Aramark (ARMK) 2003 Q1 法說會逐字稿

Good morning. Welcome, ladies and gentlemen to the ARAMARK Corporation fourth quarter fiscal 2003 earnings conference call. At this time I would like to inform you the conference is being recorded and that all participants are in a listen only mode. At the request of the company, we'll open the conference up for questions and answers after the presentation. I'll now turn the conference over to your host, Mr. Gary Sender.

Thank you. And welcome to ARAMARK Corporation's conference call to review the results of our first quarter of fiscal 2003. Here with me today are Bill Leonard, ARAMARK's President and Chief Operating Officer and Fred Sutherland, our Executive Vice President and Chief Financial Officer. Bill and Fred will present an overview of our first quarter results and business operations after which there will be an opportunity for phone participants to ask questions.

Before we begin, however, a few housekeeping matters. As we discuss the results for the quarter, you may want to refer to the financial statements attached to this morning's news release which can be found on our web site at www.ARAMARK.com. Any recording or other use or transmission of this audio may not be done without the prior written consent of ARAMARK. Various remarks that 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 Act 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 2002 form 10K, filed with the Securities and Exchange Commission. We disclaim any duty to update or revise such forward-looking statements, whether as a result of new information, future events or otherwise. I will now turn the program over to Bill Leonard. Bill?

Good afternoon. Thank you all for taking the time to join us here today. Unfortunately, Joe Newbauer is not able to be with us as a recent death in his family requires him to be out of the country. In addition to Fred discussing the financial results for the first quarter of 2003, I will provide you an update on our recent acquisitions of Fine Host Corporation and Clinical Technologies Services. Also, I will discuss new business wins and highlight our program to drive organic growth which we call mission one.

Let me start by saying that ARAMARK's financial performance for the first quarter measured in terms of sales, net income and EPS has been quite positive overall and about what we expected. We've been able to achieve these results through a combination of increased new business sales, lower loss business, and our ongoing discipline focus on managing costs. Our economically nonsensitive businesses performed quite well. But we continue to be affected by a challenging economy and lower employment levels which impact important sectors of our business. Consolidated sales for the first quarter of fiscal 2003 were $2.4 billion. Up 13% from a year ago.

Our new business generated in the first quarter showed a significant increase over the comparable amount contracted in the first quarter of 2002. While business lost during the quarter was lower. We reported $136 million of earnings before interest and taxes in the first quarter of fiscal 2003. Compared to $118 million reported in the first quarter of the prior year up 15%. Our consolidated EBIT margin improved to 5.7% for the quarter. Up about 10 basis points over the prior year quarter reflecting continued cost control efforts and favorable sales mix.

Our net income for the first quarter was $62.7 million, an increase of 22% over the prior year period. Diluted earnings per share with 31 cents for the current quarter compared to 27 cents in the prior year quarter up 15% on a higher share base which, of course, results from our December 2001 initial public offering.

I would like to now comment on two of our most recent acquisitions. Fine Host and Clinical Technologies Services. As you know, we closed the Fine Host acquisition in mid December 2002. We'll begin including its results in January 2003. Fine Host is a food service company with annual sales of approximately $300 million coming from about 900 client locations, all in the United States. Its current headquarters in Greenwich, Connecticut and it employs 14,000 people. Fine Host's profile complements ours and breaks down into five groups.

Education, sports and entertainment, business, healthcare and corrections. The education group represents about 1/3 of the total volume and includes 165 accounts. Sports and entertainment which includes stadiums, arenas and convention centers makes up about 1/3 of the sales base and includes marquis accounts such as Raven Stadium in Baltimore, Raymond James Stadium in Tampa, home of the Super Bowl champion Buccaneers. Business clients such as G.E. Medical Systems, Kimberly Clark and the Federal Reserve Bank of Miami account for 20% of sales and about 140 accounts.

Fine Host also manages food for over 100 correctional facilities and about 45 long-term care facilities and hospitals. Importantly, Fine Host will strengthen our presence in client sectors such as community colleges, smaller convention centers and long-term care. Overall, about 2/3 of the Fine Host volume is in economically nonsensitive sectors. We're in the early stages of integrating Fine Host operations with ours and expect this to be mostly complete by the fourth quarter of fiscal 2003.

We see a good fit with our existing operations as well as increased potential for same store sales growth, opportunities to improve marketing, merchandising and cross selling. After achieving cost reduction synergies, we expect Fine Host to generate profit margins equal to the margins of our food businesses. We're quite optimistic about this portfolio, new business, and the opportunities it provides to expand our client relationships.

The integration of Clinical Technology Services known as CTS continues to proceed at a rapid pace we expected. As previously disclosed, ARAMARK's acquisition of CTS closed on September 30, 2002. For a purchase price of $100 million, we acquired a best in class service provider that complements our existing clinical technology business which came with the ServiceMaster acquisition. And strengthens our presence in the important healthcare service sector. We are now, the premier independent clinical equipment service provider with over 270 clients and consolidating all of our clinical equipment service operations in Charlotte, North Carolina.

Clinical Equipment Services are an integral part of our ARAMARK Servicemaster healthcare facility services business. This structure enables us to focus on providing these specialized clinical equipment services while leveraging the strength of our existing client relationships maintained by our management teams in the healthcare industry. Our clinical equipment business will have dedicated operational and technical teams to service our clients on a regional level as well as dedicated district and front line management.

We're pleased with the pace at which this business is being folded into existing ARAMARK operations. The CTS customers see the benefit as well. In customer attrition since the acquisition has been less than 1%. Targeted modest expense and purchasing synergies will be realized during the next 12 months and of course, cost selling opportunities for food and additional facility business as well.

On the topic of organic growth, our strategy of cross selling food service facility support services and uniform business has it continued to gain momentum and has enabled us to expand our service relationships. We have previewed a new strategic area focus mission one during our last conference call, and in our 2002 annual report. Mission one, however, is about more than just cross selling. The pillars of mission one include retention, base business growth, new business and developing the one best team. This platform will be our primary growth driver and focus for the foreseeable future.

In the best examples of mission one are clients turn to us to satisfy multiple service needs that are not part of their business. We're training our entire management team, including most of our front line managers to become knowledgeable about our total array of services. These managers will continually educate their existing clients but additional ways ARAMARK can help them. We believe this increase mission one focus coupled with the broadest spectrum of services we're now able to provide gives ARAMARK a distinct competitive advantage in serving the needs of our existing clients as well as new clients.

Let me share with you just two of the many examples of mission one success stories. A business services food service director [INAUDIBLE] in Wisconsin headquarters, recently reminded his client that ARAMARK could manage other services for them. It turns out a reminder was all the client need. The food sevices director contacted the uniform team who were already serving a line in Ohio. Now, ARAMARK provides rental mops, towels at alliance headquarters, as well as alliance locations in Iowa, Illinois and Minnesota. The simple conversation with a with a client resulted in a five-year uniform services contract.

Here is a mission one victory featuring our facilities organization. The Valley Medical Center in Seattle, the largest healthcare delivery system in the area, has been a Servicemaster client for 14 years. The Servicemaster director of environmental services pulled such a strong partnership with Valley Medical that when he won a Servicemaster award, their Chief Operating Officer flew out to present it to him personally. In 2002, the opportunity to expand the partnership from facilities to food. Given the director's relationship with Valley Medical, he asked them to meet with an ARAMARK healthcare food support team to review our capabilities given that they were self-operated. Shortly thereafter, Valley Medical ordered ARAMARK the food service. Almost doubling the size of our relationship to about $3 1/2 million annually.

We're confident that mission one will continue to drive our success since we really just begun to educate our organization. To date, we can count on almost $80 million in mission one sales and we've just begun. Next week, over 5,000 of our managers including most of our front line managers will attend our first ever company wide front line manager's meeting to learn about our mission one objectives. Importantly, they will hear their jobs are expanding to incorporate mission one goals and they'll each have specific growth targets tied to mission one accomplishments. We're looking forward to several days of focused organic growth discussions.

Now, let he me turn the program over to Fred Sutherland to discuss the financial results of our individual business segments. Fred?

Thanks, Bill. Before I get started, I would like to point out the first quarter results did not include the fine host acquisition which was wrapped up in mid December, 2002. We will, of course, include Fine Host results starting in the second quarter of our fiscal 2003. Revenues for CTS, on the other hand are included for the entire first quarter. Sales for the first quarter of fiscal '03 and our largest segment, food and support service services were about $1.6 billion, an 18% increase over the prior year. Organic sales growth for the quarter was 3% and improvement over the fourth quarter of fiscal 2002 and was comparable to the prior year's first quarter.

Sales growth and food and support services in the less economically sensitive education sector was in the high single digits reflecting strong campus business growth from new accounts, new offering such as our real food on campus program and a bigger share of students spend in areas such as our expanding convenience stores. We're pleased to sign agreements in the first quarter to provide food service to Trinity College in Connecticut and to Southern Arkansas University.

Healthcare and corrections food service sectors combined also post high single digit sales growth, reflecting both new accounts and base business growth. The sports and entertainment sector experienced strong sales growth driven by new venues such as Houston's reliance stadium and the new Seattle Seahawks stadium and an improvement in convention center sales. We're proud to provide food services to the world series champion Anaheim Angels at Edison Field during the first quarter. Here, to sales growth was in the high single digits.

Excluding acquisitions, sales and our business services sector, were down about 6%, which was somewhat of an improvement from the rate of decline in the fourth quarter of fiscal year 2002. Reflecting continuing weak employment levels in the restructuring of our Boeing contract. Major new clients included John Hancock Insurance and Pricewaterhouse Coopers. Current quarter facility services sales were up sharply as the prior year quarter included only one month of Servicemaster results. Base business growth improved and retention rates continued to be quite strong.

In the first quarter, new business wins in the sector totaled about $35 million and new client relationships include both the Staple Center in LA and the Columbia Zoo in So. Carolina , and both of these were mission one cross selling victories

Overall, our domestic food and support business continue to experience strong customer retention rates with lost businesses as Bill said earlier, below prior year levels. Operating income this segment was about $85 million, a 27% increase from the first quarter of 2002. With Servicemaster and other acquisitions contributing about 22 percentage points of the increase.

The operating income margin was 5.5% for the quarter compared to 5.1% last year reflecting the impact of Servicemaster acquisition and the increased sales mix of higher margin campus and sports and entertainment business this quarter. For the full year, we expect margins to return to more normal levels consistent with the historical sales mix.

Turning now to our food and support services international segment, sales were about $336 million in the first quarter of fiscal 2003, 10% above sales for the same quarter of last year. With currency translation accounting for about 7% of the increase. Organic sales growth of about 3% was somewhat improved from the fourth quarter of 2002. The U.K. continued to report high single digit growth reflecting new account wins while German operations which consists largely of providing services to businesses saw a very modest sales declines during the quarter. As the German economy continues to lag. Canadian sales increased slightly.

Due to the acquisition of Travers, a remote camp business which was completed at the end of the fourth quarter of fiscal '02. Operating income in this segment for the first quarter of fiscal '03 increased 21% to about $14 million with currency translation accounting for about 8 percentage points of the increase. Income in the U.K., Canada and Spain all improved significantly while our German results were up modestly over the same quarter of last year. We continue to add new accounts in our international sector.

Recent additions and expanded relationships include the Ottawa Hospital, Canadian Imperial Bank of Commerce, Agilent in Germany along with The Boot Group in the U.K., the Caspian Sea Offshore Operations and the London School of Economics. ARAMARK's uniform and career apparel segments generally soft economic conditions and persistent low employment levels have continued to put pressure on sales growth.

Let me cover the rental segment. First quarter sales of $255 million were 2% higher than the prior year with about half of the growth coming from acquisitions. We continue to add to our sales personnel and are pleased with our overall productivity levels. The trend of new business sold continued to be favorable during the quarter at about 12% of the base with about 55% coming from first time users of rental programs. Lost business of about 8% improved somewhat over last year's first quarter and sequentially from the fourth quarter but remains challenging due to weak economic conditions. About 1/3 of a lost rental business came from accounts that simply went out of business.

Price increases contributed about 1% to the current quarter sales growth while base business growth continued to be negative at about minus 4% reflecting lower employment levels at many of our existing accounts. Operating income of $27.5 million in the current quarter was down about 9% from the prior year quarter. Net new sales growth and modest price increases were substantially offset by continued contraction in the base business and our ongoing investment in new sales reps, higher fuel costs and a very competitive business environment which all resulted in downward pressure on margins. The direct marketing segment, sales for the first quarter increased 1% compared to the first quarter of '02.

Growth in healthcare and quick service restaurant areas was offset by challenging quarterly comparison for galls, the safety products provider. Last year's first quarter, Gulls experienced exceptionally strong customer demand in the aftermath of September 11th. Operating profit for the quarter increased 2% over last year and operating income margins improved slightly. Driven primarily by continuing uniform manufacturing efficiencies. The resulting in organic growth rates in both sales and operating income was a negative 3% as a result of the difficult Gulls comparison.

Sales in the educational resources segment for the first quarter were down about 1% from last year's first quarter to about $112 million. Reflecting both a decline in average full-time equivalent attendance and the closing of several underperforming centers. We have continued to control variable costs during this period. Mitigating to a large extent the decrease in sales. Operating income was down 4% compared to the prior year quarter reflecting the lower enrollment as well as increased insurance costs. Our corporate expenses for the quarter totaled about $7.5 million compared to $7.8 million in last year's first quarter. Our business continued to generate strong cash flows.

Operating cash flow which as you know we define as net income plus noncash charges such as depreciation, amortization and deferred taxes thus all capital expenditures totaled $84 million for the quarter which was up over last year's strong results. Net capital expenditures for the first quarter of 2003 at $54 million were up from last year's $37 million as we opened a significant number of new accounts including Houston's Reliant Park, the SBC Center in San Antonio and the University of Florida. At quarter end, our total debt balance was $2.1 billion compared to1.9 billion at the end of physical 2002. This increase reflects acquisitions closed during the quarter most notably Clinical Technology Services and Fine Host as well as normal seasonal working capital trends.

Sales of stock by employees after the December 6th class A stock unlock have been pretty much as we expected and significantly below the sales after the June unlock. We estimate that ARAMARK's class B flow is approximately 70 million shares which is roughly double the 34.5 million shares afloat at the time of the IPO. Share repurchases by the company in the first quarter totaled about [1.6] million shares and approximately $95 million remains available under the current company share buy back authority. As you know, the economy was quite weak in the December quarter with GDP growth of less than 1% versus 4% in the prior quarter.

Although our first quarter growth was clearly an improvement over the fourth quarter of fiscal '02, particularly in food and support services, we continued to be concerned about the overall level of employment. In addition, conditions in the uniform business continue to be extremely competitive. We continue to target second quarter diluted earnings per share of 21 to 22 cents which would represent a 10% to 15% growth over prior year quarter after eliminating the one-time Red Sox game which we had in the second quarter of last year. This projected result is also.consistent with our overall full year EPS range and our long-term earnings growth objectives.

Our previous guidance on 2003 results excluded the impact of Fine Host which we now expect to add about $200 million to our fiscal '03 sales for the last three quarters of the year. Due to the timing of the transition costs and the realization of synergies, we expect that Fine Host acquisition will be cash flow positive for the year while reducing full year EPS by one to two cents per share. Now, let me turn it back to Bill to wrap up.

Thanks, Fred. We're pleased with the results our organization delivered in the first quarter. I am particularly proud of the way we're growing our business. One account at a time by adding value and meeting customer's needs. The integration of our most recent acquisitions is going smoothly.

The energy level of all employees is high and I look forward to being with them next week as we roll out the objectives of our mission one initiative. This will be our cost strategy for the next few years. We'll update you on our progress. We consider all of you as partners as well. We take our commitments to you, our fellow shareholders, very seriously. We'll work hard for you and thank you for your continued confidence.

Thank you. The question and answer session will begin at this time. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press one four on your telephone. If you wish to withdraw, press one three. Your question will be taken in the order it is received. Place stand by for our first question. Our first question is from Amanda Tupper from J.P. Morgan.

Good afternoon. Thanks for the run-down. It was very helpful. I wanted to a little more clarity on this mission one that you're rolling out. Which sounds like you're simply formalizing something you guys have done for a long time successfully which is cross selling into your customer base. Is this different or is it just formalizing it. Is there a cost involved in training everybody? Is this different from the competitors? How long until this gets totally rolled out in your sales force et cetera?

That's out of the question. This is Bill. Some of it is just formalizing some of the things we've done. Retention has been a focus of the company but I think when we think of growing base business. In some, we've done a great job. In some, we think there's room to improve. But I think when you look at the additional competencies we've added with the acquisition of Servicemaster, Clinical Technology Services, there is a lot more we can add to our existing customers but I definitely think it is a focus on getting our managers to look at the client and look at not just what they do for the client today but to look at what else can ARAMARK do for that client so part of it is more formalizing it but I think it really gives us a new approach to how to take our existing customers and how to grow it out. I mean I think if you look at the customer base we have today, we think there's equally as much new business there that we don't have than the amount we serve. So, we think it is formalizing some of it but it's definitely a new initiative as far as growing out the rest of the business.

The real trigger here, Amanda, was the acquisition of the Servicemaster management services business because although we were in the support services business, it was a relatively small business and the capabilities there really weren't the same as they are now with Servicemaster so that's really been the impetus and the stimulus to have the organizationally work on making the front line manager really representative for this broad range of services that we provide.

Plus, are you taking of some what you learned in cross selling into both customer bases where there was overlap and now trying to apply that to the broader -- the rest of the company?

Yeah. And the key is really -- as Bill said, the key really is the front line manager, the front line manager who has the trust relationship with the client but often is only providing one type of service, is really the channel through which you have to drive this opportunity to provide another service. And it is typically going to be another service that front line manager doesn't provide. Him or herself through their operations and that front line manager may not be totally familiar with. So, it is really a -- an organizational challenge is to how do you focus the services through that key pipeline which is the front line manager's relationship with a client.

I think the other thing, if you'll remember, those very little overlap between the ARAMARK customers and the Servicemaster customers even though they both have exactly the same needs. So, I think as we learn by having a front line manager services meeting with the Servicemaster people when we brought them into the fold, we started picking up business. We think we need to formalize it and get 6,000 new sales people out there helping us drive the business forward.

Was there cost involved in this program?

Not really. Other than the cost of the meeting. It is really just a change in focus.

Ok. One last question on it. Are you -- is this only for the food and support services division?

Absolutely not. This is for every place where people wear uniforms. We have examples of accounts where we do have all of our services on site.

Ok. Great. Thank you very much.

Thank you. Our next question comes from Chris Guteck from Morgan Stanley. Please state your question.

Good morning, Bill and Fred. Couple of questions. First starting with uniform rental business where the margin was a little bit lower than we were expecting. I guess we've been hearing anecdotally that pricing quoted to new clients is down as much as 10% to 20%. To what extent are you guys seeing that and is that correct basically?

Chris, if you look at the -- our net price increases, right, which I mentioned earlier were about 1%. That's obviously got -- it's got two components to it. It has the annual price increases that are part of the contract and then it would have net price changes that would come on renewing contracts. And those prices -- could be price increases. Could be the same price or a lower price. It is obviously contract by contract situation. We continue to see as a part of the 1% overall net number, we continue to see positive annual price increases under the terms of our contracts. Typically, in the range of 2% to 3%. Offsetting that are net price declines on renewals of contracts. It is hard to generalize but if you look at it -- if you sort of look at those net price declines outside of the API, outside of the annual price increase, and you look as it relative to the number of contracts we renew each year because obviously we have three, four, five-year contracts. There's no question that we see maybe 5%, 10% price declines and renewals and occasionally, lower than that. So, you know, if I settled in, I would say we might see on average single digit price declines and particularly competitive cases, we might see price declines that are in excess of that.

How much do you see where the terms of the contract you're allowed to raise API that because of important clients and they see what's happening with the pricing for new clients, they come back to you and say hey, we would like to have our prices reduced as well in line with what you're offering to new customers. You have seen that historically in weak economic periods?

Chris, you usually don't see that. The customer doesn't know what other customers are paying. If you have a five-year contract and you're getting a 3% a year CPI, you would either deal with it at the end of the contract -- every once in a while, does somebody come in and say hey, I got a quote here and my contract is up in a year. If you don't match it, I'll go out. That happens occasionally but normally speaking, you treat the contract as it is if you're entitled to the price increase, you take it.

Ok. It in the press release and your preprepared comments referred to the rental margins. Could you quantify the year of your growth in the growth and what your impact was?

Chris, we don't talk about the actual numbers related to the sales force but the head count increase was in the high single digits. So, you really have the combination of the head count increase and then of course normal raises. And it was I guess the easiest way to say it, it was the most significant factor in the margin change.

Ok. It was more important than the pricing situation?

Um, yeah. The pricing is a little hard -- it is a little hard to quantify the impact of pricing on margin. But my educated guess would be that it is more significant than the pricing impact on the margin.

Looking forward to your expectation that as the lower prices for new clients come on and the sales force continues to grow that even in the context of the continued cost cutting efforts and the rental business that margins will continue to decline a bit year over year or is that being a bit too pessimistic?

Well, I think it is hard to say. I mean, clearly we had a margin decline this quarter. The environment out there continues to be a very tough environment. But you know, we've been -- we've seen base business declines for -- the industry has as well for a number of quarters. And you know, at some point, that lapped. So, I think there -- personally, we'll continue to be pressures on margins in the industry. But I do think with the strong new sales, with the improving retention, and with just the movement through time, that my own belief is that's a condition that won't continue.

Then finally, if I could, how would you characterize the pricing environment in the food and support services division? Stable versus the last couple of quarters or getting a little bit worse?

I would say it is pretty stable. It isn't anything I say is totally different from what has been in the past.

Ok. Thank you.

Thank you. Our next he question comes from Cary Callahan from Goldman Sachs. Please state your question.

Good morning. Couple of questions if I could. One is as you blend in fine host and CTS, does that impact the overall seasonality of the business by quarter?

Slightly. You know, fine host does have a fair amount of school business which again, you know, is closed in the summertime. They also have sports and entertainment but I would not say it would significantly change our quarters at all.

It is $300 million on a domestic food service business that's roughly $5 to $6 billion. They don't have a lot of major league baseball in their stadiums or arenas, there is a little more focus toward the fall because they're more football oriented but not a big factor.

Ok. Can you comment on your new business efforts for the entire company and then maybe go down line by line. I know you talked a little bit about on the uniform side and then also related to that, what your retention levels were, business by business.

Well, yeah. Overall, let's talk about new sales. New sales pretty much across the businesses were up over prior year. And lost business across all of the businesses was down over prior year. So, that was true in food. It was true in uniform. And if you look at it -- if you annualize out retention rates, our uniform retention rate is somewhat improved than it has been. Now that improvement is in the order of about about a percent. And the food business is also running at improved retention rate if you annualize it out. At this point we're running at an annual retention rate into the mid 90s which would be I think probably a percent or two higher than it was last year.

Mid 90s on the food side?

Yeah.

Just to remind us, the new sales last year were somewhere between $800 to $900 million.

I think we said over $800.

You're tracking above that.

Yes.

Ok. And then just ask you to follow up on Chris's question on the pricing environment. Can you just give us a little better flavor for the B and I which seems to be the most competitive food service segment. Not only pricing but willingness to commit capital on the part of competitors.

Well, I would rather not talk about the competitors but pricing is tough in the market. The real challenge in the B and I market though, we're still waiting our share of accounts. Just the reduction in the work force out there. That's the challenge that they're fighting is you know, until employment levels come up, it is going to affect our B and I business as it affects our uniform business. The good news is we've got a lot of businesses that are not economically sensitive and those are doing very well.

Ok. And competitors -- I don't want to talk about them specifically but the degree of rationality, you know, in general, are people a little more rational than we were a few months ago or about the same?

I think it is about the same.

Ok. Thank you.

Thank you. Our next question comes from Kevin Monroe from Thomas Lehman Partners.

Thank you. On the food services business, can you just kind of maybe comment what were the key levers that kind of drove the improving internal revenue growth and are you seeing any mitigation on the business services side and also, why aren't the operating margin, the improvement there, why isn't it sustainable?

Well, yeah. On the sales side, first. The organic revenue growth which pretty much across all of the businesses within food and support services, business services as I mentioned was down 6%. I think it was down about 9% or so in the fourth quarter. The education segment was at or a little better than -- actually it was better in the first quarter than it was in the fourth quarter. The sports and entertainment business was better which was mostly a big part of that was adding a number of new accounts. Which we mentioned Reliant was one of those and Seattle's Seahawks stadium. And the losses were also down as well.

The margin improvement, if you look at -- the point we were making is if you look at the margin improvement in the first quarter in food and support, it was pretty significant. And part of that was the mix because we had very strong performance in sports and entertainment which is a higher margin business. And the education business was very strong. It is a somewhat higher margin business so I guess our point was that that spread EBIT margin spread which is quite significant in the first quarter, we expect that to normalize really. We still it -- target margin improvement but we're not sure that we're going to continue to have that sort of really significant margin of improvement year over year.

So, the margin will basically follow its seasonal trend with maybe some modest improvement.

Right.

Ok. Thank you.

Thank you. Our next he question comes from Jack Omahoba from Wachovia Securities.

I'm wondering if you could address some of the new business wins in the food and support services segment. In particular, are you seeing any shift in trend in terms of winning new business from competitors versus the trend for self-operators to outsource?

I think it is a combination of both. You know, I think clearly our first choice is to get to people who don't outsource to outsource seems to be a great way to get it and I think the mission one in the cost selling -- cross selling will help us as we do, that you have a relationship with a client that no one else has on the other side so I think it is a great opportunity for us but I think it is about normal, you know. Some comes from the other customers but our target would quite frankly be taken from Self-Op which is the biggest competitor out there.

I wouldn't say there has been any big shift in the mix.

Very good. Thank you.

Thank you. Our next question comes from Michael Griffins from Robert W Baird.

Good morning. Question just on the balance sheet. You're sitting at roughly two and a half to three times EBITDA in terms of debt. How much comfort room do you think you have to take it up and how aggressive do you think you'll be on acquisition?

I think our debt to EBITDA, if you look at last year, on an annual basis, is around 2.5. And we have -- we have typically run between two to one and three to one. And you know, we have an investment grade rating from the major rating agencies. And you know, our target has been to continue to maintain an investment grade rating. Also, the businesses that we acquire, if you look at Fine Host, if you look at CTS, obviously generate a pretty healthy level of EBITDA as well. So, you know, we -- we're cognizant of the overall mix of debt and equity. We like certainly having an investment grade rating and that's one of our criteria. And we think within that given the strong cash flow of the base company and the EBITDA of the companies we acquire, we don't see any particular constraints in our ability to continue to make the right add-on acquisitions.

You think you'll be aggressive in the future in continuing to target more acquisitions each quarter?

It all depends. I mean we find the right company that has -- that we think is going to help us overall. We'll make the acquisition. You know, there have been some acquisitions both on uniform side and the food side that if we think the price is too high, we won't make the acquisition.

We don't really -- we would like to control the timing but we don't. And if you look over the last 12 months, for example, you'll see obviously a very heavy level of acquisition activity but we didn't control the timing of Servicemaster CTS, Fine Host, Harrison, any of those being available. And if you look at the year before that, you'll see a much lower level of acquisition activity. So, it is not something we're really -- where we control the ebb and flow. As you see it, does ebb and flow significantly.

Thank you.

Thank you. Once again, should you have a question, please press one four on your push button phone. Should you withdraw, please press one three. Our next question comes from Chris Guteck. Please state your question.

Quick follow-up. Fred, I believe that the December quarter of '01 was somewhat weak because of the after effects of September 11th. Not because of the indirect effects on the economy because of September 11th but more directly impacting the company. I'm curious, when you normalize for that effect, what would have been the impact on the year over year organic growth for this quarter both revenues as well as EBITDA's? Have you done the calculations?

If you look at -- on the revenue side, it is certainly less than 1%. Because you may remember, we had some pluses or minuses. I think the convention center business was weak and I think going quarter to quarter against that and S and E, the Oregon an growth has pickup from that. On the other hand, we had some shift in gains that helped us in the first quarter. On the stadium side. So, I think it is pretty meaningfully less than 1%.

Just to connect the dots on your guidance for fiscal '03, you didn't explicitly reaffirm the guidance. Are you saying you're comfortable with the old guidance range after you subtract a penny or two because of the acquisition of fine host?

Essentially, Chris, we haven't announced any update in our four-year estimate. So, the way we've -- we handle the guidance as you know is we provide guidance at the beginning of the year for the full year then on a quarter by quarter basis. You know, we update guidance for the upcoming quarter. So, we really it -- we feel that there's no need for us to update our guidance. And you know, I think if you look at the second quarter, our targets for the second quarter in terms of percentage increase and earnings per share year over year, they're consistent with the first quarter. Very consistent actually with the overall year. If you adjust for at 53rd week. Our view is to just leave it at that.

Great. Thanks, Fred.

Thank you. Ladies and gentlemen, as a reminder should you have a question, please press 14 it at this time. If there are no further questions, I'll turn the conference back to Mr. Sender.

Thank you very much. This concludes our conference for today. Thank you for your active participation. And we hope everyone has a terrific day. All parties can disconnect now.

Ladies and gentlemen, this concludes your conference for today. Thank you for participating and have a wonderful day. All parties may now disconnect.