Aramark (ARMK) 2004 Q4 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, to the ARAMARK Corporation Fourth Quarter Fiscal 2004 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. At the request of the Company, we will open up the conference up for questions and answers after the presentation.

I would now like to turn the call over to Bobbi Chaville, Associate Vice President of Investor Relations. Please go ahead, Bobbi.

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

Joe and Fred will present an overview of our fourth quarter results and business operations, after which there will be an opportunity for phone-in participants to ask questions.

Just a few things before we get started --

I would like to remind you that any recording or other use or transmission of this audio may not be done without the prior written consent of ARAMARK.

When we discuss earnings per share, we are referring to diluted earnings per share.

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

In the earnings press release and in today's discussion of results, we mention certain non-GAAP financial measures. The Investor Relations section of the Company's website includes reconciliations of these non-GAAP financial measures to the most comparable GAAP measures as required by SEC rules.

Various remarks that we may make in this call relating to matters that are not historical facts, including remarks about future expectations, anticipation, beliefs, estimates, plans, and prospects constitute forward-looking statements. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties, and important factors, including those discussed in the Risk Factors, MD&A, and other sections of our Form 10-K and Form 10-Q.

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

I would now like to turn the program over to Joe Neubauer. Joe?

Thank you, and good morning. Thank you for joining us for our fourth quarter earnings call.

I would like to start this morning with an overview of ARAMARK's 2004 performance, which will include strong organic growth for the year and significant progress towards achieving our Mission One objectives.

I'll update you on several issues that we talked about at the last earnings call; in particular, our healthcare business, our national parks, and Galls. And before turning over the call to Fred, I'll discuss the financial details and results of our business segments and give you the 2005 outlook. I will discuss our international business, as we've experienced some recent challenges in that segment.

Today, ARAMARK reported fourth quarter 2004 sales of 2.6b, net income of 84.6m, and earnings per share of 44 cents, which includes the impact of the September management change of 3 cents a share. This compares to '03 fourth quarter results of sales of 2.6b, net income of 105.3m, and EPS of 54 cents.

Adjusting for 2 previously disclosed non-operating items in the 2003 fourth quarter, which Fred will describe later, net income in 2003 was 92.2m, and earnings per share were 47 cents. Two thousand and three's (2003) fourth quarter also included an extra week, which had the effect of increasing sales and earnings by an estimated 8 percent, compared to our normal 13-week quarter.

I'm very pleased to report that we crossed the $10b mark in sales last year. Full-year 2004 sales of 10.2b grew 8 percent in total and 6 percent organically from 2003, which is within our 6- to 8-percent top-line organic growth range target. This is a significant accomplishment for our Company and one which all of our employees should be very proud of.

Two thousand and four (2004) income from continuing operations was $263.1m, and earnings per share were $1.36, which again includes the 3-cents charge related to the management change as compared to $1.34 for 2003.

Now, on a comparable basis, reflecting the non-operating items that Fred will discuss later, we had EPS growth of 10 percent even with 1 less week in 2004.

Full-year organic sales growth on a comparable-week basis doubled from 3 percent in '03 to 6 percent in '04, and we had 6-percent organic growth in our Worldwide Food and Support Services business and 2 percent in our Uniform business, both significantly improved over prior year.

Year to year, new business is up from last year -- I'm sorry, year-to-date new business is up from last year's robust levels. However, lost business is also up year over year due to particularly competitive market in the Sports and Entertainment sector and our ongoing discipline not to stretch to retain business that we deem economically unattractive.

Mission One sales were more than 25 percent of our new business. The momentum in our Mission One continues to build throughout the organization in 2004. Our employees connected and collaborated on over 2,000 specific Mission One opportunities throughout the course of the year. Now, these opportunities included expanding services with existing customers, as well as approaching potential customers in an integrated fashion.

I'm very pleased with our Mission One progress so far this year, and this initiative is the key to growing our business in the future, and I can assure you that we are being especially diligent in our focus on achieving profitable growth.

We also generated strong internal cash flow of $306m for the year, up 11 percent from a comparable 274m in 2003.

Last week, we announced that our Board of Directors approved a 10-percent increase in our quarterly dividend to 22 cents on an annualized basis and authorized an additional 200m shares of repurchase, action which show their confidence in our business model, our continuing strong cash flow generation, and our ongoing commitment to shareholder value.

Now, we mentioned a few challenges in our last quarter's earnings call, and I'd like to update you on them.

We're making good progress on the large multi-service healthcare contracts. This business is attractive to ARAMARK since we think it differentiates us from our competitors in the marketplace and plays to our strength of delivering unparalleled quality and breadth of service in the healthcare industry. These contracts are long-term, mostly 10 years, and we have seen the financial performance of these contracts improve from the third quarter to the fourth quarter.

We have also seen improvement in our clinical equipment business from a third quarter as our profit improvement programs against specific clinical equipment accounts begin to take effect.

While we expect to continue to see some level of challenges through the first half of 2005 in both of our healthcare and clinical equipment business, we expect these businesses to operate in more normal levels of profitability in the second half of 2005.

Turning to our Parks business, most of our parks [turned][ph] an improved year-over-year performance for the fourth quarter. However, as we anticipated, Lake Powell continued to be negatively affected by the drought conditions and the related publicity.

In our Uniform Direct Marketing segment, we experienced weak results driven principally by the ripple effect on Galls of the Department of Commerce investigation of export sales. We are cooperating fully with the investigation in refining our export procedure. While our export sales are a very small part of Galls' overall sales, we expect -- as expected, we did experience a decline in sales to other customers.

Turning now to our International Food and Support Services segment, 2004 fourth quarter sales generally increased across the board. However, improved earnings in nearly all of our international operations were more than offset by a significant decrease in the U.K. results as a combination of several issues negatively affected this business. Fred will discuss the details in a minute, but I can assure you that we are focused on these issues and have already initiated corrective action. We expect to see meaningful profit improvement in our International segment throughout fiscal 2005.

Now, let me turn over the call to Fred, who will discuss our financial results in detail and give you our 2005 outlook. Fred?

Thanks, Joe.

I want to spend a couple of minutes taking you through our overall financial performance, and then I'll discuss our business segments.

As you know, our fiscal 2003 fourth quarter included 14 weeks, compared to a normal 13-week quarter. We estimate that the additional week added about 8 percent to sales and operating income for the fiscal 2003 fourth quarter and 2 percent to the 2003 full year. As a reminder, organic growth adjusts for the impact of acquisitions, divestitures, and foreign currency, as well as the extra week in fiscal 2003 and the calendar shift between '03 and '04.

Total sales for the 2004 fourth quarter of 2.6b were up 1 percent versus the prior year. Sales for our Worldwide Food and Support Services business increased 5 percent on an organic basis, while our Uniform Rental segment delivered 4-percent organic growth, up from 3 percent in the 2004 third quarter.

Our Uniform Direct Marketing business declined 3 percent organically, driven principally by weakness at Galls.

For the full year, sales were $10.2b, which was up 8 percent on a reported basis. As Joe mentioned, organic growth was 6 percent in Worldwide Food and Support Services and 2 percent in our overall Uniform business.

Fourth quarter 2004 net income was $84.6m, compared to $105.3m for the '03 fourth quarter. Two thousand four (2004) includes the impact of the management change that we announced in September, while 2003, as we discussed last year, includes insurance proceeds related to our World Trade Center operations and a charge to write down a residual investment in our Periodicals Distribution business.

Earnings per share for the 2004 fourth quarter were 44 cents compared to 54 cents in the '03 fourth quarter. Adjusting for the items I just mentioned, comparable earnings per share were 47 cents for this year and 47 cents for last year. And as I mentioned, last year's results were affected by the extra week, which added about 8 percent to the 2003 results.

Turning now to our U.S. Food and Support Services segment, fourth quarter 2004 sales were $1.8b, and organic sales growth was 6 percent.

To facilitate my discussion of sales growth by sector, comparisons of '04 will be to '03 amounts that have been reduced by about 8 percent for the quarter, resulting in comparable week comparisons.

Business Services' sales growth was in the mid-single digits for the quarter. This growth was driven by a balance of improved base business growth and solid net new business. New accounts included Merck and Blue Cross Blue Shield of Louisiana.

Education had a strong quarter, with sales growth in the low double digits, driven by very solid base business growth in higher education. This growth was, in turn, fueled by our marketing efforts designed to increase student participation through voluntary meal plans, increased per-capita spending, and expanded [C][ph] store business, as well as by the start-up of several significant K through 12 contracts.

New accounts include the University of California at Irvine and the Garden City Michigan School District.

Sports and Entertainment sales growth was slightly negative as sales were affected by a decline in our parts business, a lower number of baseball and football games, and a weak concert market.

Facility sales growth was in the low double digits for the fourth quarter and the full year as we continued to show solid net new business in both the healthcare and education markets. New business includes the DC Convention Center and the candy manufacturer NECCO.

The Healthcare and Corrections Food Services businesses delivered high single-digit sales growth that was driven by solid base business growth. New Corrections account wins include Cook County Commissary in Illinois and the Alabama Department of Corrections' Youth Centers.

U.S. Food and Support Services' fourth quarter operating income of $136m includes a 4m favorable litigation accrual adjustment due to the settlement of the East St. Louis matter and the unfavorable effect of about $1.5m from the disruption caused by 4 hurricanes in the Southeastern United States on our Stadium and Arena, Conventional Center, Correctional, and Education businesses.

Two thousand three (2003) operating income of $167m included the $32m of World Trade Center proceeds and, of course, the extra week impact of approximately 8 percent.

Turning now to the International Food and Support Services segment, fourth quarter sales of $463m were 25 percent above the 2003 fourth quarter. Foreign exchange contributed about 10 percentage points of this increase. Organic sales growth was 3 percent. Full-year sales increased 28 percent over 2003 to $1.8b, 6 percent on an organic basis, up from 4 percent for 2003. This currency translation contributed approximately 12 percentage points.

Recent new business wins include Conoco in Canada, Real Madrid, a soccer stadium in Spain, and WestWind Capital and Main Airport Center in Germany.

Fourth quarter segment operating income decreased $5m from the prior-year period to approximately 8m in 2004. Increased operating income in Canada and Germany was more than offset by a decrease in U.K. results. The U.K. results were negatively affected by losses from some of our offshore oil services operations, catering alliance integration efforts and related costs, and several fourth quarter accounting adjustments. These adjustments included a write-off of prior amounts and a revision to current year estimates of amounts due from vendors, as well as a reserve for possible contact client adjustments.

Turning now to our Uniform segment, fourth quarter 2004 sales in uniform rental of $264m were down 3 percent due to the extra week in the '03 fourth quarter, but organic growth was 4 percent compared to 3 percent in the '04 third quarter. We are encouraged by the performance of our uniform rental business. We have seen 4 consecutive quarters of improved organic growth, and the fourth quarter's growth was the highest since the first quarter of 2001. I'm pleased to say that client retention improved to 93 percent for the full year from 92 percent in 2003.

New business sold for the quarter continued at a solid rate of about 13 percent of the year-earlier base with about 60 percent of the new sales coming from first-time users of rental programs.

Lost business was steady at about 8 percent, with almost 1 quarter of the losses coming from customers who simply went out of business.

Price increases contributed about 1 percent to current quarter sales growth. We were also encouraged by our base business growth, which improved throughout the year and was a negative 3 percent for the quarter. We expect to see continued improvement in fiscal 2005.

Fourth quarter 2004 operating income for uniform rental was $31.1m, even with the 2003 fourth quarter, not withstanding our investment and our planned sales force ramp-up and before considering the effect of the extra week last year. The operating margin improved more than 30 basis points from the 2003 fourth quarter, driven by higher organic growth and lower garment costs, which resulted from a higher level of self manufacturing, offset by continued pressure on fuel and labor-related cost, as well as the ramp-up cost of the sales force.

Uniform direct marketing sales decreased 12 percent in the 2004 fourth quarter to $100m, and organic growth was negative 3 percent. The sales at Galls were negatively affected by the ripple effect of the Department of Commerce investigation.

Operating income for the segment declined from $7.6m in the 2003 fourth quarter to $1.5m in the 2004 fourth quarter due to weakness at both Galls and WearGuard-Crest.

At Galls, the year-over-year sales decline and costs associated with the investigation had a significant impact on profits.

At WearGuard-Crest, the customer mix shift to lower-margin products and costs incurred for a major national account rollout and our quick-service restaurant business also had a negative impact on earnings.

Now, I'd like to spend a few minutes on the balance sheet and cash flow.

At year-end, total debt was about $1.9b, up from $1.7b at the end of fiscal '03. Our credit profile continued to strengthen during fiscal '04. At year-end, approximately 70 percent of our debt was at fixed interest rates. Internal cash flow, 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, was $306m for 2004, up 11 percent from the comparable $274m for 2003.

Net capital expenditures were $288m for the full year, compared to $270m for full-year '03. We expect net CapEx to continue to be in the general range of 3 percent of total sales. Working capital was a $43m use of cash for the year.

During the quarter, we repurchased 3.1m shares for $76m. Total repurchases for 2004 were 7.4m shares for $193m. As Joe mentioned, last week, our Board of Directors approved an additional $200m authorization for share repurchases, bringing our total remaining authorization to about $225m.

Now, I'd like to provide you with our 2005 outlook and guidance. Our guidance assumes a slow but steady improvement in the economy and employment levels.

Our full-year and first quarter guidance are before consideration of the impact of the National Hockey League lockout.

We anticipate our full-year consolidated sales to be between 10.7 and $11b, driven by organic growth in the range of 5 to 7 percent.

We are targeting 5 to 7 percent organic growth in our Worldwide Food and Support Services business and 2 to 4 percent in our combined Uniforms business.

Diluted earnings per share for 2005 are expected to be in the range of $1.50 to $1.60.

First quarter 2005 sales are anticipated to be between 2.6 and $2.7b and diluted EPS to be in the range of 36 cents to 38 cents.

We currently operate 11 NHL venues with annual revenues of roughly $100m. If the lockout lasts for the full season, we estimate that the impact on EPS will be a reduction of about 4 cents, about 2 cents in each of the first and the second quarters.

And now I'd like to turn the call back over to Joe to wrap up.

Thank you, Fred.

As many of you know, our Board announced a management change about 2 months ago. I've agreed to serve as CEO of ARAMARK for at least 3 years. I'm supported in my efforts by the 200,000 people, strong, who comprise ARAMARK, as well as the strong leadership team of 8 executives, who, with me, make up our Management Committee. These include our 4 operating presidents, as well as the 4 executives from our corporate office who have an average of more than 15 years' experience at ARAMARK. We meet on a regular basis to formulate strategy, to oversee operations, to focus on leadership development, and to deliver our Mission One initiatives.

Over the past 2 months, I've met with many of our employees and our clients, and I'm optimistic and enthusiastic as ever about ARAMARK's business model and our future. So what gives me such optimism? Well, several things.

ARAMARK is well positioned to benefit from the outsourcing trend that we continue to see in the U.S. and internationally. Our Mission One initiative has surpassed my expectation, and I have every reason to believe that this momentum will continue into 2005 and beyond. And we have a strong and deep [bench][ph], and I plan to greet our top 230 leaders next week at our Annual Management Meeting in Florida.

That being said, there are some issues that continue to affect our business negatively, some within our control and some that are not within our control. As you can imagine, we're working diligently through the issues that we can control. Now, we can't necessarily control the competitive environment, but what we can and will do is to continue to make business decisions that are in our shareholders' best interests.

We must and will balance growth and profitability, and I've delivered this message to our team. We need to maintain discipline in how we serve our clients, and this includes leveraging best practices across our businesses, and we will focus even more on our end-users; that is, the consumers.

As we complete our third year as a public company, I'm proud of our record since our initial public offering. During this time, we have improved our top-line organic growth rate to 6 percent through our Mission One initiative with increased sales and earnings per share at an average annual rate of 11 percent and 15 percent, respectively.

We have returned over $500m to our shareholders in the form of cash dividends and share repurchases while maintaining a healthy investment in the business, making strategic acquisitions, as well as maintaining investment-grade credit rating.

We have significantly boosted our service capability with the acquisition of the ServiceMaster business and successfully divested our non-core childcare business.

And we've expanded our international footprint into China, Ireland, and Chile, and by increasing our ownership stakes in our operations in Japan and Korea.

We continue to have confidence in our business model and believe that our future is quite positive.

I thank you for your continued confidence in our team, and we look forward to speaking with you throughout the year.

Now, I would like to open it up for questions.

Thank you, sir. [Caller instructions.]

Jonathan Shapiro, Goldman Sachs.

Hi, guys. This is actually Fitz Peters sitting in for Jon. And I -- you guys actually answered the question I had, so thanks anyway.

Good. Thank you.

Thank you.

Brandt Sakakeeny, Deutsche Bank.

Joe, just a couple questions on the cost side first. Could you just walk through either like natural gas, state unemployment insurance, worker's comp? Do you think you'll be anniversarying some of the price hikes that you saw last year this year in the first half or the second half? When do you expect that cost -- those sort of cost pressures to start improving?

Brandt, this is Fred. Let me take a shot at that. In the fourth quarter, fuel costs -- as you know, energy cost affects our Uniform Rental business. In the fourth quarter, the year-over-year impact of that was in the range of 20 to 30 basis points as it applies to the Rental business. So we think that that will continue to be a challenge for us if fuel costs and natural costs continue to go up. So it really depends on what the future costs are in those categories.

With regard to worker's comp, state unemployment insurance, and the like, healthcare, I think gradually we will start to make some progress on those. We've initiated with this new fiscal year a whole series of programs to better control our worker's compensation costs and healthcare costs with changes to our benefit plans, prescription drug programs, care management programs, new safety programs on the worker's comp side.

We led in worker's comp with our Uniform Rental business about 9 months ago, and in fact, their frequency and their severity is down year over year, '04 to '03, which is a huge accomplishment by our Rental team. Now, having said that, it takes a while for that to work its way through the system, so I think we -- we're hopeful that, first, we will reduce the rate of increase to being more in line with the increase in the business.

Okay, great. Did you -- and I apologize. I jumped on late. Did you give us an [add/stop][ph] ratio in the Uniform business?

Yeah, it was minus 3 percent.

[Inaudible - multiple speakers].

Slightly improved over the third quarter.

Okay, great. Thank you.

Monica Aggarwal, Merrill Lynch.

Can you give us an update on integrating the large healthcare contracts?

Yeah, Monica, this is Fred. As Joe mentioned in his comments, we think we've made terrific progress, both in the large healthcare contracts and in the clinical equipment business, and there was a clearer improvement in profitability in those large, complicated multi-service contracts between the third quarter and the fourth quarter. And while they're not running yet at target levels of profitability, we are increasingly confident that we will get there during '05.

Where have the main challenges been? Is it because they're just lumpy because they're large, or you know, are there any metrics you can control to make sure that the transition is smoother going forward?

Monica, let me try and answer that. You know, we have a very large portfolio of services that we offer our healthcare institutions. So what have we learned in all this is that this is a terrific opportunity for us to add value and build long-term relationships. It really strikes a real need in our clients.

And having as much data out front about what they're doing is very important to us in properly evaluating the economic benefits that we can bring to them.

Now, even the top client, the top hospitals, struggle to provide the granularity that we need, the information upfront that we need, and where we can, what we have done is on an interim basis have agreed with them that we'll share the economic risks while we both learn the granularity of what we need to do. And from then on, we can go on and take it completely on our nickel, so to say, from a profitability point of view. And we've actually done that with several contracts in the last few months, and that works quite well for us.

Okay, thank you very much [here][ph].

You're welcome.

Chris Gutek, Morgan Stanley.

A couple questions on the international business. I guess we've had a couple quarters now with pretty meaningful deceleration in the growth now to, you know, into the lower single digits. What's the main driving force behind that? And if possible, could you give us some sense of the growth by your 3 main countries?

Yeah, Chris, this is Fred. We have had some deceleration in the growth over the last 6 months. The market is very competitive, particularly in the U.K., which is our flagship operation in terms of overall size. And I'd say generally our U.K. growth rates are pretty consistent with the overall international growth rate. Our other -- Germany has -- I think is pretty consistent with that as well. Germany, I think as you know, the economy there has been quite weak, and we think we're doing competitively relatively well there, but we do have low single-digit growth rates. And then generally in the other countries, our growth rates are in the mid- to high single digits.

Okay. And then I was quite surprised by the reported growth, as opposed to the organic growth being a lot higher than we'd assumed. Fred, could you give us some sense for the contribution by the major acquisitions over the last year?

Well, the principal -- there are 2 effects in international -- acquisition effects that affect the difference between the reported growth and the organic growth. One is the addition of Catering Alliance in the U.K., and the other is the consolidation of Chile, the Chilean joint venture that we now own 51 percent of. And those 2 account for the bulk, the vast bulk of the difference between the reported growth adjusted for currency and the organic growth.

Okay. And then, finally, the margins in the U.K., Fred, maybe if you could elaborate a little bit more. Clearly, it sounds like some of these issues are relatively short-term, non-recurring. For example, the CA integration costs and maybe some of the other issues. If you could just give us a little bit more sense for the impact of some of these costs individually and what the timeframe will be for those cost pressures to go away?

Well, the -- there were several things, as I mentioned in my comments.

Catering Alliance is an acquisition that we're still in the process of integrating, although in the context of total ARAMARK, it's relatively small. It is about -- it does account for about 20 percent or so of the revenues that our U.K. business before Catering Alliance, so it's a fairly significant acquisition for the U.K. management team. And we are now in the process, after holding it separate for some period, of integrating it in, and I think we'll continue to see some challenges there over the next quarter or 2.

In our offshore oil business, we have a couple of challenging contracts that we are working on, and I think those also will be contracts that we'll need to work hard on to improve their profitability in our offshore business over the next quarter or 2.

The other factor in the quarter related to some year-end accounting adjustments that we took related to receivables from vendors as we identified some differences and wrote off some receivables. We see that as pretty much of a 1-time sort of item and not really one that has an impact on our overall U.K. business as we move forward.

Okay, great. Thank you.

Chris, let me just add to that. You know, our U.K. business has more than doubled in the last 4 years, both organically and through the acquisitions. And Fred mentioned Catering Alliance. Before that, we did Campbell Bewley. And you know, looking back at that, we clearly need to add some infrastructure, some people, some systems, some processes to keep pace with the growth overall there, and we think we know what we need to do. We've already started doing it. It is a tough and competitive marketplace. As you know, we are number 4 there -- number 3 there, rather. There are 2 other big competitors. But having said that, we don't expect these issues to have a meaningful impact on our 2005 results, and we expect to see profit improvement in our overall international segment throughout 2005.

And, Joe, just to follow up on that, obviously, Compass has had some problems in the U.K., so you're pretty confident there isn't a broader industry problem there in terms of significantly increasing competition that will impair the profitability going forward?

Well, I think, generally, as you know, Chris, we don't comment on the competition. And you know, we've read the press, just as you all have, but we really don't have a clear insight as to what their issues are. As best we can tell, you know, we don't believe that our issues are related to theirs at all. We are very satisfied with our supplier arrangement in the U.K., and we don't anticipate any ongoing impact on the business.

Right. Okay, thank you.

Kevin Monroe, Thomas Weisel Partners.

Joe, just to touch back on the healthcare contracts again to see if you could give us a little more clarity on the issue that you touched on in terms of getting the proper data upfront. Is the fact that you're expecting an improvement in the profitability towards the second half of '05, is that more a factor of anniversarying some of the initial contracts that might not be as profitable as you want? Or is it -- are you having success in going back to those contracts and reworking them, so to say?

This is Fred. I think that the answer is really a combination of the 2. Clearly, as you start these contracts up, you have a lot of start-up costs associated with it. You're relocating people into the operation, there's an awful lot of training going on, and those costs, obviously, are all borne upfront. And many of these contracts, we're taking over 10, 12, 15 different services and literally hundreds of people that are scattered throughout various departments in the hospital. So that gradually -- that additional expense gradually dissipates over time as the operation -- as we take over the operation. So that's one component.

The second is that as we take over the operation and get further and further into the business, in a couple of cases, to the extent that we have not received the most accurate information as to what the costs are that we are picking up or there are areas that are not clear as to whether this is their -- the hospital's cost or our cost, those are things that you have to work through with the client by sitting down with the clients and working all of that out. And we're well into that process, and generally, that's gone fine because the clients generally have been happy with the service we're providing, and we are reducing their costs.

Okay. A follow-up question. Just going to ask the question anyway. Do you guys -- would you give any level of -- you know, what's the level of profitability of those healthcare contracts now maybe versus the general U.S. food services and where do you expect it to be? Do you think it's the higher-margin business, kind of in line, or is this a lower-margin business going forward?

I think it's fair to say that the businesses -- the margins in the business have improved over the last 6 months. The margins are clearly lower than our average overall margin in the business, but we're quite confident that the margin in this business can be comparable to our overall margin in the food business.

This is Joe. I would add that, you know, we're targeting the margin in these businesses, which are multi-service businesses to the healthcare industry, to be well in line with our overall portfolio of businesses in terms of margin. Now, you understand that in any one of our businesses, I can pick out 10 contracts that are below our target margins.

Right.

That's every day. And that's what we do for a living, you know, make them better all the time. So I think these were just, again, larger, more visible, a little more learning for us, but I think we've got it now.

Good. Thank you.

Jeff Bourke, Robert Baird.

First off, just welcome back, Joe.

Thank you.

Fred, just a quick clarification. The write-off of receivables in the international business that occurred this quarter, is it the same process that you went through last year where you had some cost-plus contracts you adjusted, or is this a different process?

A small portion of it was the same.

Okay.

But it was a small portion.

Okay. Shifting gears to the Uniform business, can you kind of walk us through where you are now in the process of ramping your sales force? Have you done most of the hiring at this point?

Well, we have increased the sales force year over year. I think the crossover point was about midway through the year in the year-over-year headcount. And our headcount of the combined sales force sales management in the fourth quarter year over year is up double digits over the prior year.

Okay.

So we've made good progress in the last 4 to 5 months of ramping that sales force up, and we'll continue to increase the sales force going forward. I think the rate of growth will be somewhat less than what we've seen in the last 4 to 5 months.

Okay.

But, of course, we're still -- year over year, we're feeling the impact of that double-digit headcount increase, let's say, versus the fourth quarter of last year from a P&L point of view.

And in our sales productivity, the sales per sales rep are actually comparable, very comparable, to what it was last year in the fourth quarter, so we're pretty pleased to be able to ramp up the sales force headcount pretty significantly without a big drop-off in the productivity.

Okay, great. My last question is in the Sports and Entertainment market, a couple of high-profile losses with the Lakers and the Cubs recently, is there a significant issue going on there, or is that just normal competitive trading back and forth?

Well, as I mentioned, this is -- continues to be a competitive industry overall, and every so often certain accounts become extremely desirable to one competitor versus the other. As we -- as I said in my comments earlier, we are not going to do things that are uneconomical or things that, in our opinion, don't increase shareholder value for us.

Overall, we compete very aggressively for all these pieces of businesses. These clearly are big revenue accounts, not necessarily big bottom-line accounts at times, and we are very disciplined in terms of how we approach them. And sometimes you win and sometimes you lose those, and clearly, a couple of those we didn't see them quite exactly the same way our competitors did.

Okay, great. Thank you, guys.

Gary Bisbee, Lehman Brothers.

A couple of questions. Given the improvement you've seen over the last 6 months in the margins in these large healthcare contracts, does this change the focus of your sales effort, you know, going forward? And I guess maybe a better way to ask the question is if you'd look over the next 2 to 3 years, do you expect this facility services or these larger contracts to be a material -- materially larger piece of the Company?

Let me try to answer that. Clearly, they have become part of what we're all about on a daily basis. The sales force in the healthcare business is getting more and more sophisticated in selling these contracts. As you can imagine again, these contracts require a totally different approach to the sales process because you need to sell them at a much higher level of the client institutions. This is not the purchasing agent making the decision. This is usually the chief operating officer or very often the chief executive officer making the decision to outsource several hundred people at a time.

I think we'll get more skilled at that. I think that we are getting more inquiries from other clients as to what we're doing. This is becoming clearly known in the industry, and we're delighted with the progress we're making against it.

And given that, do you feel like that business today is less competitive so you'll be able to grow that more rapidly over time just because you're one of the fewer people offering those services?

Well, you know, as I said before, this is a very competitive marketplace, and you know, you can't -- the wonderful thing about the service business is there are no trademark, no patents that expire every 14 years. All you have is your skill of the people, the training of the people, and your ability to conceive the needs of your clients and satisfy them. So we'll continue to try and stay ahead of everybody in this marketplace.

Okay, thanks. In past couple years, I think you've given an actual dollar amount in terms of the annualized new business sales or wins that you've had. Are you willing to give us either a number or where that -- what the direction's been over the last year?

Yeah, the direction, it's up sort of mid-single digits in the overall annualized volume of sales year over year.

Okay. And then just one last one. Is that -- you've also, the last couple of quarters, said that lost business, partly by design, I guess, due to profitability, has been up year over year. Is that number that you've given historically net of lost business? And just any commentary on, you know, how the net new business minus lost business may have been in fiscal '04? Thanks.

As I mentioned, the net business -- the lost business has increased, and therefore, the net business is down versus last year, and that's really affected by these large revenue accounts that I mentioned before, particularly in the Sports and Entertainment business.

Okay, thank you.

Brad Safalow, JP Morgan.

Just was hoping you could give us some -- just a little incremental detail on what the trends look like currently at Galls and whether you see any signs of an inflection point of profitability as you get further away from the kind of headline exposure to the investigation?

Well, I think that, you know, at Galls, you remember, the investigation had to do with our export sales from Galls that required Department of Commerce licenses. That was a very small part of what -- the business that Galls was conducting, less than 5 percent of its business. We're fully cooperating with the investigation, but we can't predict the length of the investigation or the outcome of the investigation.

We continue to experience a decline in sales. Some weeks actually have been a little better. Some weeks have been a little weaker. So we can't discern a trend as yet, but we clearly hope that as we get further and further away from it, it will have less and less effect. And I think that we're still a little too close.

Remember, that happened in July, so we just have August and September in there and October, and we're behind in terms of shipping because our resources were diverted to responding to a couple of requests from them. And the profitability levels again are down because we have related costs of the investigation. So we're hopeful that the profitability of Galls will improve throughout the year, and we also are hoping that the sales trend will improve throughout the year.

Okay, so you -- I mean is there anything fundamentally that you're changing within your operations because of, you know, whatever [inaudible - multiple speakers].

Well, I think -- I think that we are training our people better, and I think it's a process improvement. But, remember, that applies to less than 5 percent of the business. So there's no fundamental change in 95 percent of the business.

Sure. And then just to shift gears on the Sports and Entertainment side. Excluding some of these larger contract losses, what would have the organic growth rate looked like? Do you have any sense for that?

I think that overall our -- let me talk about within accounts. I think our teams have done an outstanding job in increasing participation rates as well as per-capita rates for -- in many of our stadiums, and by introducing new products into the stadium. I think they've done a terrific job on it. Now, remember all of that, the losses, didn't have any impact in '04. They will have impact in '05.

Okay. So the organic growth you reported is really more a function of the number of dates you had for baseball and --

Correct.

-- parks business?

Correct.

Okay. Okay, I'll turn it over.

Jeff Omohumdro, Wachovia Securities.

Joe, it appears like the organizational focus on Mission One has been pretty effective over the past few years. I'm wondering with your return, do you evolve that? Do you change the organizational focus? How do you approach strategically moving the Company forward?

Well, clearly, Mission One is an important part of what we're all about. And we continue -- I mean the first week I was back, I went up to Toronto to lead a Mission One Star Team meeting. And we have now had about 20 of those throughout. And you know, Fred has conducted some, and our 4 group heads each conducted some. So that has become part of our culture, and we'll continue to focus on it.

Clearly, profitable growth is what this Company's all about, and we'll continue to emphasize it. I'm delighted at the ongoing interaction between our various business groups as they share leads, as they share prospects, and their ability again to go in and sell multiple and complex contracts. So that's what Mission One is all about. It just takes us to a whole new level of engagement with our clients and also allows us to focus much more on the consumer, which I'd mentioned in my comments because at the end of the day, whoever understands best about the consumer is going to be able to provide much better service to the client.

So in other words, there's still a lot more work left to be done with Mission One?

Mission One is an evolving process. It's not a -- it's a dynamic concept. It's not, you know, a 1-time deal. As I think we have used some baseball analogy with you, so last year, we were in the second inning, so now we might be in the third inning. You know, we sure as heck are not in the ninth inning. And we've engaged our entire Management Committee -- this is the 9 of us -- in Mission One. We're going to be in Florida. We're going to hand our Mission One awards. We're going to talk about Mission One. We're going to hand out Star Team awards. You know, it's very much part of our culture.

Great. Thank you very much.

[Caller instructions.]

[Ashish Naon][ph], [Fairlawn Capital][ph].

Quick question on the international. You know, I might have got it wrong but just wanted to verify. In the U.K., did you have any -- did you -- you mentioned writing off receivables related to suppliers. Were there any issues with regards to payment terms? I thought I caught that, but I might've heard wrong.

No. No, there were not.

Okay, great. The second question is the U.K. market, as you said, is pretty competitive. Could you sort of give some more read into, since this is the most significant part, of which verticals? Is it primarily B&I you're talking about? Is it more opportunity or less competitive situation in healthcare and education?

It's really mostly in the B&I market, which is quite competitive in the U.K., and our business mix is in the -- in our international operations is much more heavily weighted towards the B&I side. So the majority of our U.K. business is B&I business, and our other businesses, Education and the like, are smaller, so it has a disproportionate impact.

Okay. Last question was on offshore. You mentioned that some of these contracts, you know, saw a regression in profitability. Could you sort of identify what the reasons might have been? And I mean it seems like that could be a pretty interesting opportunity for ARAMARK given that you're not [indiscernible] any significant manner and competitors have grown that business significantly over the years. Could you sort of just tell us a bit more about what the issues were? Is that a -- is that just an execution issue, or is it something to do with the structure of those contracts?

Ashish, this is Joe. Again, the offshore business, if you think about in [North Sea][ph] and everything else for a minute, the North Sea is pretty easy. We understand that, where they're all [all][ph]. Then we're in a few other places where it's much more challenging, and those are pure execution issues. They're nothing to do with anything else. It's just, you know, scopes, [indiscernible], and execution. That's all it is.

Great. Thank you.

Chris Gutek, Morgan Stanley.

A couple follow-ups. Fred, your own definition of cash flow excludes the working capital impact. But if you include working capital, the cash flow from operations compares quite unfavorably with the prior year. What explains the working capital movement?

Chris, our working capital last year was actually positive. It was a source of cash. And as you know, it's been a source of cash for the last couple of years. And part of that, as we talked about, is the tax benefit that we've gotten on the old option programs that we had as a -- as a private company, which allows us to deduct the expense on those as they're exercised. And as we've said in the past, that benefit is declining over time, and it's pretty much over the next year it's pretty much going to be gone. So I think we've always said that our working capital is generally -- we would expect to be a moderate use of cash. The $40m, $43m, I think, use of working capital that we had for '04 reflects, again, a more moderate use of cash. Plus, in '04, remember, our [indiscernible] growth rate doubled in the Company from the beginning of the year to the end of the year. And as a result of that, we clearly had increases in receivables coincident with the doubling of the business. Having said that, though, our DSOs are pretty much on par with where they were the last year.

And then, secondly, our inventory is up somewhat, mostly in the Uniform business, and that's associated with the introduction of some new products, particularly in the fire retardant area, where we've had some fairly substantial inventory builds because of some big contracts we've signed.

And then, as I mentioned, we're in the midst of a national rollout in one of our QSR customers and have built up our inventory connected with that.

Okay, great. And then if I could just follow up a little bit on the Galls situation, and I apologize for maybe beating a dead horse here, but the export sales that are subject to export license requirements are a pretty small percentage of Galls' total sales and, therefore, loss of those sales shouldn't really move the needle in terms of the revenue and the margin. I assume that the broader problem is the federal government significantly cutting back on orders from Galls while the investigation is proceeding. Is that correct? And if so, can you put some numbers behind that?

Yeah, I -- Chris, this is Fred. The Galls business had negative organic growth. The overall direct marketing segment, I think we said, had 3-percent negative organic growth in the quarter, adjusting for the extra week. The Galls business had more negative organic growth than that. The -- and the drop-through on that is relatively high. The gross margin in the business is in the 40s. And it was not the export sales specifically that affected the profitability; it was this ripple effect, as you point out, with other government agencies.

Okay.

And we think we can -- we can slowly but steadily work our way through that -- through that issue.

Okay. And then, finally, Joe, when you look at the big picture for these uniform sales businesses, both [Crest-WearGuard] and Galls, it seems that the Crest-WearGuard business competes in a pretty competitive, commoditized business, and then Galls, it's always in our view that it might be a good business, but it's not necessarily a great strategic fit. No real synergies there. Have you guys reevaluated your commitment to the business? And if you are still committed to these businesses, why?

Well, I think that a significant portion of WearGuard sales are coming through the [AUS][ph] sales force, and that's an increasing percentage. And as a matter of fact, the direct sales portion by AUS is very strong double digits and actually accelerating. So we're very excited about that. We're also very excited about the uniform part of the Galls business, which again is accelerating much faster than the rest of it. So we think it all fits together, and we're very committed to it.

Okay, great. Thanks.

And that will be our last question for today due to time constraints. At this time, I'd like to turn the call back over to Bobbi.

Thank you all for your questions and your interest in ARAMARK. We hope you have a great day.

And that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.