Aramark (ARMK) 2003 Q4 法說會逐字稿

Welcome to the ARAMARK Corporation fourth quarter fiscal 2003 earnings conference call. At this time, I would like to inform you that this conference is being recorded for rebroadcast and that all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS). I will now turn the call over to Gary Sender, Vice President of Investor Relations. Please proceed sir.

Thank you, and welcome to ARAMARK Corporation's conference call to review the fourth quarter and full year results of fiscal 2003. Here with me today are Joe Neubauer, ARAMARK's Chairman and Chief Executive Officer; William Leonard, the Company's President and Chief Operating Officer; and Fredrick Sutherland, our Executive Vice President and Chief Financial Officer. Joe, Bill and Fred will present an overview of our operating results, after which there will be an opportunity for phone-in participants to direct questions to our team.

Before we begin, however, a few housekeeping matters. As we discuss the operating results, 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 mention 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, (indiscernible), 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.

Thank you, and good morning everybody. I want to thank you for taking the time to join us today. I would like to touch on some of the highlights of our operations, and then ask Bill and Fred to get into more detail about our business and financial performance during the quarter, and provide the current outlook for fiscal 2004.

As an overall statement on the fourth quarter and the full year performance, I'm pleased to say that our people executed our business and financial models exceptionally well, and Bill and I are very proud to be leading them into our third year as a public company. As a client-centric organization, having the trust and respect of our clients is crucial to ongoing success. And keeping one's promises is an integral way to build long-term, strong, unlimited partnerships. Bill, Fred and I hope that you agree that we have operated this Company according to the strategies that we have shared with you, and our ongoing commitment is that we will continue to do so in the future.

Our top priorities are organic growth, operating margin improvement, the generation of strong internal cash flow -- all leading to double-digit earnings per share growth. I'm pleased to report that once again, our people have delivered solid results for 2003 in each of these areas, notwithstanding the challenging environment that we operate in.

Organic growth for the full year was three percent. Importantly, our organic growth rate picked up in the fourth quarter to 5 percent, led by improvements in both business services and facility services, as we anticipated last quarter. Our ability to continue to serve our clients is also demonstrated by the strong new sales year that we had in 2003. We sold a record of over $860 million in annualized new business in 2003, up over a very solid level of 2002. Cross-selling and multiple service line sales represented more than 10 percent of the total sales.

In our domestic food and support services group, this number is in excess of 15 percent. Now, considering that we have just been ten months into the launch of our Mission One initiatives, coupled with the leadtime that's required for these very complex efforts, we are quite satisfied with these results. On the other hand, our lost business declined by about 20 percent in 2003 as our client retention rates reached 95 percent, 2 percentage points over 2002. As a result, our net new business in '03 increased by about 50 percent over 2002, and this result is a great way to enter the new year of 2004.

In 2003, our overall Company operating margin, after eliminating the operating income impact of (indiscernible) acquisition, was stable, a significant accomplishment in our opinion, given the margin reduction in our uniform business and the national parks operation. For the year, our U.S. food and support services margin improved by 10 basis points, despite the significant profit pressure in our national park business.

The Company was able to generate significant cash flow. Once again, we executed successfully against our financial model of net capital expenditures equaling depreciation and amortization, and demonstrated our ability to continue to grow our business without significant investment in working capital. The result was that our internal cash flow matched our net income, and I anticipate no change in this model going forward. As a result, we are pleased that ARAMARK was able to again deliver double-digit earnings per share growth for the year.

As you saw in Tuesday's announcement, ARAMARK Board of Directors initiated a quarterly cash dividend of 5 cents per share. The Board's decision to pay a quarterly dividend was the result of our continued solid financial performance, strong cash generation, and was encouraged by the recently enacted tax law changes. The modest level of the declared dividend demonstrates a continuation of our prudent financial policy of maintaining a strong balance sheet and ongoing financial flexibility. You can be assured that ARAMARK remains committed to investing in the profitable expansion of our existing businesses, pursuing attractive new business opportunities -- including acquisitions -- maintaining a strong balance sheet and returning cash to our shareholders through dividends and share repurchases. Our strong cash flow should allow us to pursue all of these in the future.

Now let me turn the call over to Bill to review the results and some exciting new business wins.

Thank you, Joe. I'm delighted to share with you the actual results of the quarter and year. ARAMARK's sales for the quarter were $2.6 billion, up 19 percent over the fourth quarter last year. 2003's fourth quarter had one additional week versus the fourth quarter of 2002. For fiscal 2003, our team generated sales of $9.4 billion, 13 percent above the prior year, driven by a combination of acquisitions and organic growth. Our fourth quarter operating income, before other income, was $210 million. Excluding the positive impact of the receipt of insurance proceeds, which Fred will discuss in more detail, operating income before other income was $178 million, an increase of 10 percent versus the prior year quarter.

Reported income per diluted share in the fourth quarter of 2003 was 54 cents versus 40 cents in 2002. Our income per share from continuing operations, excluding the net positive impact of these several unusual items which impacted the year's fourth quarter, increased 18 percent to 47 cents, from 40 cents. For the year, income per share from continuing operations, excluding unusual items, was $1.26 versus $1.10 in 2002, a 15 percent increase. For the full year, ARAMARK generated 3 percent organic growth. While not in the range of our longer-term objective of 6 to 8 percent organic growth, we are pleased that our balance of economically sensitive and non-economically sensitive businesses allowed us to generate this topline performance.

The overall ARAMARK organic sales growth rate in the fourth quarter was 5 percent, significantly above the organic growth rate for our third quarter. The sequential strength of business services and our facilities organic growth was encouraging. Sports and entertainment organic sales growth rebounded to high single digits, due to the strong results from Major League Baseball. On the other hand, as anticipated, our parks and recreation business was still quite weak due to reduced tourist traffic. International food and support services generated 21 percent sales growth, aided by currency, acquisitions, and 3 percent organic growth. Uniform rental organic growth was flat, reflecting the ongoing challenging employment environment. We have not yet seen an improvement in overall employment levels, especially in the manufacturing sectors. Uniform direct sales organic growth was 3 percent, driven by strong demand in our (indiscernible) business.

Our team has been executing our Mission One strategy quite well since its February launch. We have analyzed each ARAMARK customer and prospect to determine how we can best serve them by providing additional or multiple offerings. We've designed and implemented reporting and incentive systems to capture the benefits of Mission One's 4 main fillers of retention, base business growth, new business and building the one best team. To date, over 10 percent of our new sales have an additional cross-sale or multiple line of business component, whether it's offering an additional service to an existing client or establishing a new multiple-offerings relationship. And as Joe said a few minutes ago, in our domestic food and support services group, where there is tremendous opportunity, over 15 percent of our new sales could be attributed to Mission One activities.

Before I turn the discussion over to Fred, I would like to share a couple of recent Mission One success stories with you. From our business services group, an exciting expansion with the Bloomberg Media organization in New York. Many if not all of you have Bloomberg terminals in your office, and therefore understand their passion for innovation. In February of this year, we began providing refreshment services to the Bloomberg office in Chicago. We added additional business over the next three months. In July, we learned that Bloomberg was looking for a single source food and refreshment services partner to serve their 22 offices and 4800 employees in the U.S. and Canada. In line with its 24 by 7 mentality and emphasis on innovation, Bloomberg's senior management team expressed its interest in a food program that was focused on new ideas, exciting marketing and merchandising and consistent service to (indiscernible) level. We offered a total ARAMARK solution, a collaborative effort between our business services and refreshment services groups. Sales for this new Bloomberg partnership are estimated to be $10 million per year.

I also want to tell you about a very exciting opportunity we have in the health-care sector with a large Southwestern health-care system. I know we have told you about other recent multiservice health-care wins, such as Mt. Sinai and Empire Health Services. By the way, just last week we added clinical equipment management to the Mount Sinai agreement. But this new opportunity is different. Initially, ARAMARK and the client focused on improving the hospital's overall quality in areas such as environmental services and patient and public food offerings, but it didn't stop there. Together, we expanded the scope to incorporate almost every service we offer -- environmental services; facility management; plant operations; patient and staff dining; clinical equipment management; patient transportation; laundry; grounds maintenance; security and uniform services. ARAMARK will also manage the total operation of a brand-new conference center located on its large campus. This includes 133 guest rooms, a full-service restaurant, room service, meeting space and ballroom catering. We anticipate the entire relationship will generate annual sales in excess of $25 million. As you can imagine, we have been working on this opportunity for over six months and we're very excited about the scope and complexity that our teams are able to tackle for our clients. We hope to be able to announce this win shortly. When you combine this new multiservice account with Mt. Sinai and Empire Health, it's clear that we are significantly broadening and enhancing our portfolio in the health-care sector.

Now, let me turn the program over to Fredrick Sutherland to discuss the financial results of our individual business segments, some new business wins and our outlook for 2004.

Thanks Bill. ARAMARK's overall performance was once again in line with our expectations for the quarter. As you know, this quarter includes an extra week compared to the fourth quarter of 2002. Our sales from continuing operations for the fourth quarter of fiscal '03 were approximately 2.6 billion, up 19 percent from a year ago. Income from continuing operations was 105 million, or 54 cents per share. Before the two unusual items which were mentioned in our press release earlier this morning, which I'll describe in a moment, income from continuing operations was 92 million, or 47 cents per diluted share, compared with 81 million, or 40 cents per share in the prior year fourth quarter, an increase of about 17 percent.

These results exclude two items. The first is a 32 million final settlement for business interruption insurance related to the 9/11 loss of our operation at the World Trade Center, which is reflected in the operating income of our U.S. food and support services segment. The second is a $10.7 million write-down related to the expected sale of a small residual interest in our previously-divested periodicals and distribution business. This cash positive transaction is expected to occur in the first quarter of fiscal 2004. This write-off is reflected in the other income and expense line. So that you can better understand the performance of our underlying businesses, my ongoing discussions will exclude these amounts.

Operating income before other income was 178 million. The margin was 6.9 percent, 50 basis points lower than the fourth quarter of '02. Softness in our national parks and uniform operations, and to a lesser extent, the impact of the Fine Host acquisition, reduced the current quarter margin. Our full year margin of 5.6 percent was 20 basis points below the '02 margin of 5.8 percent, driven by the expected loss from the Fine Host acquisition. As Joe mentioned earlier, without the Fine Host loss, full year margins would have been equal to 2002, as margin declines in our national park and uniform rental operations were offset by margin improvement in our other operations, consistent with our long-term objectives. We have completed the Fine Host integration and expect margins on this business in '04 will approach the U.S. food and support services overall level.

Sales for the fourth quarter of fiscal '03 in our largest segment, food and support services U.S., were about 1.8 billion, a 21 percent increase over the prior year quarter. Organic sales growth for the quarter was 5 percent, which compares favorably to the 2 percent organic growth delivered in the third quarter. As forecasted in our fourth quarter guidance, the business services sector organic growth was a positive 1 percent, significant improvement over the negative 7 percent seen in the first six months of the fiscal year and the negative 2 percent registered in the third quarter. This is the first positive quarter for business services since our fourth quarter of 2001. We expect that this positive growth will continue in '04.

Some of the new accounts signed in the quarter in addition to Bloomberg were Ingersoll Rand and Nike. Mid single digit organic sales growth in the less economically sensitive education sector was fueled by strong base business growth. We were awarded the food service contract for the athletic training facility at USC's campus, which was a Mission One expansion, and for the Brooklyn campus at Long Island University. We were also pleased to win the bid to provide food service to the Cherry Hill, New Jersey school district.

As expected, the sports and entertainment sector showed mixed results for the fourth quarter. On the one hand, our stadium and arena performance was quite strong, given a favorable baseball schedule, solid attendance for baseball and a strong summer concert season at our venues. This was offset by the anticipated weakness at our national park operations, which had a negative impact on the overall sports and entertainment margin. We were pleased to sign new agreements with the Franklin Institute, the Orlando Science Center and the Citizens Bank Park baseball stadium, the new home of the Phillies.

I'm very pleased to report that our facilities business organic growth improved from the low single digits in the third quarter to the high single digits in the fourth quarter. As we indicated in last quarter's call, the cumulative impact of new business growth and a much stronger retention rate helped to fuel this robust organic growth rate improvement. Client retention in our facilities business now stands at 96 percent, and this is a marked improvement from the 89 cents level at the time of the ServiceMaster management services acquisition. We signed new business with Northwest Airlines, the (indiscernible) Park School District in Chicago and the University Of Pittsburgh Biomedical Science Tower. In our other sector where we report our health care and corrections results, we delivered strong high single digit organic sales growth, consistent with prior quarters. We signed new accounts with St. Luke's Hospital in San Francisco and Friendship Village, an assisted living community in Illinois. In addition, we will be providing commissary services to inmates at the (indiscernible) County New Jersey Prison.

Fourth quarter operating income for the domestic food and support services segment increased 11 percent versus the prior year, excluding the impact of the funds received for the 9/11 insurance claim. Margin decreased 60 basis points, driven primarily by the weakness in the national parks business and by the impact of the Fine Host acquisition. Margins in our other businesses were up.

Turning now to the food and support services international segment, sales were 372 million in the fourth quarter of fiscal 2003, 21 percent above sales for the same quarter last year, with favorable currency translation accounting for about 10 percentage points. The organic sales growth was about 3 percent. Our UK and Spanish operations posted healthy sales increases, driven by new business wins. Operating income in this segment for the fourth quarter of fiscal '03 increased 11 percent to approximately 12.9 million. Favorable currency translation contributed about 9 percent. The earnings growth rate for the quarter was somewhat reduced to reflect an adjustment arising from our internal review of certain management fee contracts. We signed new contracts with the Vancouver Coastal Health Care System in Canada, with Plymouth College in the UK and a large Volkswagen manufacturing plant in Mexico.

Let's move on now to ARAMARK's uniform and career apparel segments. On an overall basis, the combined rental and direct marketing sales increased 8 percent over the prior year, with a 7 percent increase in the combined operating income. Organic sales growth for the combined units was 1% percent. Significantly higher margins in our direct marketing operations helped offset some of the reduced margin in the rental group. In the uniform rental segment, fourth quarter 2003 sales of 271 million were up about 8 percent year-over-year, while organic growth was flat. New business sold was about 12 percent of the base with about 55 percent of the new sales coming from first-time users of rental programs. The strong new business rate is consistent with levels we have seen for some time.

Lost business was about 8 percent, and about 30 percent of this came from accounts that simply went out of business or declared bankruptcy. Price increases contributed about won percent while base business declined about 4.5 percent. Operating income of 31 million in the current quarter was down 4 percent from the prior year quarter. The fourth quarter margin was 11.4 percent. The margin decline was driven by continued base business shrinkage coupled with higher energy and health care costs. However, we expect to show improvement in the rate of margin decline in the first quarter of '04.

In the direct marketing segment, sales for the fourth quarter increased 10 percent to 113 million, compared to the fourth quarter of '02. Organic growth was 3 percent, an improvement over the negative 1 percent in the third quarter of '03. Strong demand for (indiscernible) products fueled the sales growth. Operating income was up significantly, based on a favorable mix of product sales and improved profitability at our WearGuard-Crest operations.

As Joe mentioned earlier, our business continued to generate strong cash flows, as they have in prior years. For the year, internal cash flow -- which is an operating metric that we define as income from continuing operations plus non-cash charges such as depreciation, amortization and deferred taxes, less net capital expenditures and nonrecurring gains -- totaled 306 million compared to 253 million last year. Net capital expenditures for the year were 239 million, up from last year's 215 million, driven primarily by investments to support new business and productivity-based upgrades to our uniform facilities. Our net capital expenditures of 239 million were more than matched by depreciation and amortization of 263 million.

Our businesses' working capital needs tend to be seasonal, and is a significant source of cash during the fourth quarter. This historical trend continued in '03. For the year, working capital was a $60 million source of cash. Although a portion of this positive cash from capital, as we have mentioned before, was the result of continuing tax benefits from our old private company program, notwithstanding this, our operations still generated positive cash from working capital.

Our balance sheet and current liquidity position remain strong. Total debt outstanding at the end of September 2003 was about 1.7 billion, down over 100 million from '02. As another indicator of the Company's ability to generate strong cash flow, since the IPO, we have re-invested 420 million in capital spending, spent approximately 150 million for acquisitions net of divestitures, returned cash of over 280 million to our shareholders via share repurchases, and still reduced our debt by about 100 million. That's improving our credit ratios. Our strong cash flow has also enabled us to competently declare a quarterly cash dividend while still preserving the financial flexibility to fund all our growth initiatives. In the fourth quarter, we purchased 1.8 million shares of our class B common stock for about 46 million. 68 million remains under our current share repurchase authorization.

Looking forward to fiscal 2004, we expect economic conditions to stabilize with a gradual improvement from today's environment. Although GDP growth has improved, unemployment remains stubbornly high, especially in the manufacturing sector, even though it has recently shown signs of improvement elsewhere. As you know, fiscal 2004 is also back to a normal 52-week year from 2003, which was a 53-week year. This year-over-year sales impact is approximately a negative 2 percent. As we did for 2003, our commentary on organic growth rates are all adjusted for this effect.

We believe that ARAMARK's 2004 organic sales growth will be between 4 and 6 percent. The higher end of this range could be achieved if economic conditions, particularly job creation, accelerates. Our worldwide food and support services organic growth is expected to be also between 4 and 6 percent, while our uniform -- overall uniform business is expected to deliver 1 to 3 percent organic growth. We are clearly pleased to anticipate this positive momentum and expect that organic growth rate compare to '03, and we attribute this (indiscernible) performance to our ongoing focus on high retention rates, winning new business and growth with existing customers -- all key components of our Mission One strategy. We currently expect to see reported consolidated sales for '04 of between 9.6 and 9.9 billion.

We anticipate 2004 diluted earnings per share to be in the range of $1.38 to $1.44 compared to the adjusted $1.26 in 2003, which would again lead to double-digit growth. Adjusting for the positive in 2003 of the 53rd week, EPS growth is even better. For the first fiscal quarter of '04, sales are estimated to be in the range of 2.25 to 2.4 billion, with organic growth of 2 to 4 percent. The more moderate organic growth in the first quarter is attributable to the fact that the addition of the 53rd week in '03 creates a calendar shift which causes first quarter of '04 to close just after new year, where our first quarter of '03 closed just after Christmas. You can imagine the Company does not generate significant sales during the year-end holiday season, particularly in our campus and business service operations. We currently estimate that diluted earnings per share will be in the range of 33 to 35 cents, compared to 29 cents in the first quarter of '03.

Let me turn it back to Joe to wrap up.

We are very delighted with the momentum of our business and the traction which our Mission One initiatives showing. I mentioned trust earlier. I can't describe to you the personal pleasure and satisfaction that we all take when an existing client adds an additional ARAMARK service, or when a new client hires us to perform multiple services. Those decisions clearly show that our clients respect and trust our Company and our people, and they demonstrate their confidence in us by awarding us additional business. I'm very proud of the efforts of our team. The solid financial results for 2003 are another affirmation of the good work our folks are performing for their clients every day. Now, as we move into our third year as a public company, I as an incoming executive Chairman are more excited than ever before about our future prospects, and look forward to coming to work every day to continue to help this fine organization grow.

I've not had a chance to speak with most of you since our announcement last month, naming William Leonard our new CEO, effective January 1. We made this management transition decision from position of strength and stability, at a time when things are going quite well for the Company; when Bill and Fred and I are working well together as a team; when the business is sound and we continue to develop a deep pool of management talent. I've known and worked with Bill for more than 20 years. He is an outstanding leader who develops excellent people, builds great teams and is a terrific manager of our business. For those of you who have met him, you know his passion for clients and customers. He completely understands and has been significantly involved in developing our strategy, and he really understands the significant and big opportunities that are ahead of us. I look forward to being very involved with the Company on a number of fronts -- helping develop the executive management team; increasing the level of client and customer contact; developing strategy; participating in these, as well as other investor events; and being helpful to Bill in any way he needs. I trust that of considerable interest to you, my enthusiasm for ARAMARK hasn't changed given the change in my title, and I plan to continue in my position as a major shareholder of ARAMARK.

Thank you. Joe and Bill and Fred will now be happy to take a few questions. I ask that you state your name and affiliated firm before you speak your question, and please limit your follow-up questions to just one or two, to give everybody an equal opportunity. Operator?

(OPERATOR INSTRUCTIONS). Mike Scnheider, Robert W. Baird.

Maybe you could give us a sense -- you mentioned in the release that you've won 860 million in annualized revenue this year. Would you happen to have those figures by quarter for the year, or maybe even just the fourth quarter, to give us a sense of how the momentum is building during the year?

We don't typically disclose that number by quarter because it is lumpy, so you will see some quarters where we're basically the same or maybe slightly down, some quarters where we may be up quite a bit. So it's very hard to sense momentum, I think, if you look at it on a quarterly basis, particularly since some of the accounts we sign now are 10, 15, $20 million accounts.

Then the offset of that would obviously be the business lost during the year. Would you happen to have that annualized figure?

What we said is that the lost business was down 20 percent year-over-year, and we typically haven't disclosed the dollar value of lost business. Our client retention rate is 95 percent for the total year, so you can pretty much work your way into it, based on a 95 percent retention rate. And that's about 2 points above the prior year. That retention rate has been pretty stable all year; no spikes up or down one way or the other.

To be clear, the organic sales numbers that you reported in the press release and on the call are just for the extra week in the quarter?

Absolutely.

Christopher Hussey, Goldman Sachs.

First on the uniforms business, you mentioned that you would hit the top end of your organic growth rate of 4 to 6 percent if the economy started to work out. Does that suggest that in a recovering employment environment, that the uniforms business has an organic growth rate of only 3 percent? Could you give us a little bit of color on why you think that the 3 percent growth rate in -- the organic growth rate for the uniform business is so, I don't know, it seems a little low for a recovering employment environment?

We sure hope it's higher than that. The question is that we really haven't seen the turnaround yet. All the indicators are the economy is getting better. But clearly in the uniforms, it's employment levels and it's employment levels in the manufacturing side. And as of now, we have not seen that turnaround yet.

What are you thinking guys thinking then, for employment levels? Can you give us a thought of what is embedded in that one to three percent in uniforms, four to six percent in the total?

I could say we have it ramping up from the first quarter, expecting it to get slightly better in the second, third and the fourth. But we didn't put what I would call very aggressive numbers there until we actually see it starting to turn.

Finally, on the acquisition strategy going forward, anything sort of on the horizon that we can think about in '04? Any particular focus of your business where you are thinking you are a little underserved and you would like to try and beef up?

I think that we have talked to all of you before about our various areas of interest, and really, they have not changed from last year to the coming year. Again, as we mentioned before, acquisitions are very lumpy. It takes two to tango all the time. And you have also noticed that we really have not done a major acquisition, major meaning $100 million acquisition, for almost a year. That's not because we have not been looking, we just have not found one. So it's hard to tell when they come.

Braandt Sakakeeny, Deutsche Bank.

Actually it's Ben Lieblich at Deutsche Bank. I was wondering if you guys could comment a little bit about the pricing environment as it is today, and what you think it will shape up over the course of the coming year?

Let me take a shot at it for a minute. These are very competitive marketplaces where, in our opinion, will continue to be very competitive marketplaces. And if you look at the food and support business, as we've said to you again on these conference calls and we have said to you individually before, we sell value, not price. And as Bill went through his description of the Mission One wins, as we do more of those, that is a very complex sale. The service relationship between ourselves and our clients is very deep and very complex. And I think you really win and lose based upon the quality of your offering, the quality of your people and the quality of your solutions for their particular problem. You have to be competitive and you have to be in the zone to win those, but it's a much more complicated sale than just the price. On the uniform side, I think that -- and I will let Bill comment on that in a minute -- I think that we would say that we have seen some slight moderation in the pricing declines. But overall, I think it's getting a little bit better. It's staying at fairly low rates, but it's getting a little bit better. Bill?

I would say think it's stabilizing from where we've seen it. I'm mean, it's still very competitive in the uniforms, but I think we definitely have seen pricing a little better.

Actually, maybe just to continue on the uniform side -- do you benchmark yourself pricing-wise against Cintas? I think they've raised prices a little more this year than you have? Any comments on that?

No, I would rather not.

Chris Gutek, Morgan Stanley.

A couple of quick questions, really focusing on the margins. A two-part question, the first on the U.S. and the second on the international food and support services segments. Fred, could you go into a little bit more detail explaining why the margins were down? (indiscernible) the margins in the U.S. were somewhat lower than what we were looking for it, and recognizing that there are a couple of moving parts there, but the national park business is a relatively small piece of the total business. The second part of the question is on the international business where the quarter over quarter comparison is quite unfavorable. Could you go into a little bit more detail on what happened there?

Yes. The domestic margins for the quarter were really, as I mentioned earlier, there are really a couple of impact. One was the impact of Fine Host in the quarter. And that had about a 30 basis point or so impact on the margin in the quarter, and pretty much in line with our expectations. And as I said earlier, now that -- we ran a little bit slower on the integration of the Fine Host operation. We wanted to make sure in shutting down the operation, merging all of their operations into ours, that we did that the right way. And so in the fourth quarter, it did have an impact on the overall margin. And we expect now that that's completed, that it should be equally profitable to our own base of business in '04. The parks business, although it is a relatively small part of the business overall, essentially generates all of its income in the fourth quarter. So it's not an insignificant contributor to the fourth quarter margin. As you know, our fourth quarter margin is higher than our overall year margin, and that's driven by sports and entertainment, both the stadiums and the parks business. Our profitability at the parks business was down significantly from the fourth quarter prior year. And so, that was an impact in the fourth quarter, even though if you look at all of the other food and support services business, the margin growth, frankly, in all of the others was quite strong.

(indiscernible) you elaborate on that? When you say quite strong, is that 5, 10, 20 basis points in general?

It was strong, quite strong. It was certainly in line with our overall long-term objectives. The international margin -- as you know, we operate in the contract business. We have hundreds of contracts outside of the U.S.. Based on a recent routine internal review of certain of our client interest contracts, we felt the need to work to clarify or adjust certain of those contractual arrangements. And in the fourth quarter, we've adjusted our results to reflect the possible effect of that effort. We don't see that -- and as you see, it did change the year-over-year trends in international for the quarter. But we don't at this point see it as having any impact on the general trend in international going forward.

Kevin Monroe, Thomas Weisel Partners.

Picking up a bit where Chris left off there. Can you kind of quantify the internal growth in the U.S. food business, specifically the business services? Is the improvement in internal growth coming from market share gains and new business, or is it coming from kind of an overall pick up in your existing customer base?

The improvement has come largely in an improvement in our net new business. Part of that is lapping a couple of contract losses last year. And we've had a solid new sales year in business services. We continue -- if you break down the components of growth between net new sales and base business growth, we still see base business growth that is flat to slightly down. And that -- there has been some improvement but not any great improvement there. It's really been improved client retention and higher new sales rates in business services that have led to the increase.

Is that new business coming on -- I guess this is a question on pricing -- is the new business coming on at similar or better margins, or is the pricing difficult, and it's coming on at a little lower margin?

I would say the margins are coming on as good or better. Again, it's not quite the pressure that we felt on the uniform side over the last year or so. So I would say it's as good a pricing or better.

Joshua Rosen, CSFB.

You've made good progress with Mission One and the metrics you referred to regarding the cross-selling activity. As you look into the future, where do you see these metrics going, the 10 percent and also the 15 percent you referred to?

Clearly, as I said earlier, we are basically a few months into this. And we've told you that this is a multiyear process for us; this is not a one year process for us. Because it takes a while (indiscernible) the size of the organization that we have to get it (indiscernible) in every -- the front line manager, and every district manager. It takes a while to get it throughout the whole geography and around the world. And many of these sales are quite complex and they take a long time. Having said all that, we're very pleased with the performance that we have had at the moment, and we hope that this will continue to increase. Clearly, we are all working very hard to make it higher and higher, and we have very high expectations expectations that the momentum will pick up as we demonstrate -- both internally to our own people and to our clients -- that we are able to take on these much more complex transactions. Bill went through with you the buildup in the health-care vertical, for example. And we think that that will beget more business of that complexity and that size, and those come in 10, 20, $30 million kind of increments. And we are very excited about that.

So is it fair to say it's difficult to predict the acceleration of that trend, but you would expect to see those metrics continue to move forward?

Yes.

Bill, you had mentioned the long-term goal again of 6 to 8 percent organic growth. Can you talk a little bit about what you would need to see in the marketplace to get to this level? Is this largely just going to be driven by improvement in B&I (ph), or there are some other factors at work here?

I think the main thing would just be a return to a normal economy, an employment level going back to where it was. I think as we're showing, the rates are going up today. I think, obviously, an economy turn would really be a major -- if you think back to the uniform company being down 5 percent on the existing base, that's a huge impact. If that just flattened or stayed level, we would have a big pick up there. I think the six to eight percent is a solid number, and that's where our plans are to be.

Monica Aggarwal, Merrill Lynch.

Looking at your earnings guidance of 10 to 13 percent, excluding the extra week for '04, we think it looks a bit conservative if you do get organic sales growth to accelerate around 6 percent (indiscernible) employment base recovery. So are there any cost pressures which would cause you to be more cautious or conservative? For example, we have recently seen a significant increase in protein pricing, with overall CPI for food up 6.6 percent in September. Did that impact your fourth quarter, and could that have any impact going forward?

I think the guidance range as you say is on 126, which takes out the 2 cents in the third quarter for the bond tender and the tax provision. The EPS growth is in the 10 to 15 percent range going against the 53rd week. So the 53rd week impact, obviously, is reducing that EPS growth. But we think that's really reasonable, and part of where we are going to fall out in that range in part really depends on, as you say, how the economy performs and whether we do see some pickup overall in the level of economic activity and employment. And that's clearly one of the swing factors. On food price increases, and Bill or Joe may want to add here, we have seen some increases in food pricing, I guess particularly in the protein area. We have a lot of tools that we can use to combat that. First, if you think about it we are not really locked into a particular line of food or food concept as many restaurant chains are, so we have a lot of flexibility to really change the menu in our operations. And we have pretty good pricing flexibility. Now, where we have less of that would be in our college operations, where we operate under board plans. But overall, we think we can manage through a period of food cost increases.

I would just add to that that if you look at the overall food basket, there's still some things going down. Coffee is going down, etc . So the overall food basket, I think -- while we might get some pressure on it, we don't think it's going to affect us very much.

Adam Waldo, Lehman Brothers.

Matt Keating from Lehman Brothers sitting in for Adam Waldo. Can you please (indiscernible) for us what proportion would be assumed -- the re-acceleration in the Company's organic growth rate from the 3 percent we saw in the current year to 4 to 6 percent in '04 is driven by new business wins to date versus your expectation for a moderate improvement in the underlying US employment environment during the year?

There is some component in base business growth. As Bill mentioned earlier, we are assuming that gradually during the year we go from the four to five percent negative base business growth in the uniform business, what we call the shrinkage, to a level that is approaching breakeven. That doesn't have a tremendous effect on the whole year because it happens during the year. Similarly, in our business service operations, we're assuming that we go from being sort of flat to down a couple percent, so by the end of the year that we are up in the low single digits, again, as we move towards the end of the year. But a big part of the growth is really the carry on effect of having a 95 percent retention rate coming into the year and having sold more new business in '03 than we sold in '04. So for example as you heard earlier, the facilities business which was growing low single digits in the first three quarters, in the fourth quarter is now growing high single digits. So there is a lot of momentum carrying in some of these businesses already into the next year.

One quick follow-up on the tax rate. What is your guidance for '04 on that?

I think our overall tax rate is about 37.5 percent. It sometimes varies because some of these onetime items have screwy tax rates associated with them. But generally, that's a safe bet.

John Ajay, Humway Capital.

First of all, I want to make sure I understand the margin -- international margin correctly and what you were seeing there. When I look at the past, it looks like the fourth quarter was down 0.1 percent from the third quarter, so I would have thought you would have been at 4.4; you were at 3.5. Are you saying that this issue with the contracts basically was a onetime accrual adjustment, and therefore, the 3.5 percent is not the run rate that that quarter really had, it was more of an accrual adjustment?

Right.

Okay. Can you estimate what it would have been if it weren't for that?

No.

And then, what are you assuming for the parks business in your '04 forecast? Are you're assuming flat on the depressed '03, or are you assuming a return to normalcy?

We're essentially expecting and forecasting some modest improvement in our parks operations. We're not assuming that it improves back to the level it was two or three years ago.

If it did that, that would create upside?

Yes, that's right. Potentially there would be upside if it went back to the level of two or three years ago.

And when you talk about Fine Host getting back to the average margins for the U.S. food and support services in '04, is that supposed to happen instantaneously in the first quarter of '04 or is that supposed to gradually get there?

It's a gradual impact.

What is it that's going to allow you to get to that point, further cost-cutting? What is it that has you at that point now and ending at the end of the year?

Some of that is just improving operations. We have made a lot of acquisitions over the years, and one, quite frankly, on the stadium and arena side, we think we are much better at running those than the other person was. So we just see steady improvement as we go. And again, as Fred said earlier, we just went slower with the integration because we wanted to make sure we did everything we could to protect the account base.

You were absorbing some costs, right, as part of the integration, through the P&L?

Absolutely. All of the costs through the P&L.

Do those continue in the early part and then disappear in the late part of '04?

They're pretty much done. We closed down their headquarters over the summer and there was some continuing costs associated with that. But as of now, it's pretty much all done.

So those (indiscernible) and should actually bounce back pretty quickly, because those costs, I don't think, were insignificant?

That part -- as you point out -- that part is done; the other part which Bill is referring to is they're marketing merchandising programs, given the size of the Company, really don't match up to ours. So we will need to drive some operational improvements through the individual contracts, which you obviously don't do in a matter of a week or two.

Also lastly, corporate expense was a little bit higher than what I was looking for, even when you adjust for the extra week in the quarter. Was there any kind of onetime distortion there? What would be a good ongoing level to use for corporate and other?

I think the corporate items in the -- I think in the quarter were pretty flat.

Well I have 8.2 million, it was 6.7 in the prior quarter. So I guess, year-over-year there's some --

(multiple speakers)

I think that it will vary some quarter to quarter, because its corporate overhead, and then there are other minor onetime items that flow through there. But if you look at it year-over-year, it was 8 million last year in the fourth quarter and 8.2 million this year, with an extra week added.

Thatcher Thompson, CIBC World Markets.

Two quick questions. One was the 860 million in new business -- can you just describe what happens to margins typically in the start-up phase of new business?

Again, it varies all over the lot, but generally, new business that starts isn't as profitable as business that we have had for two or three years, overall. But again, you have to remember what affected it was really the increment of year-over-year. Because hopefully the business that we be sold two years ago and last year will be much more positive next year. So the trick here is to continually improve over last year. That's why we also focus very very steadily on retention. The two percent improvement in retention is more meaningful to us than improving the new sales effort, because that's much more profitable business that we'll retain.

Good point. Second question -- in the uniform rental business, how much of that business would be classified as in the manufacturing segment?

I don't think we've ever released that. I would say at about 30 to 40 percent.

Yes, somewhere in that range.

Bradley Saflo (ph), J.P. Morgan.

A follow-up to Thatcher's question. Given your exposure in the manufacturing segment, and you've talked a little bit today about a normalized employment environment, what if -- what efforts are you making to combat your exposure to the manufacturing sector, if you just don't see a commensurate pickup in employment levels in that subsector of the economy versus, let's say, the services space? And if you could comment on where you're directing your new sales effort on the uniform side?

Let me take it overall, then I am going to let Bill talk about the uniform side for a second. Clearly, if you look at where we have invested our incremental dollars in terms of the acquisition, they are not manufacturing into the manufacturing sector. Whether you look at ServiceMaster or (indiscernible) clinical equipment, even Fine Host overall in the portfolio is over 2/3 non-manufacturing, non-economically sensitive. That's clearly where we are going overall, and that's what we're doing. In terms of the sales forces, that's how we deploy our sales forces. As far as specifics on the uniform side, I'm going to let Bill --

I think just over the history of the industry, it has been going away from manufacturing as manufacturing jobs have been leaving the country. There are still plenty of other non-manufacturing opportunities that we all share, whether it be in an automobile dealership, supermarket business. The service industry is still growing in this country and will for a long time, so I don't think it's a major impact. Again, I think if you say it's probably slightly less than 30 percent today, it was probably 60 percent 25 years ago. So I think you do see it's much more in the service business, as you see the whole uniform industry.

Is there a substantial difference in the new account growth rates in the services side versus the manufacturing side?

No.

A question for Fred. With the dividend policy now in place, will there be a substantial difference in the rate at which you repurchase shares?

At the end of the day as we've talked about, we have a set of financial policies -- we want to maintain a strong balance sheet, we want to maintain our investment-grade rating, we want to continue to re-invest in the business. And we will make acquisitions that strategically fit into our overall direction. Then, because we generate very strong cash flow, there is a certain amount of cash flow that's available for dividends and share purchases. So I think we clearly look at all of that together.

Okay. So it's conceivable, depending on how, obviously, cash flow goes, that you could sustain or use up the remaining balance?

There's no question, ex some significant level of acquisition activity, that the Company will continue to generate excess cash flow.

This is all the time we have today for questions. I will now turn the conference back to Gary Sender.

Thank you all very much for your questions. We obviously are here to answer any additional questions that you we weren't able to capture in today's call. And we hope you all have a terrific day. Thank you.

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, with an ID number of 307335. This concludes our conference for today.