we’ve had over double-digit increases in the cost of healthcare that we absorbed in our numbers, and quarter-to-quarter the level of claims do jump around and this quarter we had a pretty successful quarter in that area. But that is an area of concern going forward and how the new legislation may impact us going forward. So it’s something we continue to work closely on with our HR consultants.

Andrew Whitman – Robert W. Baird

Okay. And then just kind of one other question, just thinking about the balance sheet and a little bit on capital allocation here. I saw that you reiterated guidance, $50 million to $60 million. Can you just talk a little bit about the acquisition environment? I mean, obviously just a small one here the first quarter. Can you talk about what’s out there today maybe versus a year ago? Is there distress out there with smaller companies? Where is pricing and how do you look at capital allocation for capital for your existing business versus acquisitions? You know, where is the priority?

Ronald Croatti

We’re certainly looking into any opportunity out there that makes good business sense. We like the fill-in type acquisitions, there’s no question; but we’re still finding a sellers’ reluctance. They still have that same telephone number in their mind, and it takes some convincing to bring them down to reality. So the smaller guys are still out there, they’re still pulling a good week’s pay out of their business, and they’ve still got their telephone number. As we talk to the bigger guys, at this point, there’s no bigger guy ready to move forward that we can see. We’d certainly like them to, but again, everybody is hunkering down and hoping things come back and they can get their volume back and get more money. That’s what it amounts to.

Do you want to add to that, Steve?

Steven Sintros

Yeah, I think that’s the challenge with volumes down from where they were three years ago. If someone was thinking about selling, they’re looking at multiples being a little bit lower, but also the base that those multiples are based on being down. And if they can do it, they’re trying to hang in there and wait until things come back a little bit. We are seeing some small ones that might feel a little financial distress here or there, but nothing of any real size.

Andrew Whitman – Robert W. Baird

Okay, so it sounds like just kind of in general, then, the bid aspect which has been wide isn’t really narrowing. Is that a fair way to kind of sum it up, maybe?

Steven Sintros

Yeah, I would agree.

Andrew Whitman – Robert W. Baird

Okay. And then just in terms of priorities, is that still a priority? Is there potential that with the balance sheet where it is that there might be considering a buyback? How else do you look at kind of discretionary cash?

Steven Sintros

Yeah, I think the nature is that we’ll continue to look at these acquisitions because the smaller tuck-in ones that we can meld into our existing operations can really be pretty accretive, and so that’s probably the first priority to the extent that we can find opportunities. After that, I think as the cash does accumulate, we will continue to look at our own valuation and see whether stock buybacks make sense. Right now, we have no formal plans, but that’s probably the order of priority.

Andrew Whitman – Robert W. Baird

Okay, sounds great. Thank you.

Operator

Thank you. (Operator instructions) And our next question is from the line of Chris McGinnis with Sidoti & Company. Please proceed with your question.

Chris McGinnis – Sidoti & Company

Good morning. I guess just digging into—you know, just with the guidance and today’s number. I guess I understand there’s going to be some compression coming in, but it just seems like with the beat today, at least the strong performance today – and this came up last quarter as well – you’re being a little too conservative on going forward. Can you dig us through a little bit deeper somehow to better translate what would be a pretty significant slowdown from Q1 to where you get to your full-year guidance?

Steven Sintros

Well, I think if you’re looking at the profit side, Chris – let’s hit that first. If you look at last year, our first quarter operating margin – I’m just looking at core laundry’s right now – was 15.7%, and the average margin over the remainder of the year was 11.5%. And some of the items I mentioned in the webcast – the pay rate increases January 1, some of the other kind of Q2-specific costs – as well as what continues to be sequentially higher merchandise, is what caused that last year to occur. And I think basically what we’re saying is that we anticipate the same trend happening this year. You know, embedded in the guidance assumes a similar margin decline from the second through fourth quarters of last year to the second through fourth quarters of this year. So on the cost side, that’s really the assumption.

You know, we talked about a little bit last quarter that in our business, it’s a little bit difficult to project six, nine months out the relationship of merchandise costs to revenues because there isn’t necessarily a one-to-one relationship. It depends on your inventory of used stock and how much utilization you’re getting out of that for your needs, but that’s the assumption that’s embedded in there. So on the profit side, I think that’s the approach we’ve taken. We have a little bit lower tax rate this year as well that’s helping us out. It helped us in the first quarter.

On the revenue side, similarly, last year and then typically the way it’s been with us is that our first quarter really kind of sets the tone for the year, and as we mentioned with some of our price adjustments being focused in the first quarter – and as Ron mentioned, pricing being challenging – what ends up happening over the remainder of the year is you end up giving some price back; and so there’s a little bit of a headwind, at least sequentially, through some of those other quarters.

So if you look at last year and this year, what we’re saying is that they’re going to transpire relatively similarly based on the benchmark of the first quarter, and then specialty garments can be wildcard for us a little bit.

Chris McGinnis – Sidoti & Company

Right. And if you—this may be too much information, but if you back out maybe what you think is—not one-time items but of the 5.7% growth in the quarter itself on core laundry ops, if you back out the price and all that, what was your—can you talk about your growth rate? I guess—you know what I mean? A little bit stronger on the core, I guess, driver of more additional wearers in the base coming into the quarter?

Steven Sintros

Yeah. You know, we’re not going to give out the components of the growth. I think what we can say is that similar to prior years, we try to get a 1.5%-plus bump from pricing. It’s a challenge to do that in this economy, but that’s what we’re focused on and it’s a day-to-day focus of our route sales representatives on a customer by customer basis. But we’re not going to go into the components of the growth.

Chris McGinnis – Sidoti & Company

I understand. And just a last question just on new wearers coming in. Of the new guys coming in, what’s the percentage of new, never before—new to the program itself? New to the rental program itself?

Ronald Croatti

What we call no-programmers. We’ve seen that pick up about 7%. It’s coming in at about 28% right now.

Chris McGinnis – Sidoti & Company

All right. Thank you very much.

Operator

Thank you. Again, it is the one followed by the four to register a question. Our next question comes from the line of Michael Kim with Imperial Capital. Please proceed with your question.

Michael Kim – Imperial Capital

Hi, good morning, guys. Just going back to core laundry, are you seeing any particular strength or fast recovery in certain verticals, and are there some areas that are perhaps lagging from where these other areas are picking up, or are you seeing pretty much a broad-based improvement at this point?

Ronald Croatti

I think it’s pretty much a broad base. The only real area that we’ve seen strong is in the oil area.

Michael Kim – Imperial Capital

Okay. And with the pricing—you know, fairly aggressive pricing for new accounts, how is that impacting the retention rate? How has the retention rate changed from prior periods?

Ronald Croatti

It really hasn’t. I think we’re out there working with our customers constantly to sell them the value of our program and how we differentiate. You know, the retention rate has actually improved a little bit.

Michael Kim – Imperial Capital

Okay. And then just turning to specialty garments, typically first and third quarter are the strongest seasonally. Is it your sense that with the reactor outages—you know, scheduled reactor outages, that that pattern should hold this year, and would third quarter look fairly similar to the first quarter at this point?

Steven Sintros

Yeah, I think our best guess is that it would be. I think—you know, we’ve received the guidance from our guys that third quarter should be a fairly strong quarter as well, and so I think you’ll see a similar pattern to the past years.

Michael Kim – Imperial Capital

And then just—you know, in the past you talked a little bit about operating income or operating margins for specialty garments this year. With the first quarter performance and perhaps looking fairly similar in third quarter, what’s your sense now with the—you know, how does that intersect with your revised guidance?

Steven Sintros

Yeah, I think compared to what I guided at year-end, we’re probably a little more optimistic on the profits of the specialty garments group than we were at the beginning of the year. As we talked about, their revenues were fairly high but the margin was down, and again, there’s not too much to read into that. On a quarter-to-quarter basis, the mix of their projects can really change; so I wouldn’t take that to mean that the margin is going to be necessarily lower going forward, but I think on an overall basis part of the improvement in profits comes from a slightly more positive outlook for them for the remainder of the year.

Michael Kim – Imperial Capital

Okay. And then lastly just on free cash, I know quarter to quarter there can be variability from a timing and working capital standpoint, but what’s your sense for the full year in terms of free cash flow relative to last fiscal year?

Steven Sintros

You know, without having a specific number in front of me, I think it will be down and primarily on the merchandise side. I mean, you saw the use of cash for merchandise and service in the first quarter. I don’t think it will be as significant for each quarter for the remainder of the year, but I think each quarter will have a larger use of cash in that area than last year, and so that will cause the year-over-year free cash flow to be down, especially with profits projected to be a little bit down as well.

Michael Kim- Imperial Capital

Okay, great. Thank you very much.

Steven Sintros

Thank you.

Operator

Thank you. Again, it is the one followed by the four to register a question.

There are no further questions at this time. Mr. Sintros, I will now turn the conference back over to you.

Ronald Croatti

This is Ron. We’d like to thank all of you again for your interest in our Company. Along with the rest of the world, we’re watching the economic indicators closely and are hopeful the economy is now preparing for an eventual upturn. We remain confident that when the market recovery is actually upon us, Unifirst will be firmly positioned to capitalize on all the opportunities.

We look forward to talking to you in a few months when we’ll be reporting on our second quarter performance. Thank you all.

Operator

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and we ask that you disconnect your lines.

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