Aramark (ARMK) 2004 Q1 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, to the ARAMARK's First Quarter Fiscal 2004 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 up the conference up for questions and answers after the presentation. I will now turn the conference over to Gary Sender. Please go ahead, sir.

Thank you, and welcome to ARAMARK Corporation's conference call to review the results of our first quarter of fiscal of 2004. Here with me today are Joe Neubauer, ARAMARK's Executive Chairman of the Board; Bill Leonard, the Company's President and Chief Executive Officer; and Fred Sutherland, our Executive Vice President and Chief Financial Officer.

Bill, Fred, and Joe will present an overview of our first quarter results and business operations, after which there will be an opportunity for phone-in participants to ask questions. Before we begin, however, a few housekeeping matters.

As we discuss the results for the quarter, you may want to refer to the financial statements attached to this morning's news release, which can also be found on our website at www.ARAMARK.com.

In the earnings press release and in today's discussions of results, we mentioned certain financial measures that are considered non-GAAP. Generally, a non-GAAP financial measure is the numerical measure of the Company's performance, financial position, or cash flows that either excludes or includes items different than those prepared or presented in accordance with Generally Accepted Accounting Principles. The Investor Relations section of the Company's website includes a 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. This information is also included in today's press release.

Any recording or other use or transmission of this audio may not be done without the prior written consent of ARAMARK.

Various remarks that we may make in this call relating to matters that are not historical facts, including remarks about future expectations, anticipations, beliefs, estimates, plans, and prospects for ARAMARK, constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various risks, uncertainties, and important factors, including those discussed in the Risk Factors section in the Management, Discussion, and Analysis of Results of Operations and Financial Conditions section of ARAMARK's 2003 Form 10-K filed with the SEC.

We disclaim any duty to update or revise such forward-looking statements whether as a result of new information, future events, or otherwise.

I will now turn the program over to Bill Leonard. Bill?

Thanks, Gary.

Good morning, everyone, and thank you all for taking the time to join us today.

ARAMARK's financial and business performance for the first quarter, measured in terms of sales, organic growth, and earnings per share, was in line with our objectives. We've been able to achieve these results through a combination of solid new business sales, continued high levels of client retention, lower interest rates, and our team's ongoing disciplined focus on managing costs.

First, let's talk about sales.

In 2004's first fiscal quarter, we generated sales from continuing operations of just under $2.5b, a record first quarter and an increase of 8 percent over the prior-year period.

Our U.S. and International Food and Support Services segments' organic sales growth, which Fred will discuss in more detail, was 4 percent and 6 percent, respectively, while the Uniform segments had flat organic sales growth.

We had strong sales growth in our Facilities Services, International, Education, and Healthcare businesses.

On the other hand, the lack of employment growth had a dampening effect on our Business Services sector and the combined Uniform segments.

ARAMARK's Sports and Entertainment operation had positive reported growth due to the inclusion of Fine Hosts' NFL accounts, which performed quite nicely. Fewer Major League baseball games in the period, resulting from the later start of our first quarter, led to somewhat lower sales in this part of our business.

In terms of new business, we're doing quite well. Our net new business is up more than 30 percent over the prior-year quarter, and our retention rate remained comparable to last year's high level.

Let me now comment on our earnings. ARAMARK reported first quarter 2004 earnings per share of 35 cents, a 21-percent increase over the prior-year quarter. This significant increase was driven by higher operating income, reduced interest expense, and a lower share count. Strong earnings also helped drive a 7-percent increase in internal cash flow to $80m.

There are three additional topics that I'd like to cover. The first is another tool that we're using to drive Mission-One success. The next is to provide some color on an exciting acquisition we've just completed in the U.K. And the final is to tell you about the organizational structure change we implemented effective January 1.

First, I'd like to provide some additional insight into how we're driving the execution of our Mission-One profitable growth strategy throughout the organization.

We've discussed previously how every ARAMARK manager is responsible for Mission-One success. I've also described some of the tools we've equipped our folks with to assess each account to see how we can provide additional services to our clients and the systems we've put in place to capture these opportunities.

We get great ideas of how we can expand services when our front-line managers interact with each other to discuss their clients' environment. Part of this lead-sharing effort involves bringing people together in what we call "star" teams. These are regionally based groups of ARAMARK managers from a variety of our operations who share best practices and potential opportunities. We have teams established in over 30 major markets.

Given the importance of this effort and our belief in its success, a member of our executive team will attend virtually every meeting in 2004 to demonstrate the commitment we have to this effort and to share best practices.

Mission-One is a deeply embedded effort with tangible goals, metrics, and measurement systems, coupled with very strong management commitment. Thousands of our managers are interacting to help us achieve these objectives. We're proud of what we've accomplished in its first year and believe that the real momentum generated by Mission-One is just beginning to become apparent.

Our first quarter new sales due to Mission-One initiatives were over 15 percent of the total. This is higher than what we've reported before, and part of the increase was due to the Scott and White Health Care System win. Even apart from this one significant account, Mission-One is contributing more and more.

Let me briefly comment on a recent acquisition. Consistent with our objective of growing our International business, we recently acquired Catering Alliance Limited, the sixth-largest contract catering company in the United Kingdom. It had 2003 sales of about $75m and has a current sales run rate of about $90m. Catering Alliance is a well managed, rapidly growing, profitable, and highly regarded company, with most of its clients in the Business and Education sectors. Catering Alliance's mix of clients and its geographical focus nicely complement our existing business in the U.K. and we believe will help us to grow and expand in this region.

I would now like to take the opportunity to describe the recent organizational changes that we've made. As many of you know, ARAMARK has historically competed in a number of service businesses. Over the past few years, we have followed a disciplined strategy of increasing our focus in our core Food and Facilities Services and Uniform businesses. This program was completed last May with the divestiture of our last non-core business, our Childcare operations. As a result of this increased business focus and in an effort to accelerate our growth and deliver on our Mission-One objectives, we decided to streamline the organization to enable me to have more direct insight into our businesses.

Effective January 1, 2004, [Jack Donovan][ph] and [Andrew Caren][ph] have started to oversee our domestic Food and Facilities Services segment, while Ravi Saligram and [Tom Bozell][ph] will continue to have responsibility for our International Food business and our Uniform segments, respectively.

Jack Donovan has assumed responsibility for our businesses providing food service to the Business, Sports and Entertainment, and Correctional sectors. Jack has been with ARAMARK for 16 years and has held various positions, including President of our Education Group and our Corrections operations.

Andrew Caren, who joined us in 1995, now has responsibility for our businesses serving the Educational, Healthcare, and Facilities markets. Andrew was previously President of ARAMARK ServiceMaster and our Healthcare Food business. In light of our Mission-One initiatives, we felt that it was logical to put the Education team under Andrew since we see increasing linkage between Food and Facilities in both the Healthcare and the Education markets. Importantly, Andrew and Jack will have shared performance objectives to help drive Mission-One success.

Ravi Saligram will continue to manage our International business. Ravi recently joined us from Six Continents, a large worldwide hotel chain, where he served as North American President of Brands and Franchise and previously was President of their Asia-Pacific operations.

Tom Bozell will continue to oversee our Uniform businesses. Tom has been with us since 1992 and has held various positions in our Uniform businesses, including most recently President of our Direct Marketing segment.

We are excited about the strong team we've assembled and their passion for profitable growth.

With that, I will turn the program over to Fred Sutherland to discuss the financial results of our individual business segments and some new business wins. Fred?

Thanks, Bill.

During my discussion of the first quarter of fiscal 2004 financial performance, I will define and use certain terms, including internal cash flow and organic growth, that are considered non-GAAP measures. The reconciliation of these items to their most comparable GAAP measures can be found on our website.

Bill mentioned that our first quarter 2004 sales were up 8 percent to 2.5b.

Our U.S. and International Food and Facilities segments had organic sales growth of 4 and 6 percent, respectively, while our economically sensitive Uniform segments had flat organic growth.

To calculate organic growth, as you know, we exclude items such as acquisitions, divestitures, currency fluctuations, and the impact in fiscal 2004 of a calendar shift on our Education business. And last year's 53rd week caused this year to begin later in the school season.

Operating income was 137m, an increase of 7 percent versus the prior year. Year-over-year margins were flat, in large part due to the fact that this year's first quarter encompassed the New Year's holiday week as a result of last year's 53-week year. This period is traditionally quite slow for our Business Services and Education sectors.

In 2003, the comparable holiday week was included in the second quarter. This impact was incorporated into the first quarter earnings guidance, as you'll recall, which we provided in our fourth quarter 2003 earnings press release.

Sales for the first quarter of fiscal '04 in our largest segment, Food and Support Services U.S., were about $1.7b, a 7-percent increase over the prior-year quarter. Organic sales growth for the quarter was 4 percent. Now, let me give you a little bit more color on this 4-percent increase.

Business Services sector growth was flat to the prior year. As Bill mentioned, consistent with economic statistics you're all familiar with, we are not seeing a pick-up in hiring at our client locations. Despite these challenges, we have been successfully signing new accounts, including Kellogg Corporation's [McComby][ph] Conference Center in Battle Creek, Michigan, Phoenix Home Life, and Northrop Grumman, and our retention rates continue to be quite solid.

Growth in the Education sector was in the mid-single digits, reflecting solid base business growth. We are continuing to capture a bigger share of students' spend by expanding our retail operations on campuses.

We were pleased to sign new agreements in the first quarter to provide food service for Frostburg State University in Western Maryland, Stevens College in Columbia, Missouri, the York School District in Virginia, and Millard School District in Nebraska. These wins were particularly gratifying since most school and campus contracts are awarded later in the spring.

As Bill mentioned, while the Fine Host accounts performed well, the Sports and Entertainment-based business was down slightly. First quarter of 2003 had 20 more regular season baseball games than the first quarter of 2004 due to the calendar shift. Baseball playoff games were about a wash on a year-on-year basis. We won new business in the quarter with [Glacier] Bay National Park in Alaska.

The Healthcare and Corrections Food Service business areas, which make up our "Other" sector, performed very well and posted high single-digit sales growth, reflecting strong base business growth.

We signed new accounts, such as Mission Hospital in California, the Marion County Indiana prison, and an expansion of our Meals on Wheels business within our Fulton County Prison operations.

Growth in the Facilities business was also strong and in the high single digits, in line with our recent experience. We are pleased to report that we are winning new business at a healthy rate. We signed new Facilities business with Washington University, Manhattan Marymount College, and Good Shepherd Hospital in Texas, and we'll now manage additional sites within the [Flowers][ph] Bakery System.

Operating income in the domestic Food and Support Services segment was about 90m, a 6-percent increase over the same quarter last year. The operating income margin was 5.4 percent for the current quarter versus 5.5 percent reported in the first quarter of 2003. The lower margin was principally due to the calendar shift and the inclusion of a less-profitable holiday week in the first quarter of '04.

For the year, we are still targeting margin improvement in our U.S. Food and Support Services segment.

Turning now to our Food and Support Services International segment, sales were about 415m for the first quarter of '04, 23 percent above sales for the same quarter last year, with currency translation accounting for about 14 percentage points of the increase.

Organic sales growth, as I mentioned earlier, was 6 percent, in line with our expectations. All of our International operations generated positive organic growth, with Canada, the U.K., and Spain each growing quite nicely due to new business.

Operating income in this segment for the first quarter of fiscal '04 increased 16 percent to approximately 16m due principally to currency translation. The operating income margin was lower than prior year, primarily due to start-up costs for a number of significant new contracts in Canada, some lost business, and lower results in our Offshore Oil Services business.

We continue to add new contracts in our International segment. Recent new wins include the NATO headquarters in Belgium, the Crowne Plaza in London, and the [Great Lace Race Course][ph], also in the U.K., and the [Encanna Supercamps][ph], which is part of our Remote Site business in Canada.

Now, let's turn to our two Uniform segments and focus on the Rental segment first.

First quarter '04 sales of 256m were basically flat with the first quarter of '03. New business sold continues at a solid rate of about 12 percent of the year-earlier base, with about half of the new sales coming from first-time users of rental programs. Lost business was about 8 percent, and about a third of the losses came from customers who simply went out of business. Price increases contributed just over 1 percent to current quarter sales growth and are modestly up over the prior-year quarter, while base business declined just under 5 percent due to continued labor contraction at our existing accounts.

Operating income of 29m in the current quarter was up about 5 percent from the prior-year quarter. Effective cost controls, favorable sales mix, and a small divestiture gain drove the margin improvement. We are clearly pleased with this positive margin trend given the deterioration that we have seen in the past two years.

In the Direct Marketing segment, sales for the first quarter were $127m, down 2 percent from the prior year. Increased sales of safety products were offset by reduced sales of work clothing, where customer demand remained sluggish.

Operating income of 11.5m was 15 percent above the first quarter of '03, primarily due to effective cost controls.

Our net corporate expenses for the quarter totaled about 9m, compared to 8m in last year's fourth quarter. The increase was due to higher liability insurance premiums and normal increases in corporate administrative costs.

Interest expense of 29m was down about 6m from the prior year due to lower borrowings as well as lower rates. We expect that interest expense will increase to about 32m or so in the next quarter based on expected borrowing levels and interest rates.

At quarter end, our total debt balance was 1.96b, compared to 1.73b at the end of fiscal 2003. This increase is due principally to seasonal working capital needs.

Working capital was higher in the first quarter of '04 as compared to the prior-year quarter primarily due to the calendar shift and normal payment cycles for items such as accounts payable and payroll.

Overall, our first quarter cash flow was on plan.

For the first quarter of fiscal year '04, an operating metric, which you're familiar with and we call internal cash flow, which we define as income from continuing operations plus non-cash charges, such as depreciation, amortization and deferred taxes, plus all capital expenditures and non-recurring gains, was strong and totaled $80m, compared to 75m last year. Total capital expenditures for the first quarter of '04 of 70m were somewhat higher than the 64m of '03 due to investments for new business.

ARAMARK repurchased 1.2m shares of its Class B common stock for about $33m in the first quarter. We have about 35m left in our prior buyback authorization, and last week, the Board approved an additional 150m program.

As you know, we also paid our first quarterly dividend in December, and last week the Board approved our second quarterly dividend of five cents per share.

Turning now to our expectations for the second quarter of 2004, we expect to report sales in the range of 2.3 to 2.4b and diluted earnings per share from continuing operations of between 22 and 24 cents, compared to 19 cents in 2003 second quarter.

Now, let me turn the program over to Joe Neubauer for some additional comments.

Thank you, Fred.

We're quite pleased with the results that our organization delivered in the first quarter. I'm particularly proud of the way we're maintaining our high client retention rates and adding new business, both within existing client accounts, as well as establishing new client partnerships.

Now, I've said this before. Our client-centric model is quite sound, and our team is executing it very well. The trend towards outsourcing continued to be strong, despite the challenging employment climate.

Many of you have heard us talk about our client thrust and long-term unlimited partnerships before, but to illustrate these points, I want to go into some greater detail about our new 10-year partnerships with the Scott & White Health System.

You recall that Bill spoke to you about this unnamed client in our call in November, but I wanted to expand on those initial comments because this is truly a Mission-One success story, and it really comes down to one word -- trust.

Winning our clients' trust just reinforces our desire to outperform for them. Scott & White's challenge of delivering quantifiable increases in patient, staff, and visitor satisfaction, we offer the comprehensive hospitality approach. To their challenge of capturing financial efficiencies, we offer a single-point ARAMARK leadership and accountability for our services, a call center on premise to handle all of their needs with just one phone call, staff transitioning to ARAMARK, as well as guaranteed economic value, including cost savings.

We did not win this business purely on economics. That's not our game. We won it by partnering with them and winning that trust. Together, we solved a set of unique interrelated problems with an integrated approach that represents significant economic value creation for both Scott & White, as well as ARAMARK.

As we look at the wide scope of services we provide to our partnership with Scott & White, let me just list a few of them for you -- patient, staff, and guest food offerings, environmental services, patient transport, facility management, plant operations, clinical equipment management, onsite conference and lodging facility, laundry, ground maintenance, security, and uniforms -- you can see how mission-critical ARAMARK has become to Scott & White. That's what trust is all about. We tend to outperform in our partnership with them, and because we are certain that there are other similar opportunities in the pipeline, we stand ready to take full advantage of these opportunities using all of our Mission-One tools.

Before we take your questions, I wanted to tell you how pleased I am with the smooth transition that we have made with Bill becoming Chief Executive Officer effective January 1, and with our recent organizational changes.

It's been business as usual for us, mostly focusing on our clients. Things are not slowing down at all. Both Bill and I have embraced our new responsibilities and are more ready than ever for the next chapter in the evolution of our working relationships. We're excited about our new leadership team and with [marquee] events, like this month's [Superbowl] and the upcoming Summer Olympic Games, people from around the world will be interacting with our outstanding teams. We couldn't be prouder of how they treat our clients and our customers every day.

And now we'll be happy to answer any questions.

Thank you, sir. The question-and-answer session will begin at this time. [Caller instructions.]

Our first question comes from [Josh Rosen][ph] with CSFB. Please state your question.

Good morning. It's [Clayton Conisharo][ph] calling in for Josh. You mentioned that the cross-sell or the percentage of new business was 15-percent-plus in the quarter. Could you remind us what it's been the last couple quarters?

Yeah, this is Bill. The last time reported was about 10 percent.

Okay. And what areas or what service lines are you seeing the strongest uptake, cross-sell, and where should we expect this metric to go over the next year?

Well, I don't think I can give you where the metric would go. And, again, we said it was over 15 percent. It's really across the entire business systems that we have. I wouldn't want to say it's just in one place. And, again, we think it's a very robust process of Mission-One, so I wouldn't want to try and pigeonhole it to one line of business. It really affects all of our businesses.

Okay. But as you've mentioned, we've seen 10 percent and then 15-percent-plus with some of the other initiatives that you're putting in place or additional initiatives. Should we expect continued momentum over the next--?

We can hope so.

Okay, great. Also, I was hoping that you could provide a little bit more color on the margins internationally. You mentioned a few line items that impacted the margin. Could you give us a little bit more help as far as what we should expect in the second quarter and for the rest of 2004 with, again, some of the start-up contracts in Canada and also the losses in some of the offshore oil services?

Yeah, this is Fred. The start-up losses in Canada, we started up a number of significant remote camp contracts and a couple significant healthcare contracts, and it's not unusual at all to have significant start-up costs in connection with that, and that -- it had an impact on us in the first quarter. That's not something that lasts for a long period of time. And while there will be some lingering effects in the second quarter, we really haven't changed our outlook at all for the opportunity in the International business, and, you know, our margin targets and expectations in that business are pretty much the same.

The Offshore business, we had a couple of difficult contracts that we had to work our way through, and we're well in the process of doing that, and that business is less than 10 percent of our overall International business.

Okay, thank you. And then, lastly, could you quantify the size of the divestiture gain in the Uniform Rental business?

We don't disclose immaterial gains like that separately, but it was roughly half of the pick-up in the EBIT in the second.

Okay, thank you very much.

Operator, are there more questions?

How embarrassing is this? Did the operator die?

Don't know. We'll try to call her on the other line, see where she went. Is there somebody on the line that wants to ask a question?

Our next question comes from [Michael Schneider][ph] with Robert W. Baird. Please state your question.

Glad I got through. Hi, guys. Maybe first we could focus on the margin gain year over year. Fred, you mentioned that it was depressed because of the New Year's week being included this quarter and not being included a year ago. I'm wondering if you can put some numbers around that?

And I guess related to that then, in looking in the second quarter, it doesn't look like you've given yourself the benefit of that better timing for the week as well because the guidance seems to imply flat operating margins year over year again.

Well, I think there -- Mike, there are a number of factors that affect the margin, and the -- you know, it's hard to quantify the profit impact of an individual week. There's no question that it did have an impact in the first quarter because, in a sense, we were trading a week that's end of September/early October week, where the Education business is going full bore versus a holiday week, where most of the schools are closed. And we can quantify the sales impact, but the profit impact is a little harder to quantify. There's no question that we will see some pick-up from that in the second quarter. I think there your trading weeks that are a little bit more comparable, not -- the difference is not as pronounced when you pick up a week in March. And, you know, there are also other factors. If you look at the EPS guidance, for example, we expect that the year-over-year comparison on the interest line will be as favorable in the second quarter as it is in the first quarter because of the seasonal cash flow and because of the impact of the acquisition that Bill referenced.

Okay, and then just one specific item on the tax rate, Fred. The tax rate is running thirty-seven seven at least in the first quarter. What do you expect it to be for the year because it looks like a little bit higher than it had been running?

Yeah, you'll see it fluctuate a few tenths one way or the other, but a good number is 37-and-a-half.

Okay, thank you.

Thank you. Our next question comes from Kevin Monroe with Thomas Weisel Partners. Please state your question.

Good morning.

Morning.

Just wanted to clarify, on the Uniform Rental operating margin improvement, did you say half of that was from the divestiture?

Roughly.

Okay, so excluding it, would margins still be up on a year-over-year basis?

Yes, [indiscernible].

So that this is the first time we've had a year-over-year improvement in the Uniform Rental business in --

A while.

-- a while here. Have we turned the corner? And, you know, kind of what's driving that despite you're still seeing significant contraction in the base business, you know, just -- are better things to come, or, you know, is this kind of an anomaly?

It's not an anomaly. This is Bill again. I think that from an operational control standpoint, I think we're doing a better job. I think the business is running well. We still have the reduction in the workforce, though; we haven't turn around yet. And, you know, we're hoping to see that as the economy seems to have every indication that it's going to turn around, we haven't seen the employment level rise as of yet, but we are feeling good about the business.

Okay. Are you seeing employment come back in any of your businesses?

Generally not.

No? Okay. And then one final question on the cross-sell from Mission-One. You said it was up about 15 percent in the incremental revenue. Is that incremental revenue at higher margins, similar margins, lower margins?

It's not at lower margins.

Okay. Thank you.

Thank you. Our next question comes from [Chris Hussey][ph] with Goldman Sachs. Please state your question.

Hi, guys. Just a couple quick questions. Can you quantify how much you paid for Catering Alliance?

Yeah, it was about 46m pounds.

Forty-six million pounds. It's a lot more dollars than it used to be, I suppose?

Yeah, right. I think it's up to 185 --

Yeah.

-- now, but, you know, but fortunately, the pounds that we get back in earnings are a lot more, too.

Can you put in context a little bit the strategy there? Was this an opportunistic acquisition or, you know, is this part of a broader strategy to focus all your acquisitions in Europe at this point?

I think -- this is Fred, and Bill may want to add -- they are one of the largest of the smaller contract catering companies, independent companies, in the U.K. Well run, more -- geographically, more located in the Northern part of the country, where we're a little bit weaker. They also have a nice education component to their business, which helps us with our -- you know, our mixture's a little more weighted towards B and I. And this firmly establishes us as the number-three company in that market.

Okay, and when you think about broader looking out forward into your acquisition strategy going forward throughout the year, last year, you spent almost, you could argue, a big chunk of your free cash flow on acquisitions. Should we expect a similar strategy going forward this year?

Well, we really don't disclose potential acquisitions down the road. Obviously, we're always looking. If something's going to add value to the company, we'll look at it.

Okay. In the -- Joe, in the comments you made on the Scott & White Health Systems, you mentioned that -- I think you'd mentioned that you would include it as part of the value proposition that you've got guaranteed cost savings for the client there. Is that a normal course of business? And what does that exactly involve?

Well, I think as we take over significant portions of their workforce and a significant portion of the activities, we can do it usually more efficiently by combining the workforces, by scheduling them better, etcetera. And, therefore, we're able to derive economic benefits for them and for us, and those benefits get quantified. In the certain level, we, in essence, say we'll deliver those benefits to you.

And if you don't, do you owe them money? I mean how does that work?

Well, there are various complex arrangements, but at the end of the day, you'd better do what you say you're going to do.

All right. Fair enough.

And last question, on the employment situation, just trying to delve into that a little bit further, you know, your base business down and the Rentals business, can you walk through -- because when you look at the employment statistics over the quarter, let's say, you're not seeing necessarily a dramatic year-over-year decline in employment going on in the United States any longer. Which of your segments are still exhibiting the type of decline in employment that resulted in a 5-percent decline in your base business in that business?

I think if you look at the manufacturing component, if you look at the service component and the economy that's related to the automotive sector, I think you'll see a somewhat different employment picture year over year. And while the business is diversified across a number of sectors in the economy, those two sectors are, you know, a meaningful part of the business.

I think in the past you've described it as almost a third of the business. Is that still pretty accurate?

I think that's roughly okay.

So those businesses getting impacted still on a negative basis on the employment picture, the others maybe stable with the rest of the employment picture, the net result is sort of a 5-percent drop-off in the base business? Or are you seeing among your customers just less use of uniforms?

I wouldn't say it's less, just clearly companies that, you know, are in tough financial times and trying to cut back on certain things, and they're watching ever nickel. You know, our hope is as the economy turns -- you know, employment is not the first thing that's going to pick up, and particularly in the businesses where we are. So I think, you know, we're hopeful, as everyone is, that as the economy keeps turning, we'll see a turnaround in the employment levels.

Let me just add that in the Uniform business, our business is a lagging business to the overall economy because, first, what they do is add overtime. Then they add people. And overtime doesn't help us with uniforms. So it's a lagging indicator for us, and hopefully, as the economy picks up overall, we'll be there.

That's terrific. Thanks very much, guys.

Thank you. Our next question comes from [Brad Saffalow][ph] with J.P. Morgan. Please state your question.

Hi, good morning. My first question just had to do on the working capital change year over year. Just so I understand the impact of the 53rd week from last year, what would the working capital, kind of on a pro forma or apples-to-apples basis, look like in terms of the year-over-year change? Would it have been in line with what last year's levels were?

Brad, this is Fred. It's obviously difficult to pro forma the working capital week by week, but let me give you a couple -- a little bit of color.

If you look at the current assets -- if you look at the principal current assets, accounts receivable and inventory -- and there's additional detail which will be in the Q, obviously -- the inventory's essentially flat year over year. I think it's up $3m or something. If you look at the increase in receivables, and this is segregating out the impact of the accounts receivable facility, the increase is pretty much in line with sales. So, you know, that's where the real control factors are in the working capital.

Sure.

So the swing is in accrued expenses and accounts payable. That's all on cycle. You know, we pay payroll on a cycle. We pay our suppliers on a cycle. None of those payment cycles have changed at all. So, therefore, when you cut off is significant, and cutting off beyond 12/31 this year, which is a big payment date versus before 12/31 last year, essentially creates all of that difference. And as I said in my remarks, our working capital is on plan.

Okay. Thank you for that color. And then just on the uniform side, to look at the kind of run rate margins going forward, you know, in the past you've talked about increasing the number of sales people you're hiring. Is that still part of your strategy going forward? And how would that impact what you're seeing in margins in the cost savings you've had?

Well, the fact is, you know, we are increasing. They have targets every month to keep adding X amount of people. We don't disclose the exact amount of them, but whatever the costs of those are, we figure we're going to absorb by the better performance in that. The sales force as of now is performing very well, and we will keep adding them, and, you know, we don't think that'll have any negative impact to our margin.

Okay, so there's -- what you've, I guess, seen this quarter, we should expect to see for the remainder of the year?

Hopefully.

Okay. And then just on the Corrections and the K-through-12 sector, I think in many cases you guys have brought in, particularly in Corrections, is a cost savings. I just wanted to get your thoughts on what you think would happen in an environment where estate tax revenues, you know, start to increase again and maybe the pressure on -- or the budget constraints are not as intense and maybe the demand for an outsourced solution that is represented as a cost savings is not as strong. Is there a counter-cyclical element to those business -- or demand for those businesses?

Well, let me add -- this is Bill again. I wouldn't look at everything we're doing for our clients as cost savings. I think you've got two things you have to look at. We think we do a better job of food service in both those markets, as well as our other markets, so it's a combination of the quality we deliver, as well as some cost savings. So I don't think if the budgets come back around, they're going to turn around and decide to spend more money there. They'll probably put it in other places.

And, in fact, our corrections business, we're showing very high growth rates during the period where state budgets were in strong surplus five, six years ago.

Okay, thank you for that.

Thank you. Our next question comes from [Chris Gutek][ph] with Morgan Stanley. Please state your question.

Thanks. Good morning, guys. Fred, just to dig a little bit deeper into the organic growth you reported in the U.S. Food and Support Services business of 4 percent, I assume that's not adjusted for the various timing factors and holidays. Is that correct? And have you tried to make any rough adjustments for those factors?

We did make an adjustment for the impact on the Education business because we did have one less service week in the quarter, so that was quantifiable, but we did not adjust for the impact in any of our other businesses, so the impact on sports and entertainment or business services --

Is it your general sense that --

You remember in the fourth quarter, too, it's sort of the inverse. In the fourth quarter, you remember, we adjusted the organic growth rate downward to adjust for the 50 -- the extra week in the fourth quarter.

Right. But putting aside the extra week, just the issues with the timing of the holidays and the quarter starting a couple days into October so you missed out on some of that, is it your general sense that if you had adjusted for all these factors, the organic growth would be similar or the same as you reported in fiscal fourth quarter? Or is this a modest acceleration or modest deceleration?

It would be a guess, but I would guess similar.

Okay. And it seems as if -- well, you guys certainly highlighted quite a few new wins in the quarter. Is it a situation where the bid pipeline in general is fairly robust just because lots of coming coming up for bid? Or is it, by contrast, a situation where you guys are out there aggressively -- aggressive with the sales efforts and/or a situation where your win rates are higher? Or is it a combination of all those factors?

I think it's a combination of all those factors. And, again, you know, something like -- you look at a Scott & White, you know, that's taking something, some sell [FOB], and we still think there's a fast potential out there in the sell [FOB] market that, you know, it's not just fighting it out with the competitors that there's still great opportunities for us.

Okay, great. And, Fred, on the balance sheet, looking at the capital structure, the Company has, I guess, primarily medium-term debt and a lot of that is variable interest rate. I believe some fixed to variable swaps were terminated in the quarter, and I'm curious looking at medium to longer term if interest rates presumably will be rising, what is the strategy for maybe turning out the debt structure and also maybe continuing to switch from variable to fixed debt?

Well, there are, I guess, two questions as to term and the fixed versus floating.

On the term, we'll continue to -- we have some public debt that's coming due in the summer. We'll take a look at whether we want to refinance that in the public markets, so I think that's in the two to three hundred million range. We'll be -- we're in the process of redoing our bank revolving credit, which comes due in about another 15 months, so we'll be extending that -- that's our principle credit facility -- extending that out for probably the next five years. So we'll continue to do that in the ordinary course.

From a fixed floating percentage, we manage typically between the 50-percent fixed to 60-percent fixed, and we're very comfortable with that. Right now, we're a little bit at the low end of that range, but part of that is driven by the seasonality of the cash flow, and that number will start to move up as we move through the year.

Are you guys expecting a debt ratings upgrade in the near term here? And to what extent is the hope for an upgrade impact in the Company's aggressiveness with share repurchases?

Well, you'd have to ask the rating agencies. I guess I can tell you what I know, which is that we are on positive watch with both S&P and [Fitch]. And, you know, where it goes from there, your guess is as good as mine.

Okay, great. And then, finally, just one question I guess either for Joe or Bill. There have been obviously a number of management changes and retirements over the last couple of quarters. Is the reorganization of the senior management done, or are there other changes and/or retirements that we should anticipate over the next few quarters?

Well, I think we're pretty well set right now, Chris. I think we've got a very energized team and, you know, we've been at this for a long time, and the key is for us to make sure we have the right team to take us forward for the next five to 10 years, and I think right now we're in pretty good shape.

Okay, great. Thanks, guys.

Thank you. Ladies and gentlemen, as a final reminder, should you have a question, please press star one at this time.

Our next question comes from Brandt Sakakeeny from Deutsche Bank. Please state your question.

Thanks. Good morning; Brandt Sakakeeny. A couple quick questions. First, can you give us a little more color on the cross-sell in terms of are you seeing better success selling support into existing food clients or food into existing support clients?

Yes. This is Bill. We're seeing it both. We're seeing the same as where we have food, picking up Uniform business, where we have facilities, picking up [indiscernible] coffee business, refreshment services business. You know, it really goes every which way, as well as, you know, selling it all as one, such as we did in Scott & White. So I can tell you that those campus accounts, we've had facilities where we picked up food. There's food where we picked up facilities, uniforms, and the like. So it's -- it really isn't more one way or the other; it's really a broad approach that we see working across the whole company.

Great. And could you remind us again just roughly what the returns of margins are in the Facilities business since that's not broken out separately?

Yeah, I think we talked about at the time of the ServiceMaster acquisition. The EBITDA margins in the Facilities business are comparable to slightly higher than in the Food business.

Okay. Thanks, Fred. Also, just on the new business front as well, you talked about, oh, a lot of things driving that business but at least driving the strength in the first quarter. Have you seen anything from the competitive landscape that makes you think that potentially competitors are being less price aggressive as they've been in the past, or anything you can talk to that?

I haven't seen any change.

Okay. Final question is on commodity prices. Looks like, obviously, with fuel rising and things like that, are you hedged out of anything, or could you just talk generally about any risks that may happen in the cost structure due to rising commodity prices? Thanks.

On energy, we don't hedge fuel costs, and that's difficult to do. We do have some contracts that lock up our natural gas cost, which is the other major energy component in our Uniform business, and we've done that in the past, and we're in pretty good shape there overall this fiscal year.

On the commodities -- food commodities side, we do some locking up on coffee, for example, because obviously we purchase a lot of coffee. And if you look at food costs overall year over year, they're really not tremendously different. If you look at beef prices, for example, year over year, they're pretty comparable on where they were a year ago.

Okay, Fred, how about cotton?

No, I don't think we hedge cotton. We, you know obviously buy fabric, which has got, you know, a blend in it. A lot of it actually is blended between, you know, cotton/poly blend, but we haven't seen any increases in that.

Okay, great. Thank you very much.

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

Thank you all very much for participating today, and obviously if there's any additional questions that you come up with, please feel free to contact my office, and we hope everyone has a terrific day.

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