Aramark (ARMK) 2003 Q3 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, to the ARAMARK Corporation's Third Quarter Fiscal 2003 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are on 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 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 third quarter 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 third quarter results, after which there will be an opportunity for our phone-in participants to ask questions to our team. 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 press release, 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. 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 matters that are not historical facts, including remarks about future expectations, anticipations, beliefs, estimates, plans, and prospects for ARAMARK, constitute forward-looking statements for the 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 ARAMARK's 2002 Form 10-K. 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. Joe?

Good morning, ladies and gentlemen, and thank you for taking the time to join us today. I'd like to touch on some of the highlights of our operations and then ask Fred to go into more detail about the financial performance during the quarter.

As an overall comment on the third quarter, I'm pleased to say that our financial and business performance met our expectations and showed positive trends in several important areas of our business that have been a challenge to us in the past few quarters.

Our year-to-year new business is above the strong and successful full rate of 2002, while lost business continues to be significantly lower than prior year. As a result, our net new business is higher than prior year, and we look at this as a source of positive momentum for our future results. Our client retention rates continue to improve, up to the mid-90s, about two percentage points higher than at this time last year.

ARAMARK's sales for the quarter were $2.3b, up 10 percent over third quarter last year. Earnings before interest, taxes and other income was $128m, an increase of 2 percent over the same quarter last year. Income growth, while in line with our previously disclosed expectations for the quarter, was below the sales growth, principally due to the softness in our Sports and entertainment business.

Our income per share from continuing operations, excluding several unusual items which impacted both this year and last year's third quarter, increased 7 percent to 31 cents from 29 cents. In a few moments, Fred will take you through the reported results and the several unusual items that affected both this year and last year.

ARAMARK continues to generate significant cash flow from its operations and we will be managing our cash flow prudently, trading value for our shareholders as evidenced by the recent tender offer for a portion of our expanding debt, the repurchase of our shares, our investment in the business, and our pursuit of acquisitions. We also completed the sale of ARAMARK Educational Resource in the third quarter and received approximately $250m in cash proceeds.

The overall ARAMARK organic growth rate for the third quarter was about 2 percent, in line with our second quarter of 2003 performance. Our International segment generated strong year-over-year organic growth, and we're particularly pleased that the organic growth in the Business, Education and Healthcare areas of our domestic Food and Support Services operations improved over the second quarter.

Based on our current run rates, we expect to report positive year-over-year organic sales growth in our domestic Business Services operations in the fourth quarter. On the other hand, as we anticipated and incorporated into our third quarter guidance, our Sports and Entertainment business was particularly weak in the third quarter, driven by two dynamics: first, fewer visits to national parks, which were down 10 to 15 percent at many destinations; and second, lower baseball results due to decline in attendance, fewer games scheduled in the quarter, and the rainy weather on the East Coast throughout the quarter. Although sports attendance has recently improved, we're not yet seeing any sign of pick-up in travel activity at our national parks accounts as consumers still seem to be paring their discretionary travel spending, and some of our sites are experiencing less-than-optimum physical conditions, which we, of course, cannot control.

Now, before I turn the discussion over to Fred, I'd like to share another Mission One success story with you from our Healthcare group. Our partnership with the Mount Sinai Hospital in New York started with ARAMARK providing housekeeping services to the hospital in 1982 and has grown over time to add some additional services.

Today, as Mission One goes into full gear, we have recently been awarded the contract to provide patient food and nutrition services, laundry management, and retail food operations in addition to our existing portfolio of services, such as patient transport and environmental management for the 1,000-bed Mount Sinai campus. As a result, we have built a small housekeeping partnership into a $20m Mission One partnership. And as true partners since 1998, we have also been able to save Mount Sinai several million dollars annually. This is just one example of the impact of Mission One and our success. We continue to have terrific cases of Mission One achievements throughout the implementation of all of its components; that is, retention, base business growth, new business building, and the one best team. Year to date, over 10 percent of our new sales were directly related to specific Mission One activities.

And now, let me turn the program over to Fred Sutherland to discuss the financial results of our individual business segments and some new business wins. Fred?

Thanks, Joe.

As Joe said, our overall performance was in line with our expectations for the quarter.

Our sales from continuing operations for the third quarter of fiscal '03 were approximately $2.3b, up 10 percent from a year ago.

Consolidated net income was $89.3m, or 45 cents per diluted share, compared to $72.6m, or 35 cents per diluted share, in the prior year's third quarter.

Income from continuing operations was $63.9m, or 33 cents a share, compared to $65.3m, or 32 cents per share last year. This result, as you know, excludes both the net income of ARAMARK Educational Resources, which we did continue to own for a portion of the quarter, and the net after-tax gains of $23.6m from the sale of this business, which is reported as a discontinued operation.

As Joe mentioned, during the quarter, we completed an economically beneficial prepayment of a portion of our debt, resulting in a $7.7m pre-tax extinguishment charge, which is included in our interest expense for the quarter.

In addition, during the current quarter, we settled certain open tax years and reduced our income tax provision by $8.4m. We, therefore, see a lower effective tax rate this quarter of 27.2 percent, versus 37.5 percent for the first six months. The net after-tax effect of these two items increased income from continuing operations by two cents per share in the current quarter.

In the prior year's third quarter, as you recall, we reported as other income the sale of an investment and a previously divested business, which increased income from continuing operations by about $6.4m, or three cents per share.

Excluding both the 2002 and the 2003 items for comparison purposes, earnings per share from continuing operations was 31 cents in 2003 compared to 29 cents in 2002, an increase of 7 percent. We have added to our website a reconciliation of the above-mentioned items to the as-reported results.

Earnings before interest, taxes, and other income was $128m. The earnings before interest, taxes, and other income margin was 5.5 percent, 40 basis points lower than the third quarter of '02.

Expected loss from the Fine Host operation acquired in December and softness in our Sports and Entertainment and Uniform operations reduced the current quarter margin. We were pleased that the decline in our Uniform margins versus prior year was much narrower than we've seen all year and that the overall margin was up sequentially versus the second quarter. Margins in our other Food and Support Services businesses were generally up.

Sales for the third quarter of fiscal '03 and our largest segment, Food Support Services U.S., were about $1.6b, a 9-percent increase over the prior-year quarter. Organic sales growth for the quarter was 2 percent. As Joe mentioned, Business Services organic growth improved and was a negative 2 percent for the quarter, compared to the negative 7 percent for the first six months of the fiscal year.

Some of the new accounts that we signed in the quarter included ExxonMobil, the U.N. headquarters of New York City, and Educational Testing Services' Chauncey Conference Center.

Mid-single-digit organic sales growth in the less economically sensitive Education sector was fueled by strong based business growth. We were pleased to sign agreements with Florida State University and the William Penn School District, which was a Mission One cross-line of business win.

As anticipated our Sports and entertainment business showed weakness in the third quarter, driven by fewer national park visitors, down 10 to 15 percent at several of our larger park operations. Also, major league baseball attendance at our facilities was down about 7 percent from last year, some of which is due to a shift of games from the third to the fourth quarter. Our success with the NBA and NHL playoffs in the third quarter helped to offset some of the challenging baseball comparisons.

Organic sales growth in the sector was slightly negative this quarter, and the seasonal nature of the business accentuated the margin pressure, resulting in profit in this area of our business being well below prior year.

Consistent with our stated strategy of expanding into mid-size markets, we opened new business with the Kansas City Convention Center, the Red Rock Amphitheater in Denver, and the Lexington Legends, a single-A ball team affiliated with our partner, the Houston Astros.

Facilities' organic growth was in the low single digits, with retention rates in former ServiceMaster accounts exceeding 95 percent, up from the high 80-percent level at the time of the acquisition. We fully anticipate that Facilities' organic growth will begin to accelerate in the fourth quarter as a result of the cumulative impact of strong new business sales and higher retention rates.

The Clinical Technology Services acquisition, completed last October, has now been integrated with our own clinical equipment business and is performing well. We signed new business with the University Medical Center in Lubbock, Texas and the McKinney School District, also in Texas, and with Empire Health in Washington State, a Mission One success story, where we are providing a multiple of services, including patient food, clinical equipment maintenance, and a complete facilities manager program.

In our "Other" sector, where we report our Healthcare and Corrections results, we delivered strong high-single-digit organic sales growth consistent with prior quarters. In addition to Empire Health, recent new contracts awarded include Benefis Healthcare and the Milwaukee County Correctional System.

Third quarter operating income for the Domestic Food and Support Services business was down slightly from the prior year. As previously disclosed, in the third quarter of 2002, we received business interruption insurance proceeds of $3.2m related to our 9/11 claim, which was included in the domestic Food and Support Services segment operating income.

In the third quarter of '03, we incurred losses from the expected impact of integrating the Fine Host acquisition. These two items caused the operating income margin decline of 2003's third quarter. Margins improved in most areas of our domestic Food and Support Services operations, offset by a margin decline in the Sports and Entertainment business. While we see some signs of improvement in baseball attendance and a higher number of games to be played this quarter, we remain rather cautious on our outlook for the National Parks business in the fourth quarter.

Turning now to our Food and Support Services International segment, sales were $363m in the third quarter of fiscal '03, 21 percent above sales for the same quarter last year, with favorable currency translation accounting for about 15 percentage points. The organic sales growth of about 5 percent was two percentage points higher than the growth rate in the second quarter of '03.

Our U.K. business continued to be strong, and our operations in Spain benefited from new business in the Healthcare and Education sectors.

Operating income in this segment for the third quarter of fiscal '03 increased 37 percent to approximately $16.2m. Favorable currency translation contributed about 18 percent.

We signed new contracts with Bombardier in Canada, Johnson Controls in Mexico, and Harrods in the U.K.

Let's move now to ARAMARK's Uniform and Career Apparel segment, and I'll start with the Rental segment first.

Third quarter 2003 sales of $254m were up about 1 percent year over year, while organic growth was flat versus a decline of 1 percent in the second quarter. New business sold was about 12 percent of the base, with about 60 percent of the new sales coming from first-time users of Rental programs. Lost business was about 8 percent, and about a third of this came from accounts that simply went out of business. Price increases contributed 1 percent, while base business declined 4 percent, comparable to the rate of decline in the second quarter.

We were quite pleased that operating income of $29m in the current quarter was down only 4 percent from the prior-year quarter, the best year-over-year comparison in some time. The margin improved from the second quarter, and we are clearly seeing the results of our continued cost reductions, operational improvements, and pricing initiatives.

Third quarter margin of 11.4 percent was 60 basis points below the same quarter last year, representing the smallest gap again that we have seen in some time. Of the 60 basis points' decline, about 40 basis points was due to higher energy and fuel costs.

In the Direct Marketing segment, sales for the third quarter increased 2 percent compared to the third quarter of '02. Organic growth was a negative 1 percent, a slight improvement to the negative 2 percent in the second quarter '03.

Operating income was up 9 percent based on a favorable mix of product sales and the impact of an acquisition. Our business continued to generate strong cash flows. For the nine months' internal cash flow, an operating metric that we defined 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 $209m, compared to $193m last year.

Net capital expenditures for the first nine months of '03 were $163m, up from last year's $134m, driven primarily by investments to support new business and productivity-based upgrades to our Uniform facilities.

For the full year, we expect that depreciation and amortization will be comparable to capital expenditures. Our business's working capital needs tend to be seasonal and a significant source of cash during the fourth fiscal quarter. We expect this historical trend to continue this year.

Our balance sheet and the current liquidity position remain quite strong. Total debt outstanding at the end of June '03 was about $1.9b. Our strong cash flow has enabled us to continue to make investments in our business, repurchase a portion of our outstanding debt, pursue value acquisitions, and repurchase shares. As a reminder, in the third quarter, we also received proceeds of about $250m from the sale of ARAMARK Educational Resources. In the third quarter, we also purchased 2.4m Class B common shares for about $52m.

As you know, the last of our employee share lock-ups expired in June. We have been quite pleased with the execution of all of the unlocks, and we now consider this issue to be behind us. The current float of our Class B common stock is estimated to be approximately 94m shares, up from 34.5m shares at the time of the IPO.

To update our guidance, we continue to expect fiscal year 2003 sales from continuing operations of $9.2-9.4b and full-year diluted earnings per share from continuing operations of $1.26 to $1.30, which is simply our current guidance increased by 2 cents to reflect the impact of the third quarter debt repurchase and the tax adjustment, which I discussed earlier.

As you know, fiscal 2003 is a 53-week year, and the fourth quarter contains an extra week. Fiscal 2004 will be a normal 52-week year.

Now, let me turn it back to Joe to wrap up.

Let me finish by saying that our commitment to continue to manage the company prudently is independent of market conditions. We have a strong, disciplined management team working on the entrepreneurial culture of significant management ownership. There continues to be a movement of enterprises to outsource their non-core functions, and we are well positioned to benefit from this trend. We continue to generate strong cash flows, our new business is up over last year, and our client retention is in the mid-90s, much improved from last year, and we believe this is a terrific platform for the future of our company.

In our first 18 months as a public company, I'm proud to note that we have continued our forward business momentum during one of the most challenging economic periods in recent history. As you know, we strive to add value to those we already serve, and we look to improve our market position through profitable growth initiatives.

Let me conclude with briefly just one illustration, additional illustration of Mission One. We've spoken to many of you about our growing relationship with the University of Pennsylvania. You may recall we started this in '87 when we began managing a conference center there. Our relationship with Penn has grown dramatically over the years, and last year, we were awarded the campus food service contract. This piece of business is very valuable to us, and we are very valuable to our client, so much so that we have already been awarded a contract extension.

Now, this success in value is more than just our opinion. In a recent editorial from the independent student newspaper -- and as you know, student newspapers are quite independent -- the Daily Pennsylvanian, the editor stated, and I quote, "The efforts of ARAMARK administrators should be commended, and they might even lead Penn to a goal that has been so unattainable in the recent past, increased meal participation." We're pleased with the feedback from the Penn students and strive to earn this level of customer satisfaction across our broad portfolio of clients.

Let me say again that our team is focused on delivering quality solutions to our partners, both old and new. We have established ambitious but attainable growth objectives for ourselves that we believe will benefit our shareholders, our clients, and our employees, and we continue to thank you for your ongoing confidence in our organization.

Let me turn it back to Gary.

Thanks, Joe.

Joe, Bill, and Fred will now be happy to take a few questions. As you ask your question, I please ask that you state your name and affiliated firm, and also please limit your follow-up questions to just one or two in order to give everyone an equal opportunity to chat with our management team. I'll now ask the operator to open up for questions.

[Caller instructions.]

The first question comes from Brandt Sakakeeny. Please state your affiliation, followed by your question.

Thanks. Good morning. It's Brandt Sakakeeny at Deutsche Bank. Questions for you.

First, Joe, can you comment on the pricing environment in the Food and Catering business? Have you seen specifically, I guess, Sodexho and Compass be a little less aggressive on share gains?

And, second, just for modeling purposes, Fred, can you just let us know what tax rate we should use for the fourth quarter and for the full year? Thanks.

Let me try -- thank you for the question. Let me try to answer the competitive situation. These businesses that we operate in, both the global food business and the uniform business, are extremely competitive. They're competitive not only vis-à-vis the two companies, they're competitive with a whole raft of local companies. And while individual contracts sometimes get more competitive, more important to Company A versus Company B, I think overall the environment is quite competitive, has been quite competitive, continues to be quite competitive. We don't see any significant trends that say it's less competitive or more competitive across the board.

Brandt, on the tax rate, our normal tax rate is 37.5 percent. But I think that's what we show for the first six months, and I think it's reasonable to expect that we would go back to somewhere in the range of 37.5 percent for the fourth quarter.

Okay, great. Thank you very much.

Thank you. Your next question comes from Chris Gutek. Please state your affiliation, followed by your question.

Thanks. Good morning, it's Chris Gutek with Morgan Stanley. Hi, Joe and Fred. A couple quick questions.

In the press release, you guys stated that you're seeing some sectors of the economy showing some positive signs, and certainly the year-over-year comparison for the Business and Industry segment is looking more favorable. I guess to some extent that probably does have to do with year-over-year comparisons, and I'm curious to the extent that labor markets remain weak, what actually is the driving force behind the improvement in Business and Industry on a month-over-month, Q-over-Q basis?

Well, I think that you put your finger on a couple of the issues. One is we're [lapping][ph] lost business of last year, so that's one comparison. Number two is our retention rates are much higher, so that helps an awful lot in year-over-year comparison. I would say that we're seeing a slowdown in the rate of decline, and therefore, asymptotically, theoretically, you would reach a zero at some point in time because some businesses are going to stay in business, and some employees are going to stay employed at a certain point in time. So I think that decline is slowing down quite a bit overall, and I think those two are contributing to it. It's interesting, and Bill may want to comment on the Uniform business, but the fact of the matter is in the Uniform business, we're not seeing any significant improvement at all, and the lost business [is] about the same rate, though.

Right, correct. Chris, the shrinkage hasn't gotten any better at all. I think some of the difference is in the Business Services, I think you probably see a little bit of pick up in some of the white-collar businesses that you're not going to see in the blue-collar industry, and, clearly, whether it be refreshment service or uniforms, we're living in a blue-collar world.

And our -- this is Fred -- because our net new business is clearly benefiting our overall organic growth rate in Business Services.

Okay. And then one unrelated follow-up if I could. Fred, you mentioned the working capital has quite a bit of seasonality, but still nine months here to date, the working capital has consumed significantly more cash versus the prior year. Do you actually expect to make that all up in the fourth quarter? And if not, why have so much more cash consumption there this year versus last year?

Well, there are a couple of reasons for it, Chris, a couple of major reasons, and then some minor reasons.

One of the factors in the working capital is our accounts receivable securitization facility, and that in and of itself accounts for about a $30m or so difference in the working capital trend, first nine months of last year versus first nine months of this year, which is to say that we have basically sold less receivables than we've sold during an equivalent period last year.

The second factor is that if you look at nine months last year, nine months this year, in both those periods, we've had companies that we've acquired that were not in for the full period. So last year, for example, ServiceMaster wasn't in for seven of the nine months. This year, Fine Host is in for four of the nine months. And because of that, we get some seasonal fluctuations in the working capital because you have acquired companies that are in only for in the full period one year and then a portion of the period the second year.

The third factor, I think, if you look at our full-year working capital for last year, '02, you'd see that it was over $100m source of cash. Now, some of that was the tax benefit that we got from the extensive stock options, which was 40 or 50 million, but even taking that out, it was a big source. And we were very successful in '02 -- '01 and into '02, in some one-time programs to really push our working capital and actually able to generate a source. And while we still think that the working capital characteristics of the Company are the same, we don't expect to generate for working capital to regularly be the big source of cash that it was last year. So we still -- as I say, we expect to have a significant source of working capital for the year, and the model of the Company is still the same, that working capital we don't expect year over year to be a big use of cash.

Okay, great. Thanks.

Thank you. Your next question comes from Chris Hussey. Please state your affiliation, followed by your question.

Hi, it's Chris Hussey with Goldman Sachs. Gentlemen, can you just walk through a little bit on the Sports and Entertainment business? Maybe just, Fred, walk through the mechanics of how those margins get impacted and maybe give us a little bit of direction of how much impact was on the margins from the Sports and Entertainment business as you saw the Food Service margins go down fairly significantly year over year. And why if we get sort of a movement of some of the gains into September quarter from the June quarter, wouldn't we get a nice little kicker here in the fourth quarter?

Yeah, Chris, a couple of factors. As I mentioned, if you look at the year-over-year Food margin and you look at the -- you've got to start by looking at the business interruption proceeds last year, the impact of Fine Host this year. Those essentially accounted for 100-percent of the decline in the Food Service margin year over year. So if you say, okay, without those, we essentially are looking at a flat margin, then what happened within Food Support Services Domestic is, as I mentioned, most of the businesses improved their margin, you know, pretty much in line with our 10 to 20 basis points' target per year. On the offsetting side, you had Sports [and] Entertainment margin decline, and that pretty much was a wash.

If you look at Sports and Entertainment itself, some of the attendance decline in major league baseball, we will pick up in the fourth quarter because some of it were just rainouts, and a fewer number of games that we'll flip into the fourth quarter. That's somewhat of an effect. It's not a huge effect, but it clearly will help us somewhat in the fourth quarter.

And in the Parks business, you know, we just suffered significantly in that business because we did have a 15-percent decline in visitation. As you know, that business is seasonal, and that drops through -- you know, in a way, a little bit like a hotel. If you lose that incremental visitor, the drop-through on that is fairly significant.

Great. And the Fine Host -- what was the anticipation there on the Fine Host? How long will this continue to have sort a negative impact on margins?

We'd expect that Fine Host -- as we move into the end of this year and clearly as we move into next year, you know, we expect Fine Host to be, you know, profit-neutral to positive as we move into '04.

Okay, thanks, guys.

Thank you. Your next question comes from Kevin Monroe. Please state your affiliation, followed by your question.

Good morning. It's Kevin Monroe with Thomas Weisel Partners. Just really one question. You said you expect kind of a -- you know, the first positive quarter in the Business Services segment within a while. Is that more of a factor of things improving, or is that a factor of an anniversary of a large contract loss last year?

And, also, what gives you -- what are kind of the signs that give you the confidence that you're going to see the pick-up in the facility business, also? Thanks.

Okay. Kevin, let me answer both of those.

In the Business Services business, as we mentioned earlier, our net new business is positive. And as that works its way through quarter by quarter, we see a lift in the growth rates. We've seen some minor improvement in the base business, but, you know, that hasn't been the driving factor. And I'm sure everyone saw the employment report in July, the employment report -- you know, GDP was up in the June quarter, and that was a plus, but the level of employment in July actually, I think, was down a little bit, which was a minus.

In the Facilities business, there were contracts that were lost by ServiceMaster just around the time of the acquisition, nothing real extraordinary, but a couple of major contracts that were lost, and those contracts actually did not come out for a while for the -- they really came out of the mix in the first six months after we acquired the company, six months or so. So it's really [lapping][ph] some of these contracts that were lost just before the acquisition that we're still in the revenues for a while after the acquisition because they don't come out right away. So as we project forward and look at the new business and the lost business, we're fairly comfortable at this point that we'll start to see that growth rate pick up.

Let me just add to that. We are very precise in the way we measure organic growth here. We include -- even though as Fred just mentioned, the decision to cancel those contracts occurred before we actually closed on the transaction, while the actual closing occurred on our watch, we counted it as a loss on our watch, which is the strict way of counting organic growth. And that certainly will not repeat itself because we've told you that the retention rates certainly in our last couple of quarters on the ServiceMaster have improved significantly and are now matching our overall rates, which we expected at the time of the acquisition. That's what gives us confidence to expect that the growth rates will improve.

Thank you.

Thank you. Your next question comes from Jeff Omohundro. Please state your affiliation, followed by your question.

Thanks. It's Wachovia Securities. My first question relates to International. I wonder if you'd elaborate a little more about what's going on in the U.K. and Spain, maybe to explain the drivers there, and whether you think that momentum can continue. And, also, how your acquisition pipeline looks.

I'm going to let Bill talk about the International since he just came back from there over the weekend.

You know, the U.K. has had a good growth for the last couple of years. The retention over there has been better this year than in the last couple of years, so overall, the business looks well, looks good. As far as Spain, Fred mentioned that we've had a very good year, again, both on the Healthcare side and on the School side. He did mention acquisitions [inaudible], that we just made a small acquisition in Spain as well that really held most of the business there, and it's going very well, I think.

Let me pick up on the overall acquisition pipeline. You know, we continue to look at acquisitions all the time. At any one time, we probably look at a handful of acquisitions. Acquisitions require usually two parties to arrive together, and it's sometimes very difficult to predict how the other party's going to react at any point in time. So we had a very active 2002 year in terms of acquisitions with, you know, Fine Host and CTS and the closing of ServiceMaster.

This year, that is the '03 year, has been a little quieter overall. Bill just mentioned a small one. We also did -- I guess, Bill, three small Uniform acquisitions closed, but there's nothing significant there, and here we are in early August, and we probably don't see anything that would close during this calendar year at all for us. But, you know, you never can tell. So it's very difficult to predict acquisitions. We are still very active in pursuit of acquisitions. All of you should expect that any property in our sectors, whether it's the Uniform sector or the Food sector we look at. We continue to look at them both domestically and internationally, and if we don't achieve it, it's because -- not because we didn't look at it, because our value issues are different than somebody else's value issues.

Very good. Thank you.

Thank you. Your next question comes from Adam Waldo. Please state your affiliation, followed by your question.

Yes, good morning, everyone. Joe, a couple of high-level questions around sources of capital from the business to return to shareholders, if I may. As you think about the new tax law signed by the President on May 26, can you update us on the thought process, at least at the management level, and possibly at the Board level, around inaugurating a dividend?

And, secondly, can you give us your sort of hierarchy of capital return priorities as between repayment of higher-cost term debt, dividend, share repurchases, and potentially pulling capital out of the Uniform business by retiring laundry or garment plant capacity?

Let me address it first overall. One of the wonderful things about this company and the thing that we have talked to all of you about for a long time is the prodigious cash-generating ability of this company. It's a wonderful model. You heard earlier the question of Fred about the working capital. We've also told you that the free cash flow about equals our net income plus or minus 5 or 10 percent in any one particular year, and that just continues to operate. So within that, the question becomes, what do you do with the cash flows?

And as you also know, there are four things that one can do with the cash flows.

In terms of hierarchy, Adam, I would say, first and foremost, we want to invest it back in our business to grow our business organically.

And number two is we want to maintain a certain debt rating, and we're very keen on that, and we think we're almost there on that particular one.

Number three is we continue to pursue acquisitions, and we just talked about the acquisition process a couple minutes ago.

And number four is return cash to the shareholders via either dividends or share buybacks. Now, the recent change in the tax law makes returning cash to the shareholders via dividends versus stock repurchases almost indifferent between the two, and our Board, just like every other board around the country of a major company is taking another look at that, but we don't have anything to report to you at this time on it, but we have that very much on our agenda.

Okay, fair enough. We'll check back with you in future quarters.

Turning to the business operations in the quarter, Fred, could you quantify for us in the U.S. Food and Support business the aggregate dollar value of new business written year to date and the year-over-year rate of change?

Adam, we don't disclose on a quarter-by-quarter basis the aggregate value of new business written. What I can tell you is that on a year-to-date basis, we have written more new business than we wrote last year, and the lost business is also down significantly on a year-to-date basis from last year.

Okay, maybe trying to get at it a different way, Fred, could you give us -- without giving us the dollar value, could you give us a rough rate of growth on a nine month-to-nine month basis?

It's in the sort of mid to high single -- well, on new business, it's in the mid to high single digits.

Okay.

Lost business is down double digits, 20 percent, or -- the lost business is down quite a bit more than that.

Terrific. Thank you all.

Thank you. Your next question comes from Michael Schneider. Please state your affiliation, followed by your question.

Robert W. Baird. Good morning. Fred, along that same line of organic growth, could you possibly dissect the 2-percent U.S. Food and Support Services revenue between, let's say, new business written and its contribution to the 2-percent organic growth versus the average check size either increasing or decreasing, and then lost business, so we can get a sense of where the 2-percent organic growth is coming from?

Our overall base business performance in Food and Support Services is flat to slightly positive across the businesses, and that's really comprised of some of the non-sensitive businesses being up and the economically sensitive businesses being flat to slightly down. And the balance is really driven by the net new business.

So the average check size would be flat to up right now marginally?

It's really -- yeah, I'd say it's flat to up. That's a really component of the base business growth, and we tend to lump together participation, average check size, and obviously employment changes into the base business.

Okay.

The average check size is probably up slightly.

See, they have a --

It's not really driven by merchandising programs.

This is Joe. The average check size is one part of our organic growth. New concepts, increasing locations in existing accounts are also part of our organic growth. We don't differentiate between those two. And what we task our people with is growing base business in their existing locations. That is further complicated by -- and Fred went through this in some detail -- the mix issue. So in economically non-sensitive businesses, we have significant base growth, both mid to high single digits. And in our economically sensitive, as we have told you, we have continued to have negative growth rates. So it's very difficult to give you a precise rate for the 2 percent because first you've got to go through the mix of the businesses, and then you've got to go within business -- the new sales base business growth and the other part, so the matrix [would probably be][ph] three-dimensional if we really put it all together.

Okay, thank you. And then drilling down one more level in the Food business domestically, the Education growth rate seemed to have decelerated a bit from the last three quarters to the mid-single digits this quarter. Is that a function of some contract losses, or could you give us some color as to why things may be decelerating somewhat, or is it just all for comps?

I think it's all of the above. I think that the base business growth continues to be, you know, quite strong. I think that our new business is healthy, and I think, you know, the K-through-12 business had a little weaker winter season. We picked up a couple points on that later on in the spring. But, you know, one or two percentage point differentials there really are not very significant in one small part of the business.

Okay. And then just final question on the Uniform business. No-programmers seemed like they were up nicely sequentially from roughly 50 percent of the new wins to 60 percent. Is that a function of you accelerating the sales growth, the sales force growth, and maybe could you quantify what the sales force size is up year over year?

Well, I don't want to get into the actual size of the sales force other than we've stated, you know, we have a program in ramping it up as we go. The no-programmer was helped greatly by a lot of on-premise laundries that we had at some food manufacturers where we went in and took over their programs, and that really was a big boost for the quarter.

Is that a new program that you've launched, or just a new emphasis?

I'd say it was always an ongoing emphasis. I think we just were very opportune, and we had some very nice size accounts that we convinced they really needed to get out of that part of the business.

Bill's being modest. We were just very successful in getting new business.

Okay. Thank you.

Your next question comes from Adam Waldo. Please state your affiliation, followed by your question.

Just a quick follow-up, if you could summarize for us the drivers of the Rentals' new and renewal business pricing change year over year in the aggregate in the quarter, or if you'd prefer, I'll follow-up offline with Gary.

Yeah, we said that, Adam, the pricing impact was about 1 percent, and we don't really -- we're not able really to break that down between new and renewals.

Okay.

We've said that the pricing pressure, you know, in Uniform Rental business continues, and, you know, it's not unusual for us to renew an account at a lower price because of that increased competitiveness in the market. And I'd say that dynamic probably really hasn't changed much, would you say, Bill, over the last -- since last quarter?

No, it's as competitive as it's ever been.

Bill and Fred, would you be able to directionally quantify for us now the sort of state-of-the market price gap you're seeing between price per change in new business and price per change in renewal business if that's possible?

That would be almost impossible to do. I mean, you know, you still have plenty of customers that are happy, that are satisfied that you renew at the existing prices, and then there's other examples where to keep a customer, you know, you're going to have to take a price decrease.

Okay. I mean put another way, we've heard some things in the market that suggest maybe there's a price gap of 15 to 20 percent now in some parts of the country between price per change on new business and price per change on renewal business. Are you seeing anything like that in your business, Bill?

I would think it's probably a little less than that.

Okay, thank you, all.

Thank you. Your next question comes from [John Ajay][ph]. Please state your affiliation, followed by your question.

Hi, [Shumway Capital][ph]. Another question on the Uniform side. In terms of price actions you took in the quarter, you know, can you talk about how much you did in terms of surcharges versus, you know, raising rates on existing business, you know, faster than inflation and the timing of those things, whether or not we saw the full effect of that this quarter or if there's going to be more of a full quarter effect next quarter?

And, also, on the energy cost side, I notice that natural gas prices have been going down nicely. How much is that going to help you going forward?

Well, let me address the surcharge. There really wasn't a surcharge. What we did was we have a service charge, and due to the increased cost in natural gas, what we did was we raised the rates. And, you know, it stuck well. It has been all in the quarter, though. I don't think you'll see another uptick going into the fourth quarter. And, yes, we are hoping that the decrease in the natural gas rates will help us.

With only one [inaudible] on your guidance, you know, why didn't -- is there a reason why you're not using maybe some of the increased visibility we have today to tighten your range a little bit?

No, we're comfortable with the range where it is.

Sorry?

It's Fred. Go ahead, Fred.

Yeah, we're comfortable with the range where it is.

Okay, thanks a lot.

Fred, go ahead. Fred would like to --

Yeah, if Chris Gutek's still on the line -- Chris, are you on?

He can't talk.

Okay, he can hear. That's fine.

Oh, he can't talk. Okay.

Just to follow up on your working capital question that you asked earlier. One, somewhat of an imponderable for the fourth quarter, we do expect working capital to be a source for the fourth quarter. We expect overall that the working capital characteristics -- and we know that they're not really any different. There is one potential slight fly in the ointment for the fourth quarter, and that is the 53rd week because our -- with the extra week in the quarter, we'll be closing -- the relationship between our billing cycle and our period end is off a week, and it's a little hard to predict what impact that may have on working capital for the fourth quarter. It's really just the accounting of when we close the books. But to the extent that our billings in that last quarter exceed our collections, that would have a negative impact on working capital or vice versa. And since that only comes along once every six years, you know, that makes it a little bit harder to predict. But having said that, we still think working capital's going to be a pretty significant source in the fourth quarter.

Your next question comes from Josh Rosen. Please state your affiliation, followed by your question.

Yeah, thanks. It's Josh and Greg with CSFB. Just wanted to follow up on the continued improvement you guys have made on the retention front. Is there any way you could just aggregate that -- how much of the improvement is really just as you guys have done a great job with the integration of ServiceMaster and brought the retention up there versus sort of the core legacy ARAMARK business and retention trends within that business?

The strength is across the board. It is not directly related to our legacy business. It's strong there, and we clearly have told you what we've done on the ServiceMaster side. So it's across the board.

Okay, then just as it relates to, you know, recent sales activity, anything, you know, from a momentum standpoint as you looked at -- throughout the quarter trends as you headed in the tail end or even into July here where you've seen business activity pick up with a little bit of the more optimism that surrounds the economy as a whole?

You know, it's hard to judge it on a week -- this business on a week-to-week basis. A lot of the sales, our longer-term sales, some of them started six months ago, some of them started a year ago. We are continually working on several significant projects, and they just take a long time to come to fruition. So I wouldn't say that we would translate directly the little bit of optimism that we have seen or that people talk about in the economy in the last few weeks into direct results into -- for our businesses this quarter.

Okay, thank you.

Thank you. Your next question comes from Monica Aggarwal. Please state your affiliation, followed by the question.

Good morning, Monica Aggarwal from Merrill Lynch. I just wanted to make sure that, you know, the takeaway then is that on both the U.S. and International side, you know, the organic sales growth should accelerate in the fourth quarter on a consecutive basis from the third quarter. Given that the base business is improving a bit at least on the Business, Healthcare and Education side and then Sports and Entertainment may not be as negative as in the third quarter; is that fair comment?

Monica, there are a lot of moving pieces to the overall growth rate, you know, and we can't predict it with certainty.

Right. It looks like, you know --

There are a couple big pieces where we expect the impact in the fourth quarter to be positive.

Okay. Because I mean overall if you were to look at a business, it looks like, you know, on the U.S. side, it was a bit disappointing, whereas you made it up on the International side. So I don't know if that's the type of trend you're expecting in the fourth quarter, also?

Well, I guess I've pretty much said what I can say on it.

Okay. And what is your capex for the year?

The capital expenditures for the year we imagine will be somewhere in the 280 to 300 range.

Okay, thank you.

Thank you. Your next question comes from Lavon von Redden. Please state your affiliation, followed by your question.

How're you doing? It's actually Lavon von Redden with Hockey Capital. Joe, I just had a point of clarification. You were talking a little bit about the pricing environment, that really no change. Was that inclusive of, say, on the Food Service business some of the capital expenditure-type things that may be offered to clients to kind of win business?

I would say yes. Capital has always been part of the pricing mechanism some people have used in the food business, and, again, I think it is very, very account specific in this business, and generalizing about it is risky.

Okay, thank you.

Okay, due to time constraints, I'll now turn the conference back to Gary Sender to conclude.

Thank you, ladies and gentlemen. This concludes our conference for today. We expect to file our 10-Q hopefully early next week, and we will -- obviously, I'm available for any follow-up questions and answers. I hope everyone has a terrific day. Thanks for your participation.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-800-428-6051 or 973-709-2089 using ID number 298990. This concludes our conference call for today. Thank you all for participating, and have a nice day. All parties may now disconnect.