Aramark (ARMK) 2002 Q4 法說會逐字稿

Welcome to the Aramark corporation fourth quarter fiscal 2002 earnings conference call. I would like to inform you this conference is being recorded and participants are in a listen-only mode. I'll turn the conference over to your host,Mr. Ted Hill, Vice President of Investor Relations.

Thank you. Welcome to Aramark corporation's conference call to review the results of our fourth quarter of fiscal 2002. Here with me today are Joe Neubauer, Aramark’s Chairman and CEO, and Fred Sutherland, our EVP and CFO. Joe and Fred will present an overview of our fourth quarter results after which there will be an opportunity for phone-in participants to ask questions.

Before we begin, a few housekeeping matters. As we discuss the results of the quarter and the year you may want to refer to the financial statements attached to this morning's news release which can be found on our website. If you are listening in on the phone and don't have access to the Internet or would like a copy of the release faxed or e-mailed to you for any other reason, please call Linda Jones in our office at (215) 238-3708 and she'll see that you get what you need. Any recording or other use or transmission of this audio may not be done without the prior written consent of Aramark. Various remarks we may make in this call relating to matters that are not historical facts, including remarks about future expectations, anticipations, beliefs, estimates, plans and prospects for Aramark constitute forward-looking statements for purposes of the safe harbor provisions under the private securities litigation reform acts of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various risks, uncertainties and important factors including those discussed in the risk factor section and the management discussion and analysis of the results of operations and financial conditions section of Aramark's 2001 FORM 10K, forms 10Q and other reports and filings with the SEC. We disclaim any duty to update or revise forward-looking statements whether as a result of new information, future events or otherwise. I'll now turn the program over to Joe Neubauer.

Thank you for taking the time to join us today. In addition to discussing the financial results for the fourth quarter in the full year today we'll review our acquisition strategy, have some comments on our recent acquisitions in particular and give you a progress report on Service Master. We'll also give you an update and the unlocking of Aramark stock and our expectations for fiscal year 2003.

At the outset, let me say that our overall financial performance measured in terms of sales, net income, EPS and cash flow that been positive for both the fourth quarter and the full fiscal year 2002. Overall we have achieved record results despite the continuing sluggish economy and lower employment level. We have been able to achieve these results due to the business model that provides a healthy balance between our economically sensitive and non-sensitive business. And our experienced management team,with a disciplined focus, are managing costs.

Consolidated sales for the fourth quarter of fiscal '02 were $2.3 billion up 15% from a year ago including Service Master. This brought the full year fiscal 2002 sales to 8.8 billion. 13% above fiscal 01 level.

We reported 162 million of earnings before interest and taxes in the fourth quarter of 2002 compared to 139 million reported for prior year’s fourth quarter. Up 16%. Full year '02 EBIT excluding the 44 million of non-recurring gains increased 11% to 517 million compared to 465 million last year. As we have consistently done before in these comparisons, goodwill amortization has been eliminated from our presentation of ‘01 results to make them comparable with the '02 numbers. Our EBIT margins remained strong at 7.1% for the quarter and 5.9% for the year. The margin in Q4 was up 10 basis points over prior year while the full year margin equaled last year. We consider this a solid result in view of the additional Service Master acquisition amortization as well as the transition costs.

Our full year EBITDA margin increased 10 basis points over last year’s to 8.8%. Our net income for the fourth quarter was 81.5 million, an increase of 22% over prior year net income. For the full year, excluding the non-recurring gains, net income increased 20%. Diluted earnings per share were 40 cents for the quarter and $1.19 for the full year, again, excluding the non recurring gain. Up 8 and 9% respectively of the prior year. Including the non-recurring gains full year earnings per share were $1.34. Now comparable cash EPS which as you know, was calculated before the amortization of intangibles, such as contract rights associated with acquisitions was 44 cents for the fourth quarter and $1.32 for the full year. Increase of 13% over the comparable figures for the prior year.

Our cash flow continues to be strong. Operating cash flow defined as net income excluding one-time gains plus non-cash charges, such as the depreciation of amortization, less all the capital expenditures for '02, total $270 million, up 32% over last year. Capital expenditures net of disposals for the year were 243 million compared to 219 million in 01. After-tax return on total investment capital was 13% for '02 a bit below our historical levels of 14 – 15%, reflecting the first year impact of Service Master. Excluding Service Master, return on capital was in line with our historical standard.

We continue to sign new business at a good pace adding more than $800 million of annualized new sales volume for the year. As we enter 2003, the new business pipeline continues at a healthy level. Client retention in those two remains strong in the mid 90's range just slightly below prior year's level. Now in light of several [recent] acquisitions we have announced we thought it might be useful to spend a couple of minutes outlining the objectives behind our acquisition strategy. We acquire companies to expand geographic scope, to strengthen our position in existing businesses and to expand our client base. We currently operate in 18 countries which account for 65% of the world's GDP. Our plan is to continue seek, add on acquisitions in countries where we currently operate and to enter a few key new countries with significant GDP. Typically through an initially minority investment designed to lead to eventual full ownership. The recently completed tender offering in Japan is a good example of our goal to increase our ownership and extend our geographic reach in international markets. As a result of this transaction we and [Mit-thoo-ee] now own, each own about 49% of Ames Services which with sales of $7 million is the second largest contract food service company in Japan which it the second largest economy in the world.

In the U.S. we're generally looking to strengthen our existing service offering with emphasis on economically non-sensitive businesses. Two recent examples of this would be our recent purchase of clinical technology services (CTS) and Harrison Conference Center. First CTS. Approximately 40% of Service Master business is providing a wide range of facility management services to the health care sector. Clinical equipment maintenance or hospitals is a key component of this business. This service is mission critical to the hospital, is high value added service with attractive margins and good growth protection. So now with the inclusion of CTS. we're the leading non-wholly [owned] provider of this key hospital support service. The second example here is our earlier purchase of Harrison Conference Center and it's addition to our own conference center business making Aramark the clear leader in conference center management. Now, these are not a resort-oriented facilities but are typically dedicated training centers owned by a single client organization such as a university, hospital or corporation. In most cases we manage these conference centers for clients with whom we already do or wish to do significant food and support services business.

Another example of expanding our client base would be our recently announced agreement to buy Fine Host. This one is a straightforward fill-in acquisition which will augment in our food service presence in our educational sector, sports venues, business healthcare and correctional sectors. Finals will be folded into our existing food and support services organization with significant cost synergies. Equally important, over two thirds of the Finals business is in economically non-sensitive markets.

Now of course, speaking of acquisitions, the most important acquisition this year was Service Master Management Services, itself, which represented a major expansion of our small but important facilities business. In the uniform business we continue to concentrate on additional smaller fill-in acquisitions in both presently served and new geographic areas. Our recent acquisition in New York City of a uniform rental company is a good example of such a fill-in. In the uniform direct marketing business, our purchase earlier this year of Long Beach Uniform provided with us a new direct sales distribution channel for that business. On the subject of Aramark Service Master let me bring you up to date where we're. We acquired Service Master Management Services because for quite some time we have viewed it as a nearly perfect complement to our existing food and support business service offering to health care, educational and business clients. In fact, Aramark had already largely self-developed $200 million facilities management business that competed in a modest way with Service Master. So the acquisition of Service Master gave Aramark the capability in facility services equal to our long standing competencies on the food service side. This was important to us because the U.S. facilities management service market rivals the contract food service market in size and is less [outsourced] than food.

We believe with a robust facilities offering there are significant opportunities to strengthen our existing client relationships, enable us to market facilities services to food service clients and vice versa. In addition to this, the facilities business has very attractive financial characteristics, a relatively high EBITDA margin, little or no inventory and is very low in capital intensity. The key to this is improving top-line growth and with our current running rate of client retention and new sales we believe we're on our way to do so.

Since last November the Aramark Service Master team has kept its focus on retaining existing customers and winning new customers. Since the acquisition the retention rate among clients has increased to about 94%. Over $100 million in annualized new business has been signed and the productivity of the Aramark Serice Master sales force that been increased by over 50%. Front line management disruptions have been kept to less than 20% while we have recognized the Service Master business along client sector lines which has been so successful by Aramark in our food service side. We have also adopted certain Service Master systems and combined certain Aramark and Service Master systems.

We'll also continue to pursue opportunities to integrate infrastructure and support systems.and our cost reduction targets of $10 to $15 million are ahead of schedule. But the greatest opportunity to grow will come from the Service Master acquisition is through the cross selling of our combined services to existing customers. We believe that the ability to offer both food and facility services makes for a powerful sales tool and improves client retention. So through fiscal '02 over $60 million in new services have been cross sold to existing Service Master facility service customers as well as Aramark food service customers. For example, existing food service relationships with Monarch [Taxar] and the San Antonio Spurs have led to facility sales to those clients. Working the other direction we have seen existing facilities relationship with hospitals such as Evanston, Northwestern and Silver Cross. And with educational institutions such as [Hollings] University and [Zamsung] College lead to significant new food service contracts. We believe this is only the beginning of what we expect to be many new business opportunities.

Since our last earnings conference call in August we have continued to see the play out of our first stock unlock in June. Insiders sold about one million shares in August which represents less than 3% of their holding consistent with our announcements of last May. I have not sold any shares and do not plan to sell any during the next unlock period. Fred will discuss this with in you more detail. But let me just simply say that the past unlock and the resulting subsequent share sales have been in line with what we expected as to both the numbers of shares sold and the increase in our public flow which turned out to be 59 million shares.

Let me take a couple of minutes to summarize the environment that existed in the fourth quarter and in the full year too. The economies in which we operate have been and we expect will remain challenging for us for at least the next six months. Employment levels, which are a major driver of economically sensitive businesses have not yet shown any sign of recovery. On the other hand our non-sensitive businesses continue to perform quite well. Now specific to the fourth quarter although a major league baseball work stoppage was avoided we did experience attendance weakness in our sports and entertainment sector as a result of the uncertainty caused by the threatened labor disruption. But through autumn, the principal costs, labor and food have been kept under good control, although we experienced some increases in insurance costs. Now to add some detail to my overview, let me turn it over to Fred Sutherland to discuss the results of individual business segments.

thanks Joe. As Joe mentioned, in order to facilitate comparison of the results between ‘01 and '02 we'll follow our previous practice of talking about the fiscal 2001 amounts as they would have been reported had the goodwill accounting rules been in effect for fiscal year 2001 to give us an apples to apples comparison. You'll note the financial statements accompanying our quarterly press release show the 2001 results both as reported and pro forma as they would have been reported had the new goodwill accounting rules been in place in that year. The one-time gains, which Joe referred to earlier and which you’re aware of, are cleared included in other income in the P & L and are not in our segment results so they are really not a factor in my discussion. Sales for the fourth quarter fiscal year ’02 in our largest segment, food support services US, were a little over 1.5 billion a 21% increase over the prior year. Organic sales growth for the quarter was 1%. The balance of the reported growth coming from the Service Master acquisition. Adjusting both the 2001 and 2002 fourth quarter sales for our estimate of the effects of 9/11, the current quarter was about 1%.

For the full fiscal year sales increased 19% to about 5.7 billion. Full year organic growth was 2% with Service Master accounting for most of the difference. As you would expect, fourth quarter segment sales compared to earlier quarters are more influenced by activity in the sports and entertainment business, specifically by major league baseball and our national parks business. Sales in these areas were down from the prior year quarter. Baseball attendance at our stadiums was down mid single digits and tourist visitation at the national parks declined about10%. Consistent with national trends. It was a significant factor in the segment's fourth quarter rate of sales growth. We were. however, pleased that per capita spending at our locations was generally up due to improved marketing and merchandizing programs.

Sales in the education sector in the fourth quarter are seasonally a smaller proportion of our sales due to summer recesses at schools. Sales growth was somewhat lower in the fourth quarter due to a lower level of summer camp activity although sales growth picked up significantly after schools reopened in September. Our business services sector saw quarterly sales 10% below last year's levels. Nearly all of the decline in the growth rate which was somewhat greater than in third quarter resulted from our restructuring of the Boeing contract, which we’ve previously discussed, which occurred late in the third quarter. Although the new contract reduced our sales, we now have a profitable contract that provides value to both Aramark and to Boeing. The other food and support U.S. business including health care and corrections saw sales for the quarter continue to grow at high single digit rates.

Operating income in this segment was 122 million, a 20% increase from the fourth quarter of ‘01. With Service Master Management Service contributing about 17% of the increase. The prior year's fourth quarter included a previously disclosed 5 million charge for litigation. Over year operating income was 327 million. 19% above fiscal year 2001 results similarly reflecting the Service Master acquisition. Our domestic food and support business experienced strong customer retention rates in the mid 90% range, slightly below the rates for the prior year. We continue to win new business at a healthy rate in the fourth quarter. Significant new business included Johnson and Johnson's corporate headquarters. Chicago Board Options Exchange, Avia, Progressive Insurance and the Albuquerque Convention Center. The EBITDA margin in our food and support US segment remained strong for the year at 8.3% was slightly better than last year.

Turning now to the food and support services international segment sales were about 306 million in the fourth quarter of '02. 10% above sales for the same quarter last year. The currency translation accounting for 6% of the increase. Organic sales growth, which would exclude acquisitions and the currency impact was about 1%. U.K. share growth in the high single digit range, reflected continued strength in winning new accounts. Our German operations, which consist largely of providing services to businesses, saw sales declines in the quarter as a German economy continued to struggle. Canadian sales are also down slightly. Operating income in this segment for the fourth quarter of '02 grew 8% to 11.7 million. With currency translation accounting for 6% of the increase. Organic growth and operating income in the fourth quarter remained about flat with last year as did segment operating income margin.

We continue to add significant new accounts in our international segment as well. Recent additions included Andrew Lloyd Webber's really useful theater group in the U.K., the Canadian Forces Exchange Systems, and both [Votacom] and Marconi in Germany. Looking at Aramark's uniform and career apparel business, I'll first talk about the rental segment. Fourth quarter '02 sales of 252 million were 2% higher than the prior year with about half that growth coming from acquisitions. New business sold during the quarter was quite strong at 13% over the new sales generated in the fourth quarter of the prior year. More than half of the new sales come from non-programmers which is customers that did not previously rent uniforms. Sales for sales rep which is key productivity measure is improving and is on target. While the number of reps increased over the prior year as we continued to invest in the sales force. We also experienced strong growth in our national accounts business. Retention of uniform rental customers during fiscal year 2002 continued at prior year's level at about 92%.

The fourth quarter we were able to obtain price increases averaging about 1.5% versus the prior year. We're pleased with strong new sales, solid retention and price increases for the quarter. On the other hand, base account growth for the uniform rentals segment continues to run in negative territory, down about 3% to 4% due to lower employment levels at our existing account. Operating income of 32 million in the current quarter was equal to the prior year's quarter and that represents really a sequential improvement over the year to year performance in the third quarter.

During the year we completed the construction of major upgrading of five uniform rental facilities and we began the process of relocating the bulk of our manufacturing facilities to Mexico for uniform manufacturing. In the direct marketing segment, sales in the fourth quarter were up 5% from year ago levelsto about 103 million. Of this 4% is due to acquisitions, 1% is organic growth, which is a notable improvement over last quarter’s 4% negative growth. Just as important, operating profit in this segment for the quarter grew 45% over last year's quarter on an organic basis. Contributing to these improved results, all sales improved even against last year's very strong fourth quarter which included the weeks immediately after 9-11 which benefited their business.

WearGuard-Crest sales were flat with last years and this represents a significant improvement in both our quick service restaurant and healthcare sectors compared to the third quarter We're pleased that WearGuard-Crest have shown sequential year over year improvement each quarter this year. As in recent years, revenues in the educational resources segment for the fourth quarter continued to trend downward from last year's level to 107 million dollars. This reflects both a decline in the average full time equivalent of attendance per center and the closing of several centers. Offsetting these factors in part has been a modest increase in average tuition. Variable costs, however, including wages have been effectively central controlled during this period, mitigating the decrease in sales.

Operating income was essentially flat versus last year's fourth quarter which included a minor gain in the sale of three centers. Our corporate expenses which are those administrative expenses not allocated directly to the business segments total 7.6 million in the fourth quarter. As Joe mentioned earlier, our businesses continued to generate strong cash flows. Operating cash flow which we define as net income, excluding one time gains this year, adding back non-cash charges such as depreciation, amortization, deferred taxes plus all of our capital expenditures was 271 million for the year up 32% over the prior year. Net capital expenditures for fiscal '02 were 243 million which was slightly less than our total depreciation and amortization expense of 255 million. We're pleased that we were also able to continue our management of working capital during the year which was a source of cash.

The result of this strong cash flow year-end debt was 1.9 billion. Debt to EBITDA was down to 2.5 times and EBITDA coverage of interest was almost six times. During the fourth quarter Aramark issued $300 million of 6 and 3/8 notes due 2008 and we used the used the proceeds to replace existing bank debt. Presently we have about 850 million of our billion dollar bank revolver unused. And our debt maturities for fiscal year 2003 are minimal. Joe mentioned earlier the stock sales of stock by employees after the June stock unlock. Then pretty much as we expected. The employee stock trading facility which as you recall we established through Mellon Bank, our transfer agent has actually worked quite well and has been an effective mechanism to channel employee sales into the market. As you would expect, the facility was fairly actively used immediately after the unlock although current usage is rather low. Sales of stock by executives who may trade only during designated window periods, as you know, was first permitted in August window and after that through 10-b-5 programs. To date these sales have totaled about a million shares which is less than 3% of that group's total holding of Aramark stock and is consistent with the announcement in May.

In addition we understand that Aramark's most significant outside investor who dates back to the 1984 management buyout outside institutional investor sold its entire Aramark stock position which eliminates the significant portion of the pre-I.P.O. outside investor overhang. As you will recall, in May Aramark's board authorized a 200 million stock buy back program. Since this announcement, the company has re-purchased approximately 3.2 million shares. Share repurchases in the fourth quarter totaled about 2.8 million shares. Approximately 130 million remains available under the current buy back authority.

As Joe mentioned earlier as a result of the post-unlock activity, Aramark's class b stock presently has a float we estimate at about 59 million shares which of course is up substantially from the initial float at the time of the I.P.O. of 34.5 million shares. As you know there will be two more unlocks of Aramark stock, one which occurs this December and the final unlock in June of 2003. The number of shares becoming unrestricted, about 37 million shares each, is of course significantly less than the 80 million shares which unlocked last June and will be much less significant relative to the current public flow which increased by 60%. Joe has indicated he has no current intention to sell any of his shares including those which will unlock in December. He will be making gifts of up to a million shares about two-thirds of which will go to his family foundation with the remainder going to public charities. In addition other executive management currently expect their level of sales in connection with the upcoming December unlock and window period to be no more than 600,000 shares or one-half of what was sold in connection with the June unlock and August window period. This in total represents less than 2% of this group's holdings.

As we look forward to next year, we expect economic conditions to continue to be a challenge to growth through the first half of fiscal 2003 with gradual improvement occurring during the second half of the year. Some of you may know fiscal 2003 for Aramark will be 53-week year which we estimate will result in reported sales being roughly 2% higher than at a normal 52-week basis. We currently expect to see the reported consolidated sales for 2003 between 9.5 and 9.7 billion dollars on a 53-week basis. With sales estimated in the rage of 2.25 to 2.35 billion dollars in the first quarter. We anticipate 2003 diluted earnings per share would be in the range of $1.33 to $1.38 on a 53 week basis compared to $1.19 in 2002 excluding the one-time gains in 2002. On a 52-week basis we anticipate consolidated organic growth and sales to be in the 3 to 5% range with lower growth rates earlier in the year gradually improving in the third and fourth quarters. We expect our food and support businesses organic sales growths to be within this range, while our uniform business, which is more economically sensitive, is expected to show full year organic growth in the 2 to 3% range. Educational resources sales will likely be flat to slightly down with lower profit resulting primarily from higher insurance costs. All these estimates exclude our pending acquisition of Fine Host. For the upcoming quarter we expect diluted earnings per share to be in the 30 to 31 cent range which would represent low double digit EPS growth over the results of the fourth quarter. Let me turn it back to Joe Neubauer to wrap up.

Fiscal '02 has been both a challenge and rewarding year for Aramark. We have seen the company transition up to 18 years from being private to being once again a public company. While our non-economically sensitive businesses have performed quite well some of our other businesses are being affected by the difficult economic downturn that has lasted longer than any of us anticipated when we went public last December. Yet throughout all these challenges we achieved our earnings per share goals each quarter and continued to generate solid cash flows and strong returns on investment. We're successfully integrating our largest ever acquisition, Service Master, as well as several smaller ones. And as Fred said, we're targeting additional improvement in growth and returns for the upcoming year 2003. I'm quite enthusiastic about the Aramark business model and proud of our management team. As we embark on our second year as a public entity we are excited about the opportunities available to us despite some of the challenges. We take our commitment to you, our fellow shareholders very seriously and thank you for your continued confidence in us.

The question and answer session will begin at this time. [inaudible]

Good afternoon gentlemen. I apologize for phoning in on a mobile phone. A very comprehensive discussion about the quarter and your fiscal ’03 guidance. Could you give us a sense for the expectation that you built in with respect to inflation rates in health insurance and workers' comp insurance expense next year?

Health care cost increases overall in the 10 to 15% range. If you look at all our insurance, workers' comp, umbrella, property, employment practices, --

Would it be safe to assume [Inaudible] expectation [Inaudible] current term structure of debt and as you said in your prepared remarks [Inaudible] includes, excludes,the Fine Host acquisition.

It -- our assumption is no change in our debt structure. Ebb and flow with cash flow.

Thank you very much.

Our next question comes from Chris Gutek .

Good afternoon. It’s Sharitz Roff standing in for Chris Gutek. I have a question on the domestic food and support services. It looks like you are [Inaudible] on a sequential basis. I'm wondering if you can run through the net new business sales and the rate of net new business sales and same store sales to existing clients during the quarter.

Let me take a shot at that. Our rate of new sales growth in the fourth quarter really ran at a rate comfortable -- comparable to the rates in the earlier quarters and our overall client retention was equal to or maybe a little better fourth quarter than it was -- It was stronger he then it was earlier in the year. Same stores sales growth across most of the businesses was pretty much the same. In the education business we have had very positive same store sales growth and business services we had negative. The driver of the sequential change in the organic sales domestically is the relatively higher proportion of the sports and entertainment business and the impact of baseball and the parks, number one. And as I mentioned park visitation was down about 10% and major league baseball attendance was down about 6% and sports and entertainment itself which is normally, we said earlier, is more like 15% to 20% of our total sales it’s actually higher than 20% of our sales in the fourth quarter. Then the final and the business services as I said, we were down about organic growth was down 10%. That was a point or two lower than the organic sales growth in the third quarter and that was almost entirely attributable to the restructuring of the Boeing contract. So to summarize it was really the mix of sports and entertainment and the impact on baseball and parks and sports and entertainment then the impact of the Boeing contract restructuring on the b & i business.

And then I had a question on pricing. Are you noticing that pricing is becoming more and more competitive especially on contracts when they come up for renewal

This is Joe. As I’ve said before, this is an extremely competitive marketplace with some very strong competitors. I wouldn't say that pricing has gotten any worse. I'll also tell you it hasn't gotten much better than it was in the past. The environment is just about the same with everybody doing a very good job first and foremost holding onto what they have and number two is going out there after any new business they have.

Question on Fine Host. How do the margins compare for Fine Host with Aramark and how much margin expansion to you hope to achieve for that business?

Well, the margin at the operating level of Fine Host are very much in line with the overall margins we experience in our various business sectors. The issue for fine host is clearly its overhead structure. Relative to the size of the company. And I think that we can effectively take care of.

On the uniform business it looks like [Inaudible] ratio negative 4% during the quarter. Can you talk about the sequential trend within the quarter i.e. in the months of July, August and September?

I can tell you that the -- it was about the same to maybe a little bit better than the third quarter results and within the fourth quarter month by month I think it was pretty constant. I know it was not down. So I think it was constant during the quarter.

I would say no significant trend during the quarter.

Thanks a lot.

Cary Callahan.

On your business you typically accrete margins as you grow your food service business and you are working hard to tread water, I'm wondering if that's equivalent tradeoff in terms of margin accretion opportunity or with B&I down if that's a net drag on the margin.

I would say that varies from quarter to quarter. But I don’t think that B&I being down, they have done a good job on the cost structure and it's taken them down significantly. And I think that if we just get a slight break on unemployment levels I think we'll be in good shape. All the other businesses are doing a great job on their margins.

On the down 10% in the quarter can you give us a sense of what that, put it in restaurant terms what the traffic versus average check is and is there an opportunity on the average check side.

Well, there is always an opportunity on the average check side and as Fred said even on our sports and entertainment business while attendance was down our check averages were up. So that's the way we work it. Day in and day out. The challenge always is that if we don't have enough people in our locations, whether that’s sports locations or employment locations, that's a challenge to us. And we do the best we can there.

And lastly, I know Fine Host a few years ago was a troubled entity. Even affecting its accounting. And I'm wondering if that's all cleaned up or if there is a fixer-upper element you have to deal with.

As you can imagine we have looked carefully at this and first of all have isolated ourselves legally from all of that and number two is that the current management has cleaned up a lot of that. We don't think there is any fixer-upper on the accounting side to be done. Fred, you may want to add something here.

I think we're comfortable with that. They continue and it shows the resilience of this business in general, they continued to operate pretty effectively at the unit level in terms of overall performance and margins. And we have a pretty good handle on that overall.

Thank you.

Our next question comes from Amanda Tupper.

Good afternoon. A couple questions. Back to the earlier discussion of pricing trends, and looking at the operating income margin that you generated in U.S. food and support services, it came in about 50 basis points below what I had been looking for so I'm wondering if that's just lost leverage from revenues not being quite as strong or whether again there is anything different going on in the pricing environment.

Well, our overall EBIT margin in food support services was flat year to year and flat for the fourth quarter as well.

In the U.S. I had been looking for an uptick. Is that becuase the economy didn't pick up or if pricing is tougher than you had thought it might be?

Well, I think it's -- I think the pricing hasn't changed. I think it's driven by the mix of good solid organic growth and non-economically sensitive businesses and challenges to growth in the economically sensitive businesses and it makes it more difficult to lift your margins.

So looking out into next year when you say your guidance incorporates strength in the second half is that the second half of your fiscal year?

Yes.

How much more strength in terms -- I'm trying to figure out how back end weighted it is and also where does the 53rd week fall? Which fiscal quarter?

Well, some more strength but it's hard for me to quantify. You'll notice we give gave you a range of expected revenues for the first quarter. It's frankly designed to give you -- we gave a range for the year and the first quarter which we don't normally do to give you a feel for revenues that might build up and we did the same with the earnings per share. 53rd week falls in the fourth quarter. So the first three quarters have an equivalent number of weeks and the fourth quarter will have an extra weekend. And that he just way our fiscal accounting works.

And then circling back to Fine Host, when do you expect that to close and roughly what are the revenues that you are expecting in the year? What is the annual run rate that it's go going at right now?

We hope to close this sometime around the end of this calendar year. We -- it's running rate at the moment annual running rate is roughly 300 million dollars. Now again we might drop a little bit of that as we take over partly by our choice as we see what is and what isn't profitable. But I suspect plus or minus at most we'll drop 5% to 10% off that. I don’t hink it is going to be significant. So if you annualize that into next year that could be roughly 200 million dollars into next year plus or minus 5 or 10%.

Into the fiscal year.

Correct.

And the margins would be all in year one probably below your margins other overhead you have to take –

We have said on these acquisitions they will be accretive cash-wise. First your going to break even P&L and I think this one is going to follow right in there. And this it will take us a while to integrate all the things we want to integrate.

We don't see it being a factor in our earnings per share one way or the other.

How did you know that is what I was trying to get at.

Thought I would save you asking the question.

And shifting gears, educational services, given that you are looking for another kind of weak year there and now it sound like getting pressured by insurance costs, are you revisiting long-term plans, strategically for what you want to do with this business?

I think our position has been the same as it's been all along. It's a good business, we're working hard at it, and we hope that the trends will reverse here.

If it does have high -- it has operating leverage in the business because of the real estate nature of it. It's at a fairly low occupancy level now because of the cyclicality of the business and so we're in a position if it moves up from here we'll have some pickup.

Thank you very much.

Our next question comes from Jack Alejandro

Could we get some details on labor cost trends and turnovers particularly as it relates to the P/L businesses. Also I'm wondering the impact of potential minimum wage increase might have if you see, if any. And then finally the details on the capex targets for the fiscal year and the components of it.

Well let me try and Fred will, I'm sure, help. The trends on the cost structure we don't see any special trend at all both – in L&P much different -- our labor costs we have done a good job in controlling all of those. As you know product costs are under reasonable control-- there is no significant cost pressures -- so I think the cost structure has remained just about the same historically as it was in the past. So we don't see that. As far as turnovers are concerned, the labor markets will peaceful as far as the weakness in the economy is at a slight plus-- in terms of recruiting so we're not seeing significant problems there either. So we're in pretty good shape. As far as the capital expenditures, what specifically did you have in mind?

Did you give us the fiscal year target and then what the components are?

No, we didn't. We would expect capex in '03 to be in the $300 million range. Pretty much the same break down amongst the businesses. And no huge projects in there. We're in the process of building a new uniform rental plant in Chicago which is one of our largest rental plans. That's a big project that is in in every year.

What Fred means by big is 40 million dollars. There is no 50 million dollar project in there.

The other factors we have the annualization of Service Master which is not a big number. We have capex associated with the smaller acquisitions that we made. Harrison CTS and Traverse. So we think it will -- we think it will put us in the 300 million dollar range.

Kevin Monroe.

First question is on margins I guess we'll go through it basically through the first start with the food and support services segment. Margins are operating margins were basically flat relative to last year. You are adding on the Service Master business which is basically a higher margin business so why haven't you seen a benefit from any of those margins from that business coming in and when will you?

If you look at our EBITDA margins in the food and support services business overall, it's up slightly for the year. Service Master acquisition has a higher EBITDA margin that gives us some lift there. But you have to remember it's attracting a lot of amortization of intangibles so the EBIT margin on the Service Master acquisition is lower than our food service because of the intangible amortization. So it's not really a big factor in lifting our EBIT margin because of the purchase account.

Similarly on the uniform sides your operating margins were down on rental business but up on the margin business. What are the factors driving that and will we see a significant improvement in '03 as a benefit from the new manufacturing facility upgrades and the location in Mexico?

In the uniform margins already a couple things going on. We're seeing improvements in merchandise costs. As a result of more self manufacturing. And we continue to see that -- we expect to see that year after year. And it works through the P/L over time because it goes into the cost of the garment then that gets amortized through the life of the garment. So it doesn’t hit the P&L all at once. On the other hand, offsetting that is the investment in the sales force and we have been increasing the number of sales reps and all of that sits the P&L up front to make it productive. So those two factors have been offsetting and we had some pickup in energy costs in ’02 over ‘01. So the margin has been pretty much flat to just slightly down in '02. And we're hopeful to get margin improvement in '03.

Just getting back to the food and support services quickly. Can you foresee anything basically in the next couple quarters similar to I know in the third quarter you had the impact of losing the Kentucky derby and [inaudible] and this quarter we have baseball attendance and parks being down. Is there anything that we can -- this going to be something like that next quarter or the following quarter that you can foresee right now?

We don't foresee anything like that coming up.

Do you think organic growth can get back to the normal 3% level?

We're not predicting any organic growth but again I caution you that the economy and employment levels are still not picking up. So I would be modest in that.

That is all the time we have for questions.

Thank you very much, ladies and gentlemen this concludes our conference for the day. Appreciate your participation and you may now disconnect.--- 0