Aramark (ARMK) 2003 Q2 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, to the Aramark Corporation second quarter fiscal year 2003 earnings conference call. At this time, I would like to inform you that this conference is being recorded and that all participants will are in a listen-only mode. At the request of the company, we will open the conference up for questions and answers after the presentation.

I will now turn the conference over to your host, Gary Sender, Vice President of Investor Relations. Please go ahead, sir.

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

Before we begin, however, a few important housekeeping matters.

In March, we executed a definitive agreement for the sale of our Child Care segment, Aramark Educational Resources. During this conference call, we may refer to this segment as AER.

Fiscal 2003 second quarter year to date operating results, along with the comparable prior year periods for this business, have been reported as discontinued operations as required by Generally Accepted Accounting Principles. As a result, our Childcare results are excluded from reported sales, operating income, and income from continuing operations. The results of the Childcare business are shown net of tax as income from discontinued operations, and are included in our net income.

In our discussion today, when we refer to continuing operations, we mean operations excluding the Childcare business. I strongly suggest that you log onto our website and check on a tab called "Non-GAAP and other Financial Disclosures," where we have provided some information which we believe will be helpful for you in your analysis of our discussion today.

As we discuss the results for the quarter, you may want to refer to the financial statements attached to this mornings press release as well, which can also be found on our website at www.aramark.com. In the earnings press release and in today's discussion of results, we mentioned certain financial measures that are considered non-GAAP. Generally, a non-GAAP financial measure is a numerical measure of a company's performance, financial position or cash flows that either excludes or includes item different than those prepared or presented in according with Generally Accepted Accounting Principles. The Investor Relations section of the company's website includes the disclosure and reconciliation of non-GAAP financial measures that will be used in this Webcast conference call, and may be used periodically by management when discussing the company's financial results with investors and analysts.

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 matter that are not historical facts, including remarks about future expectations, anticipation, 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 Factors section in the Management Discussion and Analysis of the Results of Operations and Financial Condition section of Aramark's 2002 Form 10-K 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 Joe Neubauer.

Good morning, and thank you all for taking the time to join with us today. I'm going to cover our consolidated results for the second quarter, and let Fred Sutherland discuss the results of our individual business segments and other financial matters. I would also like to update you on our Mission One initiatives and other new business development activities.

Aramark's financial and business performance for the second quarter, measured in terms of sales, net income, and earnings per share, has been positive and in line with the objective that we set for ourselves. We've been able to achieve these results through a combination of increased new business sales, higher retention rates, and our team's ongoing disciplined focus for managing costs.

The balance between our economically non-sensitive businesses and those more directly affected by the company has again served us well. The ongoing issues of the challenging economy and lower employment levels show no signs of abetting -- and for the quarter, quite frankly, were a bit worse than we anticipated. Since we can't control employment levels, the weather, energy costs, or geopolitical environment, our team focuses on the things that we can control, such as how we satisfy our customers every day, how we demonstrate the benefits of an Aramark partnership to new clients. That is how we retain business, and that's how we renew customers.

Our net new business won for the second quarter was quite strong. New business sold in the second quarter was 30 percent higher than the new business sold in the second quarter of '02, while lost business was significantly lower than that last year in the same quarter. This, quite frankly, continues the positive trend in new business and retention seen in the first quarter of '03. We're clearly benefiting from our focused approach to forming new business partnerships and expanding existing ones. And remember, Mission One, our company-wide growth initiatives, we just launched formally in February of this year.

Second quarter sales which, as Gary mentioned, exclude sales from our Childcare segment, were $2.2 billion, up 10 percent from a year ago. Our overall organic growth, which we measured by adjusting for acquisitions, divestitures and currency impacts, was 2 percent, about comparable to the rate of the first quarter. The reported $95 million dollars of operating income for the second quarter compared to $126 million last year, which you recall included a pre-tax gain of $38 million dollars from the sale of our interest in the Boston Red Sox baseball league. Now, excluding the Red Sox gain for comparison purposes, operating income was up 8 percent over the second quarter of '02.

The operating income margin was 4.3 percent this year, equal to last year's, again, when you exclude the Red Sox gain. The margin improvement in our food and support services businesses was offset by the margin decline in the uniform rental and direct marketing segment.

Net income for the quarter was $44 million dollars, compared to $64 million dollars last year. Again, excluding for comparison purposes the Red Sox gain, which increased last year's net income by $24 million dollars, net income was up 10 percent, which we consider to be a solid performance in this environment.

Net income per diluted share was 22 cents, compared again to 31 cents last year; again, it includes 12 cents from the Red Sox. When you exclude the gain for comparison purposes, EPS increased by 16 percent. In the second quarter, we announced that we executed a definitive agreement for the sale of Aramark Educational Resources and Knowledge Universe for $225 million dollars in cash and a note in the principal amount of $40 million dollars, subservient to the right of a cash-free payment of $25 million dollars within 12 months of the closing. We took this action in order to allow us to focus on our core enterprise-to-enterprise businesses, where we can building unlimited client partnerships. On the other hand, AER can better realize its growth potential if it is aligned with an organization focused on the childcare market. We expect to close this transaction shortly.

Internally, we monitor the cash flow generated by our businesses before working capital and upper capital expenditures. This metric, which we define as income from continuing operations, excluding unusual items, plus non-cash charges such as depreciation, amortization, and deferred taxes, less all capital expenditures for the first half of this year, was $132 million dollars.

This cash flow metrics continued to be quite strong this year, even after the higher level of investment in our businesses, driven primarily by a number of new contracts won.

In the first conference call for the quarter, last quarter, we discussed our upcoming management meeting to kick off our Mission One campaign. Just as a reminder, Mission One is all about how we'll grow organically through client retention, base business growth, getting new business, cross-selling the full line of Aramark services to our existing clients, and doing all this with the One Best Team. In February of this year, we got over 5,200 of our managers together for three days to learn more about the specifics of Mission One and particularly, what the front-line managers need to do to insure Mission One's success with their clients.

Our President, Bill Leonard, and I told them that we can become number one in organic growth when they realize the full potential in our existing client partnerships. We have developed a systematic approach for each manager to quantify the full range of services for each one of our clients, and working together with the district or regional managers, they are charged to create an action plan for Aramark to expand its relationship with that specific client.

Frontline managers have been expected to participate in expanding and winning additional sales, and we are going to measure their performance. At the meeting in February, Bill and I emphasized our belief that with our problem-solving approach to our client issues and expanding service operating that we now have, we are on the brink of a new era – like one that I've ever seen in my twenty-plus years with the company. So we've now officially launched Mission One and we'll certainly keep you informed of our progress.

I truly believe that we're now even better positioned to achieve our long-term organic growth objectives, and that our people have never been more prepared or energized.

Let me now share with you a couple of specific examples. We recently renewed our food service partnership with the Staten Island University Hospital in New York for another ten years. In the spirit of Mission One, our District Manager there realized that we could do even more, and shared with its important client Aramark's clinical equipment maintenance capabilities. When the client showed an interest, a Mission One success story was put into action. A clinical equipment sales and engineering team worked with Staten Island decision makers and successfully demonstrated our ability to more effectively maintain and manage the hospital's mission-critical clinical equipment. This expanded partnership continued to a track record of growing our base business with Staten Island Hospital that began in 1984, when we started providing food services at the hospital's south campus. In '89, we launched the same service to the north campus, and then added vending services in '95. Additionally, our facility design team is currently renovating the dining facilities, and the hospital is a customer of our uniform rental business.

All told, this once smaller account, and a very, very important partnership, is estimated to exceed $7 million dollars in sales this year.

Let me share with you another new important international account awarded to us this quarter. Our new client, Carlton University, represents the largest win for our campus services team in Canada to date. Carlton is a 15,000 student university located in Ottawa. The client at Carlton identified our food service program, the strength of our management team, as well as our financial package, as the key factors that won us this account. As part of the due diligence represented from Carlton trailed to Boston University, one of Aramark's key campus accounts, to meet with onsite management and tour our offerings, such as a fresh food company, where, as many of you [indiscernible], meals are prepared in front of our customers. Because we demonstrated our qualities and values, we were able to secure a ten-year contract with an estimated first-year sales of $10 million dollars U.S.

In addition to that, we were also rewarded the refreshment services and conference center management business, which will set the stage for what will certainly become a long-term true unlimited partnership between Aramark and Carlton.

We are confident that Mission One will continue to drive our success. Year to date, about 10 percent of all of our new business sold was directly related to a specific Mission One activity.

Now, let me turn the program over to Fred Sutherland, to discuss the financial results of our individual business segment and some additional new business wins.

Thanks, Joe. During my discussion of the second quarter financial performance, I will define and use a metric for our measurement of the business's cash flow. This is a non-GAAP measure and a reconciliation of this internal metric to its most comparable GAAP measure can be found, as Gary mentioned earlier, on our website.

As Joe said, we were pleased with our overall performance for the quarter. Consolidated net income per share in the second quarter of 2003 was 22 cents, compared to 31 cents in the second quarter of '02, which as you know included a 12 cent per share gain from the sale of our interest in the Boston Red Sox. Excluding the gain for comparison purposes, the percentage increase was 16 percent. Income per share from continuing operations, which again, excludes the Childcare business, was 19 cents compared to 28 cents in last year's second quarter, which of course also included the same 12 cents per share Red Sox gain. Again, excluding the gain for comparison purposes, the increase in per share income from continuing operations was 19 percent.

Sales for the second quarter of fiscal '03 in our largest segment, Food and Support Services U.S., were about $1.5 billion, a 10 percent increase over the prior year quarter. Organic growth for the quarter in sales was about 2 percent. Sales growth in the less economically sensitive education sector was in the mid single-digits, despite difficult weather conditions, reflecting strong campus growth from new clients and a bigger share of student spend through areas such as our expanding retail operations. We were pleased to sign agreements in the second quarter to provide food service to the University of Michigan Dearborn and Lee Strasburg University in Pennsylvania.

The Health Care and Corrections Food Service sectors combined posted high single-digit sales growth, reflecting both new accounts such as the Baylor and Duke Medical systems, as well as very robust base business growth. Strong revenue from NFL playoff games, coupled with new account wins and a favorable schedule of events, fueled high single-digit sales growth in the sports and entertainment business.

As you may recall, we completed the Service Master acquisition in late November of '01, making this the first time both the current and prior year quarters include a full three months of its sales. Excluding acquisitions and divestitures, sales growth in the facilities sector was in the low single-digits this quarter, in line with our expectations. We signed approximately $25 million of new facility service business in the second quarter. Year to date, facilities services new business wins have increased over 30 percent versus the same period in '02. Plant retention continues to be strong, in the mid 90 percent range, up from below 90 percent prior to the acquisition. The integration of our combined facility operations is now largely complete, and we are satisfied with the progress.

Solid customer retention rates and new sales were not sufficient to overcome weakness in the overall business services sector. Excluding acquisitions, sales in this sector were down about 7 percent, in line with the declined experience in the first quarter of '03. Despite continuing weak employment levels, we expect a meaningful improvement during the back half of the year due to improved new sales and retention rates. We were pleased to announce the expansion of our food service relationships with Astra Zeneca and Pharmacia, which is now Pfizer, and a new win with the Warren Conference Center in Massachusetts.

Operating income in the domestic Food and Support Services segment was about $56 million, a 10 percent increase over the second quarter of 2002. The operating income margin was 3.7 percent for the current quarter, equal to that recorded last year. The Fine Host transition results somewhat constrained margins this quarter. Segment income in the current quarter also includes September 11th business interruption proceeds of about $6 million, and includes as well about $6 million of costs related to our February 2003 Mission One Frontline Managers meeting.

Turning now to our Food and Support Services international segment, sales were about $354 million in the second quarter of fiscal 2003, 21 percent above sales for the same quarter last year, with currency translation accounting for about 13 percent of the increase. The organic sales growth of about 3 percent was in line with the rate for the first quarter of 2003. Retention rates and new business wins won outperformed the results for the first quarter, and the prior year period, and were in line with results seen in the first quarter, as I said.

The U.K. reported mid single-digit sales growth, reflecting new account wins, while our German operations, which consists largely of providing services to business, improved its performance versus the first quarter. We still saw a small sales decline in the quarter versus prior year. The combination of base business growth and new accounts also drove a solid sales increase in Spain. Operating income in this segment for the second quarter increased by 50 percent to about $17 million from the $11 million reported last year. Currency translation represented about 19 percent of the increase. Income in the U.K., Canada and Spain all improved significantly, while our German results were down somewhat due to the base business contraction.

We also benefited from a small acquisition made last year in Canada. We continue to add new contracts in our international segment. Recent additions included Canada's Carlton University, as Joe mentioned, Better Care Health System in the U.K., and the Middlebury Hall Conference Center in the U.K.

At Aramark's Uniform and Career Apparel segment, persistent low employment levels and higher costs have continued to put significant pressure on sales and profits. I'll cover the rental segment first.

Second quarter of 2003 sales of $251 million were even with the second quarter of 2002. New business sold was about 12 percent of the base, with about half of the new sales coming from first-time users of rental programs. Lost business of about 9 percent was slightly higher than in the first quarter. About one-third of the lost rental business came from accounts that simply went out of business. Price increases contributed about 1 percent to the current quarter sales growth, while business growth showed sequential weakness versus the first quarter, reducing second quarter sales versus last year by about 5 percent.

Overall, net new sales growth, modest price increases, and lower rental uniform merchandise costs were more than offset by continued contraction in the base business, our ongoing investment and additional sales reps, higher fuel and health care costs, and a continued competitive pricing environment, all of which resulted in downward pressure on margins. Operating income of $24.5 million in the current quarter was down about 16 percent in the prior year quarter. To combat continued weakness in demand, we are further reducing costs wherever possible, tightening capital spending, and raising prices, which hopefully will improve the year over year trends for the remainder of the year.

In the direct marketing segment, sales for the second quarter increased 1 percent compared to the second quarter of '02. Weakness in direct sales work clothing was somewhat offset by increase sales for safety products from a business acquired in June of '02, resulting in a 2 percent negative organic sales growth rate, which was a slight improvement for the negative 3 percent seen in the first quarter. Operating income was down 5 percent to $4.7 million, primarily due to a less favorable sales mix and somewhat higher operating costs.

Our net corporate expenses for the quarter totaled about $7.4 million, compared to $8.9 million in last year's second quarter. The current quarter includes a $1.4 million dollar gain representing the residual payment from our prior year divestitures.

As Gary mentioned at the outset, we've reached an agreement during the second quarter to sell our Childcare business, and as a result, its operating results are classified as discontinued operations. Income from discontinued operations, reported on an after-tax basis, was about $6 million in the second quarter, comparable to the $6.3 million last year. As Joe mentioned earlier, we expect to close the transaction shortly and to record an after-tax gain in the range of $20 to $25 million dollars.

Our businesses continue to generate strong cash flows. For the first half of fiscal 2003, cash flow before working capital and after capital expenditures, and internal operating metrics, which we define as income from continuing operations, plus non-cash charges such as depreciation, amortization, and deferred taxes, plus all capital expenditures and non-recurring gains, totaled about $132 million compared to $129 million last year. Net capital expenditures for the first six months of 2002 of $103 million were up from last year's $80 million, as we opened a significant number of new accounts and continued to invest in new and upgraded uniform laundry plans.

At quarter end, our total debt balance was $2.2 billion, compared to $1.9 billion at the end of fiscal '02. The higher balance reflects acquisitions closed this year, most notably clinical technology services and Fine Host, the funding of our share repurchase program.

Share repurchases in the second quarter totaled about 3.5 million shares. As we disclosed in this morning's press release, Aramark's Board of Directors has approved this week the use of up to an additional $150 million dollars to repurchase Aramark shares. We have no specific time frame in which we plan to use this new authorization.

To sum up our view of the second quarter, we were able to grow our revenues by 10 percent, and our earnings per share, adjusted for comparison purposes to exclude the Red Sox gain, by a solid 16 percent, in line with the forecast provided when we announced the first quarter 2003 results. I'd now like to discuss our view for the remainder of 2003.

Last year, when we provided our sales and earnings guidance for the 2003 fiscal year, we assumed that the economy would stage a modest recovery in the second half of our fiscal year. As we are all aware, such is not the case, and employment levels in the U.S. are not improving. In addition, our Parks and Convention Center businesses are being significantly impacted by recent geopolitical events, and park visitation and convention center attendance are running behind last year. Early season Major League baseball attendance is also running about 5 percent behind prior year, primarily due to the cold and wet spring weather.

As a result of these external factors, we now estimate full year fiscal '03 sales from continuing operations, which again excludes Aramark's Educational Resources sales, of between $9.2 and $9.4 billion, and income per share from continuing operations of between $1.24 and $1.28, compared to $1.10 last year. Now, these per-share estimates exclude Aramark Educational Resources net income of 6 cents per share in fiscal '03 and 9 cents per share in fiscal '02. The '02 per share amounts also excludes, as we discussed, the 12 cent gain from the sale of the Boston Red Sox and another previously disclosed divestiture gain in last year's third quarter.

We estimate that income per share from continuing operations for the third quarter will be between 29 cents and 31 cents, compared to the prior year third quarter of 32 cents per share, which as I mentioned included a 3 cent per share gain from the previously disclosed divestiture.

At this point, let me turn it back to Joe to wrap up.

Thank you, Fred. We're quite satisfied with the results that our organization delivered in the second quarter. The revised estimates for the year are consistent with our long-term objective of double-digit earnings per share growth. We expect the third quarter earning comparison to be somewhat challenging due to the slow start in our [indiscernible] and National Park operations, coupled with the timing of synergies and transition costs from the Fine Host acquisition.

I'm particularly proud of the way we are retaining our existing clients and adding new businesses, both within existing accounts and with new relationships. Our client-centric business model is sound and our team is executing it well. Outsourcing is alive and well and growing, despite the continuing challenging economic climate that we are operating in. As I stated earlier, our rate of new business is accelerating, and our lost business is down. You can be sure that we are managing the company prudently with a continued focus on profitable growth. We're focusing on the thing that we can control, and are making the appropriate investments in our businesses and our people while continuing to reduce costs wherever appropriate. Most of all, our team is focused on delivering quality solutions to our client partners, both old and new.

I also wanted to thank you, our shareholders, for your ongoing and continued confidence in our organization. Thank you.

Thank you. The question and answer session will begin at this time. If you are using a speaker phone, please pick up the handset before pressing any numbers. Should you have a question, please press 1, 4 at this time. If you wish to withdraw your question, please press 1, 3. You questions will be taken in the order they are received. Please stand by for our first question.

Our first question comes from Jeff Omohundro. Please state your question.

Thanks. Jeff Omohundro from Wachovia. My question relates to the retention rates and the improvements that were mentioned. I wonder if you could provide some additional detail, in particular with segments you've seen the best improvement. And is it the result of specific actions you're taking? Or perhaps a change in the competitive environment?

Well, Jeff, I think the retention rates are improving across all of our businesses. I would say even on the uniform side, I don't think it's improved significantly, but slightly. But certainly on the Food and Support side it's stronger. And it's due to the specific focus that we have added to the overall effort that our teams are providing in the marketplace. I think that Mission One, which you will remember starts with account retention, which is the base of everything, is the most important growth element that we have, and we're really quite focused on it, and I think our teams are executing well. I would say that the marketplace overall has not changed much.

Thank you.

Thank you. Our next question comes from Jon Shapiro. Please state your question.

Hi, it's Jon Shapiro, sitting in for Carey Callaghan. Just a quick question on the 6 cents adjustment for the Education business. Is the implication from this schedule that you were sort of assuming, coming into the year, that the contribution from this business was going to be down 33 percent?

This is Fred. There are really two factors there. One is, we will not own Children's World for the full year. So part of that decline of 3 cents is due to the fact that we will not own Children's World for the full year. The other part, as we've talked about before, is that that business, because of the overall economic environment and significant increases in insurance costs year over year, was a business that, so far, if you look at it – if you look at the first quarter, I think it was up slightly, but it's pretty much a flat business to slightly down for the year. So part of it is being slightly down, but part of it is the fact that we will not own it for the full year.

Does the original guidance range sort of assume a full year of the education business?

Yes, because the original guidance we gave in the fall, and at that point, we had not signed an agreement to sell Children's World. So our original guidance of $1.33 to $1.38 assumed Children's World would be in for the full year.

So when you talk about 2 to 3 cents from the economy not picking up, presumably some of your original, at the beginning of the year, assumption of the economy picking up, would have had some impact on the educational resources business? Can we read any of that into this?

Yes, I mean – as I say, some of it is the timing of Children's World, and some of it is the impact of that economy. What we tried to show in that schedule – since under GAAP now we really should be talking about income per share from continuing operations, we wanted to make sure that everybody understood that the big difference between the old net income earnings per share, and this earnings per share, is the Children's World effect, I guess I would call it.

I'm just, again, trying to figure out the change from the beginning of the year. If you're saying 6 cents, would that number have been sort of on the low-high? If you were still holding Education, would that be more like 6.8, 6.9, 6.7, something like that?

Yes, it would be slightly higher for the full year. Children's World in the fourth quarter operates at basically a break even.

But the third quarter's the best.

Yes, the second and third quarters are equal. The first quarter is a little bit lower, and the fourth quarter is basically zero. So it's really the impact, from an EPS point of view, it's the impact of not owning Children's World for the entire third quarter – at least, that's our working assumption.

Okay. And then just a question on D&I. You said down about 7 – I know you don't like to comment specifically on competitors, but they have posted, I guess, better than that so far this year. Do you think you're losing some share there and just generally, what do you think about the marketplace in D&I?

This is Joe. I don't think we're losing share at all. You recall again that we had one large account by the name of Boeing, that we don't have anymore that somebody else has, which by itself moves it around. The other thing is, one of our other competitors, I think, has the government business, a large single contract for the military in there, which they count in that single segment. But I think overall, competitively, we don't consider that we're losing share.

And what are you seeing in pricing there, on new business?

As I said earlier, the marketplace continues to be competitive. I don't think it's more competitive or less competitive than what it was. I'm turning to Bill here, who really lives with it day to day.

Yes, this is Bill Leonard. I don't think it's changed dramatically, the marketplace, in the last year. It's a competitive business, and it's always going to be a competitive business, but you know, the question is, if you have the right offering and the right quality, you win the account.

Thanks very much.

Thank you. Our next question comes from Chris Gutek. Please state your question.

Good morning, gentlemen, it's Sharat Shroff standing in for Chris. You talked about the impressive growth in new business from Mission One. Can you just aggregate the 2 percent you're going to include in domestic Food and Support Services by net new business wins plus sales to existing customers? And also comment on what percentage of the new business is coming from other food contractors versus self-operators?

This is Fred. Mission One accounts for somewhere between 10 and 15 percent of our new sales. As Joe said, our new sales are up about 30 percent, new contract awards, in the second quarter. So you might say that Mission One is certainly an important component in that. I think we went through the organic growth rates by sector, in terms of the overall organic growth rates.

I think also that we count organic growth rates as growing out existing relationships, as well as same store sales increases from before. So we don't desegregate those two numbers.

Okay. And what percentage of new businesses is coming from the other large food contractors versus the self-operators?

I think it's pretty consistent with our historic trends. As we said in the last two years, it was about 40 percent, I believe, that came from self-op accounts, and 60 percent otherwise.

And it hasn't changed much over the past quarter or two quarters?

I don't think it's changed much.

Okay. This particular guidance for fiscal '03 – can you tell us what sort of expectations you're building in for Fine Host, and your organic growth expectations for domestic Food and Support Services business? I.e., are you still expecting anywhere from 3 to 5 percent growth, or has that come down a little bit?

Well, I think if you take our original revenue guidance back last year, which was $9.5 to $9.7, and at the end of the second quarter we said we expedited Fine Host to add a couple hundred million dollars to that. And then if you adjust for the foregone AER sales, which are somewhere in the range of $400 million dollars, and then you compare that to the current guidance that we're talking about, which really gets you to sort of an apples-to-apples comparison, we're talking about a revenue adjustment for the year of somewhere around $100 million dollars.

So we continue to see – we mentioned, for example, we continue to project improvements in some of our sectors in organic, growth, as we look at the amount we've won and the amount of business we've lost, and so we expect that to play out during the year, but we expect it because of the economy, to be somewhat below our original guidance. And that pretty much quantifies the impact for you.

On the order of magnitude of the reduction, somewhere between ¾ of 1 percent and 1 percent overall – over the whole company.

Okay. And then the final question – the proceeds from the sale of Educational Resources – have you decided on how you intend to deploy that? Meaning share buybacks versus debt reduction?

When we receive the proceeds, it will initially be used for debt reduction, mechanically. And then share buyback is really not driven by the timing of those proceeds – it's driven by, as we said earlier, the fact that the Board has authorized an additional $150 million dollar program, and then we'll make decisions on share repurchases going forward, pursuant to the authorization of that program. But initially, the proceeds would reduce debt.

Okay. Thanks a lot.

Thank you. Our next question comes from Brad Safalow. Please state your question.

Good morning, it's Brad Safalow from J.P. Morgan. I guess my first quarter is regarding the Education business – what was the impact of some of the bad weather during the quarter? What would have been revenue growth outside of that, had you had maybe more normal weather?

This is Fred, Brad. That's a tough one to quantify. In the K through 12 market, there were days where schools were closed, so we actually lost service days during the quarter, and the same in colleges – some days where they were just shut down. So I'm reluctant to really try to put a number around it, but I can tell you, it clearly was a factor in the growth in the second quarter versus the first quarter.

Sure, okay, understood. And then this is more of a directional question. Given the economic environment we have currently, have you seen any shift in terms of the type of contract for new business that you're winning in terms of profit and loss versus management? Historically I know it's been about a 60 percent, 40 percent mix, but given where employment has gone and things of that nature, perhaps you'd be more willing to outsource things completely off their own P&L to your P&L, so to speak.

This is Bill. We haven't seen any significant change. Clearly, the larger accounts tend to be P&L; the smaller accounts to be management fee. But I'd say it's the same. Currently all the clients are looking for help; they'd like their subsidies reduced, and that's what we do with clients on a daily basis. But I would say there's no significant change.

Understood. And then, just a last question on the new contract metrics – you talked about 30 percent. Is that on a dollar basis, or number of new contracts?

It's on an annualized dollar basis – well, it's on a dollar basis.

Both on a dollar basis.

Understood. Thanks a lot.

Thank you. Our next question comes from Michael Gresens. Please state your question.

Good morning, gentlemen. On the uniform business, I have several questions. First, pricing – has there been any sticking on your price increases so far, with your customers?

Well, I had said the price increased up about 1 percent. It's really – the price increases that are in the contract, obviously do go in. I think the net is that we are wooing repeat customers, as a lot of our competitors are, and sometimes you have to reduce the price to renew 'em. But I think the price increases are sticking; they're just a lot lower than they've been, and the CPI is running at a very low rate these days. So as far as overall pricing, I would say I see no significant change since the last quarter and hopefully we'll see them going up.

And have you implemented any fuel surcharges to offset the higher fuel expenses?

We haven't had any specific fuel surcharges. Obviously, we have a service charge that we charge our client, and that's one of the components that's in there.

Okay. And on the new business wins – what is the pricing like since [Sintas] [phonetic] announced earlier this year that it would be less aggressive on pricing?

I think it's too soon to tell. I do think there will be more of a rationalization on pricing as we go forward. But it's really too soon to see it.

Okay. And then fuel expenses – obviously, they're higher during the March quarter. Can you quantify how much in basis point terms it impacted margins?

Off the top of my head, I don't have it, but I think it was probably a couple million dollars in the quarter. The good news is, I guess, that we see that fuel prices coming down, going forward.

Yes, the fuel costs cost us about fifty basis points in the margin, during the quarter. And if you look at our dollar fuel costs, year over year, just for the quarter, it was up about 50 percent. On the good side, in natural gas, which is the other component of the energy costs, we've done a pretty good job of hedging that. It's a little harder to hedge gasoline prices. So we have not been impacted particularly by natural gas, but the fuel was about 50 basis points of margin.

Okay. And one final question – has there been any change in the acquisition environment for the uniform business?

I guess our sense is that the valuations in the acquisition side are coming down. And I think that just reflects the fact that most companies in this industry are growing at lower rates than they were three or four years ago, and I think that's reflected in the private market.

Okay. Thank you very much.

Thank you. Our next question comes from Adam Waldo. Please state your question.

Good morning, Adam Waldo from Lehman Brothers. Not to beat a dead horse here, gents, but just want to go through the guidance one more time on a few key assumptions. The $1.24 to $1.28 excludes the 6 cents in EPS benefits for the first half of fiscal 2003 that you've already booked – is that fair?

Right.

Okay. So if we wanted to put this on an apples-to-apples basis, we would take the $1.24 to $1.28, add about 9 cents for AER, and implicitly, your new guidance for the year would be $1.33 to $1.37, consistent with the guidance that you issued last November. Is that fair?

No, I think where you're missing, Adam, is the Children's World earnings per share in '02 was 9 cents a share. The impact in '03 is roughly 6 cents a share. In other words, most of the Children's World money will be made up until the time of the divestiture. I mean, there might be a swing of a penny a share. So you can't add the 9 cents – you really have to add the 6 cents this year.

Okay, so you would assume then, for example – last year you booked about $12 million pre-tax in AER, but you're implicitly saying we wouldn't get $12 million or so pre-tax in the second half of fiscal '03 from AER, had you not sold it?

You're talking about the EBIT, right?

Exactly – EBIT.

A couple things. We are close to halfway through the third quarter, and we haven't sold the business. So you actually have to look at April, May, June. And we have to look at our estimate as to when we think we will sell the business. And the impact of AER in the third quarter. That's why, when we've talked about the third quarter, we talked about the third quarter from continuing operations, so that we're really not, for that purpose, trying to estimate the timing of the AER disposal.

Okay. Let me ask the question may be a little differently, Fred. The 6 cents in EPS to which you all make reference in the press release – that would be a full fiscal year 2003 EPS expectation at this point. Is that fair? Had you had AER consolidated for the full year?

It may be a penny higher. Maybe a penny higher. So for the extra 30 to 45 days that it was generating EBIT, presumably we will not own it.

Okay. So, say, $1.31 to $1.35 is what the apples-to-apples figure would have been had you not divested AER and excluding capital structure changes. Fair enough?

Yes, somewhere in that range. There's may be a half a penny to a penny swing here we're talking about.

Okay. And then turning to capital structure changes then, the new guidance that you've issued of $1.24 to $1.28 – that does not contemplate use of proceeds from the divestiture, i.e., share buybacks of up to $150 million approved by the Board, pursuant to the divestiture or further deal averaging – is that fair?

Right.

Okay. And you continue to expect, from a capital structure change standpoint, about $250 million or so of after-tax proceeds from the divestiture such that the deal should be about EPS neutral or maybe a little better, depending on where you buy back the stock?

Well, we expect at a minimum, $225 million dollars of after-tax cash proceeds. As you know, there's a $40 million dollar subordinated note, which the seller has the right to pre-pay, in the amount of $25 million in the first 12 months, so that's up to the buyer as to what they will do. either at the closing or shortly after the closing. We will then take the proceeds and repay debt. And we have not made any particular assumptions one way or the other about share buybacks.

But I think, Adam, if you look at that repayment of debt, you repay marginal debt; you don't pay average debt. And marginal debt is at a low rate right now.

Okay.

So something like a couple percent.

Okay, so you would repay marginal debt from your revolver?

Right.

Okay. And then buy back shares on top of that, with the $150 million new authorization.

We may or may not at some time in the future.

Right. I mean, the base is to be determined.

Okay. Fair enough. Turning back to the operations, just two quick questions if I may with respect to the Uniform business. Could you comment a little bit on the recent management changes at Uniforms, and what that might portend, both in terms of your ongoing shifting of garment manufacture offshore, as well as potential thoughts around laundry capacity utilization – capacity reduction, I'm sorry.

Sure, this is Bill Leonard. You know, [Tom Bozer] [phonetic] we made the President of the Paramount Uniform and Career Apparel group. Tom has been with us for a long time, and he had been the President of our direct marketing companies, [indiscernible]. And we just felt that – I was doing that job in my spare time, and that as big as that segment is, we need a full-time person there. I think the business is running well in this economy; it's a tough economy for them, and I think Tom's leadership is going to really help us down the road.

As far as garment manufacturing, we mentioned last quarter that we're closing down what was remaining of our [indiscernible] manufacturing operations. That has been closed, and it's all been moved to Mexico. So as far as our manufacturing, we're doing more in Mexico now than ever before, and clearly we think there will be significant benefits out of that.

Okay. And any thoughts around, at this point, capacity reductions on the laundry plant side, or is that too early to say?

No, I don't see any reason for capacity reductions at all.

Okay. Thank you all very much.

Thank you. Our next question comes from Brad Safalow. Please state your question.

Hi, just a quick follow-up. On the acquisitions that you completed during the quarter, I know of at least one on the Uniform side in the Syracuse area. Is there anything else on the Uniform side that was completed during the quarter?

There was just one other small one in Nebraska that was made in the quarter.

Thank you very much.

Thank you. If there are no further questions, I will now turn the conference back to Mr. Sender to conclude.

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