Aramark (ARMK) 2005 Q1 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, to the ARAMARK Corporation First Quarter 2005 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 the conference up for questions and answers after the presentation.

I now turn the call over to Bobbi Chaville, Associate Vice President of Investor Relations. Please proceed, Bobbi.

Thank you, and welcome to ARAMARK Corporation's conference call to review the results of our first quarter of fiscal 2005. 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 first quarter results and business operations, after which there will be an opportunity for phone-in participants to ask questions.

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 will now turn the program over to Joe Neubauer. Joe?

Good morning and thank you for joining us to discuss our first quarter results, which included record sales, strong organic sales growth, and solid profit growth.

Today, ARAMARK reported record first quarter sales of more than 2.7b, an 11-percent increase over 2004 first quarter sales; net income of 72.4m, up 8 percent from prior year's quarter; and earnings per share were 38 cents, an increase of 9 percent over last year's quarter.

Now, these results were particularly gratifying since they were achieved despite the negative impact of the NHL strike. Overall, organic growth was a solid 6 percent, including 7-percent growth for worldwide Food and Support Services and 3 percent for our Uniform business.

New business sold during the quarter was up 18 percent over the prior year's quarter, and net new business was up 12 percent. We continue to have good traction with our Mission One programs. Members of the Management Committee and I will have the opportunity to get in front of 15,000 front-line managers this year at more than 20 regional Star Team meetings to discuss Mission One.

We continue to see good sales momentum across our business and are excited about the opportunities that we're identifying. Our results show that the way they're going to market is being embraced by our existing clients, as well as our new clients. That's because we believe that our way of going to market is creating value for our clients.

Let's talk for a moment about how we go to market.

First of all, we look at our business from our clients' viewpoint, what are their needs rather than what are our capabilities. We're not just a food company or facility company or uniform company. We offer our clients a strategic business partnership that helps them drive their mission, achieve their goals, and create a lot of value for them, not just minimize their costs. With every type of client we serve, we bring an in-depth understanding of our clients' markets, their business needs and challenges, and how they face their opportunities with their existing customers, be they patients, students, employees, or fans.

Take, for example, a nationally ranked hospital that we serve in Houston. We provide a range of facility services, including plant operation and maintenance, cleaning the ORs, transporting the patients, and much more. Our director is part of the hospital's executive team, reporting directly to the COO. She and her team understand the COO's goals, and they create customer solutions for him.

ARAMARK has helped make this hospital's clinical environment more efficient and employees more satisfied. For example, bed turnaround time has declined by 60 percent, dramatically improving patient throughput, a key efficiency measure in healthcare today. Employee satisfaction scores are up, and turnover is down, with ARAMARK providing many of the non-clinical services we have helped this hospital rank in the top of its peer group for patient satisfaction and become an employer of choice, 2 core outcomes that enabled their value proposition. And last fall, we successfully negotiated with this hospital to add food service to our portfolio of services performed for this particular hospital. This is Mission One at its best.

So you see, it's not just about cost; it's about understanding the clients' needs and creating the best solutions that deliver real value for them. We've spent considerable amount of time and effort learning about our clients' business models and getting our arms around the experiences that our clients want to deliver to their customers, be they fans, employees, patients, or students.

We do extensive consumer research with our clients' customers to better understand what they want out of their interaction. For example, what are patients and staff in hospital looking for in their meals? In the ballparks, how can our food enhance the total fan experience? Should we be recommending more heart-healthy meals to our business clients or more vegan offerings to our universities? All that knowledge enables us to step out of the narrow role of vendor and step into a new role of strategic partner.

We see eye to eye with the senior executives of these enterprises because we truly understand how to create values for them in their businesses. We embed our people, and our clients' organizations will become part of the client team, trusted advisors who can think, innovate, and help drive their business. So we're spending less time talking about our capabilities or our costs and more time talking about their needs.

Recently, we expanded a 20-year food service relationship with a global financial institution, from dining just at one location to multiple services at all other New York City sites, including vending, catering, cafes, and private dining and more.

In Japan and Germany, we also expanded our business with this particular client. Now, our client tells us that the reason they're giving us new assignments is that we treat their business like it's ours. We constantly go to them with new ideas.

In New York, for example, we brought in [Café Getaway][ph] and Just4U concepts. We introduced our catering service and opened a new company store, all to great reviews, resulting in improved participation rates and lower subsidies. That's how they measure value.

At the same time as we have positioned ourselves as strategic partners, we're also broadening and deepening our service offerings. As our people identify more opportunities to create value for our clients, we'll reach back into our portfolio of services and deliver more.

For example, over the past 18 months, we've expanded our partnership with a major school district in Southern New Jersey, from just food service to custodial services, coffee in the faculty lounges, and uniforms for the maintenance staff.

Once our food service manager was inside their organization, she was able to identify more and more ways in which we could help them. And importantly, she was able to tap into a range of capabilities that go far beyond her experience and expertise in her business unit.

That's a Mission One benefit, so today, the schools are cleaner, food costs are down, and most schools now have a federal breakfast program, factors which contribute to creating an environment that fosters academic achievement. That's how we're creating real value for this particular client.

So while we're today talking to you about winning new accounts, we can also tell you that we believe that the opportunity is equally large, if not larger, in our ability to expand our businesses in existing accounts. Our clients are happier, our partnerships get deeper, our retention rates improve, and our business grows.

Now, before I turn over this call to Fred, I'd like to make one last point. As you listen to Fred's comments about our businesses, you'll notice that the sectors we describe in our domestic Food and Support Services segment are client oriented, and now include all of the services we provide to that sector.

For example, when we discuss Education sector, we're including total food and facilities services to the Education clients. Again, our approach is client focused, based on their marketplace needs rather than our specific service capabilities.

Now, let me turn it over to Fred.

Thanks, Joe.

I'd like to first take you through our overall financial performance, and then I'll discuss our business segments.

As Joe mentioned, first quarter sales were a record $2.7b, which was up 11 percent nominally and 6 percent organically over the 2004 first quarter.

Operating income was $144m, up 5 percent from the prior-year quarter. Net income of $72.4m increased 8 percent from the year-ago quarter, and earnings per share were up 9 percent to 38 cents.

Turning to our U.S. Food and Support Services segment, first quarter sales were $1.8b, up 7 percent, and organic growth was also 7 percent, driven principally by the Healthcare and Education sectors.

Now, I'd like to give a bit more color into the U.S. Food and Support Services segment. As Joe mentioned, we can best describe this segment along sectors, so let's begin with Business Services, which includes Food and Facility Services to the Business, Conference Center, and Corrections clients.

Business Services, which generally represents about 30 to 35 percent of total annual segment sales, improved to mid-single-digit sales growth in the '05 first quarter, compared to no growth in the '04 first quarter.

First quarter 2005 growth was driven primarily by base business growth as employment levels continued to strengthen and new merchandising programs, including our new [Food Biz][ph] offering, were rolled out.

New business clients added during the quarter included Northrop Grumman and the SBC Tower and Medtronic in California. We're also quite pleased to have added the State of Kentucky as our fourth statewide corrections client.

Moving to Education, which includes campus and K through 12 food and facility services and generally represents about 25 to 30 percent of total segment sales, we experienced low-teen sales growth, fueled by a good base business growth. This compares to 2004 first quarter growth in the mid-single digits.

Now, our growth for the quarter benefited by year-over-year increase in the number of service days at some of our campus accounts. Base business growth was strong. New clients signed during the quarter included Campbell University in North Carolina and the Alton School District in Illinois.

Healthcare, which includes all patient and staff feeding, facility services, and clinical equipment management, generally accounts for about 15 to 20 percent of annual segment sales. Growth for this sector improved to the mid-teens from the low-teens in last year's first quarter. The growth came from both the base business improvement and new business.

We have seen -- we continue to see a sequential profit improvement in our large multi-service Healthcare contracts, which are now profitable on an overall basis, and we expect them to approach acceptable levels of profitability later this year. We have also seen solid improvement in our Clinical Equipment business and expect this business to continue to improve its performance in the remainder of 2005.

Overall, we believe that the issues in these businesses are largely behind us.

New Healthcare clients included the Children's Hospital of San Diego, Reston General Hospital in Virginia, and Tri City Medical Center in California.

Sports and Entertainment, which includes stadiums, arenas, parks, and convention centers and generally represents about 15 to 20 percent of total segment sales, experienced a high-single-digit sales decline, compared to a low-single-digit sales decline in the prior-year quarter.

Good performance at our convention centers and a higher number of baseball games, including the World Series, helped to partially offset the impact of the NHL lockout. We expect to see a more significant revenue decline in this business in the second quarter due to the continuing hockey impact and the lack of offset from baseball that occurred in the first quarter.

New clients added in the first quarter included Washington D.C.'s new baseball team, the Washington Nationals, Denali Bluff in Alaska, and Westbury Music Fair in New York.

Operating income for the U.S. Food and Support Services segment increased 6 percent from the year-ago quarter to $94.7m. As we expected, the operating income margin declined slightly to 5.3 percent. A strong performance in the Healthcare and Education businesses were more than offset by the lack of hockey sales at our existing arenas, which carry higher incremental margins.

Turning now to the International Food and Support Services segment, first quarter sales of $552m were up 33 percent from 2004 first quarter sales, including a currency translation benefit of about 10 percentage points.

Organic sales growth was 6 percent, with Canada, Germany, and Spain reporting strong sales growth.

We recently added a number of key Business Services, Healthcare, and Education clients throughout Europe.

We are pleased with the increase in our international profitability as operating income of $21.1m was up 29 percent over the prior-year quarter, including 9 percentage points from currency translation. The operating income margin was 3.8 percent.

We continue to make progress in addressing several issues facing our U.K. operations, including the integration of the Catering Alliance acquisition and some problem contracts in our Offshore Oil Services business. We anticipate that it will take the balance of the year to complete these efforts.

Turning to our Uniform business, first quarter Uniform Rental sales of $276m were up 8 percent from the year-ago quarter. Organic growth was 5 percent, compared to 4 percent in the 2004 fourth quarter and no growth in the 2004 first quarter.

Growth in the sales of apparel and ancillary products to rental customers contributed to this strong performance. We are encouraged by the performance of this business as we have now seen 5 consecutive quarters of improved organic growth.

New business sold for the quarter was 13 percent of the base, with about half of the new sales coming from first-time users of rental programs. Lost business was about 8 percent, with about one-quarter of the losses coming from customers who went out of business. Price increases contributed about 1 percent, and base business growth continued to show sequential improvement and was a negative 1 percent, compared with approximately negative 3 percent in the '04 fourth quarter and negative 5 percent in the year-ago quarter.

While operating income increased about 6 percent from the year-ago quarter to $30.6m, the margin declined about 20 basis points, due principally to continued investment in the sales force, as well as planned integration costs from a recent acquisition, the impact of higher fuel costs, and the fact that the 2004 first quarter included a small gain from the divestiture of a linen business. We expect year-over-year margin improvement in the second quarter.

In the direct marketing segment, first quarter sales were about $126m, down 1 percent from the 2004 first quarter. We saw improved sequential results in our Galls business in the first quarter, as sales were about flat with the '04 first quarter, and we believe that this business has returned to more normalized sales levels.

Sales at WearGuard-Crest declined about 2 percent, due principally to softness in the quick-service restaurant market.

Operating income for the segment declined $8.3m from 11.5m -- to $8.3m from 11.5m due to gross margin erosion at WearGuard-Crest in both the quick-service restaurant and work clothing markets. Gross margins at WearGuard have been negatively affected by competitive pricing pressure and costs associated with a rollout of a new uniform program for a major client.

Some ongoing costs of the Galls investigation also contributed to the margin decline. We expect these issues to continue through at least the second quarter of '05.

Corporate expenses were about $10.8m, up from $8.8m in the year-ago quarter. Added costs related to the issuance of restricted stock units and Sarbanes-Oxley 404 compliance contributed to the increase.

The first quarter effective tax rate of 35.7 percent benefited from tax credits related to legislation signed into law last October. For the balance of the year, we expect a more normal tax rate in the 37- to 38-percent range.

Total debt was $2.1b at quarter-end, up seasonally from $1.9b at the end of fiscal '04, and interest expense was up 7 percent year over year to 31.3m, primarily due to higher average debt levels for the quarter.

Net capital expenditures for the quarter were $66m, up modestly from $64m for the year-ago quarter. While we continue to invest in the business, we are also very focused on achieving acceptable returns on investment.

Internal cash flow -- which we define as net income plus non-cash charges, such as depreciation, amortization, and deferred taxes, less net capital expenditures -- was up 2 percent to $81m. The increase was limited by a decline in the deferred tax provision, reflecting a recent change in tax depreciation rules, which we expect to continue throughout 2005. The other elements of internal cash flow showed solid year-over-year improvement.

ARAMARK repurchased 1.7m shares in the first quarter for $45m. The remaining authorization is $180m.

As you may have read, in January, a New Jersey jury found ARAMARK liable in connection with an automobile accident involving an individual who had earlier in the day been drinking alcohol at a stadium at which ARAMARK provided food and beverage service. We vigorously disagree with the verdict and plan to file an appeal. While we are limited in our comments on the case while it is in litigation, we believe that we have adequate insurance and other resources to address this matter.

Turning now to our expectations for the second quarter, we are pleased with the first quarter sales growth but expect growth to be lower in the second quarter as a result of the effect of the timing of the Easter holiday on our Education and Business sectors and the fact that the second quarter will not have the benefit experienced in the first quarter of additional baseball games and more service days at certain college campuses, which helped offset the loss of hockey, which will, of course, continue into the second quarter.

We expect to report second quarter sales of between 2.5b and $2.7b and earnings per share of between 25 cents and 27 cents. Since it seems highly unlikely that hockey will be played this season, we have adjusted our guidance to reflect the estimated impact of a lockout for the entire quarter.

Our expectations for the full year remain unchanged from our previous guidance as adjusted for the NHL lockout.

Now, let me turn the call back over to Joe to wrap up.

Thanks, Fred.

I feel very good about our team's first quarter performance as we delivered against many of our goals, and I believe the momentum in our business is quite positive.

While there may be fluctuations in our sales growth from quarter to quarter due to variations in service days, the calendar impact of holidays, and the timing of new business, we anticipate that we'll achieve our overall sales and profit goals for 2005.

I'm very excited about the opportunities that lie ahead for ARAMARK. We have a great management team and more than 240,000 employees who are delivering our model of value creation for our clients. We believe it's not just about who can drive the lowest cost, but more importantly, it's about who can understand the market better, who can find the opportunities to create real value for our clients, and who can build strategic partnerships with them. That's the way ARAMARK will continue to grow, and we're already beginning to see the results of this.

We'll be speaking a lot this year about the ARAMARK model of creating value. We believe it creates clear, competitive advantage and differentiates us, helps us retain clients, get new ones, and will result in improved margins.

We thank you for your interest, and we'll look forward to speaking to you about our progress throughout the year.

Now, we'd be happy to answer any questions.

Thank you. [Caller instructions.]

Jonathan Shapiro, Goldman Sachs.

I guess 3 quick questions. The first would be, you know, the base business in Healthcare and Education, you know, was driving pretty strong growth. What would be -- you know, what do you attribute all that -- the strong-based business growth to?

Well, John, you know, we've talked before about, you know, our value proposition to our clients, and we're just continuing to expand on our existing relationships and building out from there, both in terms of new services and expanding our existing services. Our per-capita growth in our existing locations continues to grow as we're bringing in our new merchandising programs, and we expect that to continue.

With this, you know, we don't have, you know, obviously fine detail on all these sorts of numbers. Was this a significant step up from the last couple quarters?

I think it's a continuation of something that we've started, you know, several quarters ago.

We did see an increase in voluntary board plans, which is in response to our merchandising programs we continue to roll out, Jon, at convenience stores, but we also benefited from some additional service days in the quarter. Certain college campuses, for example, they started the beginning of their year after the Labor Day holiday so that their first semester ran a little further into December before the Christmas break, so we clearly got some benefit from that, but we continued to see pretty strong base business growth in that business.

Okay, thanks. On the Uniform Rental business, how would one think about incremental margins in that business? In other words, you know, as you -- particularly as the base business gets better, when do you start to see some sort of margin pop?

I think, Jon, normally the -- as you grow -- increase the growth in the business, clearly, the incremental drop-through on that is higher than your average -- than your average margin.

The 2 issues that cut the other way, principal issues, are the ramp-up in the sales force. Our sales force headcount is about 20 percent higher than it was a year ago, and that obviously is all P&L dollars, and that tends to reduce the margin. And we did see in the first quarter a pretty significant increase in fuel costs year over year. So those 2 factors in the first quarter largely offset the margin improvement that we saw from the increased growth.

Okay, and then last question, on the international business, you guys had said on the fourth quarter call that you thought you'd see a pretty significant improvement in margins outside of the U.S. this year. Do your comments that you said about working out the Catering Alliance and some of the offshore stuff in the U.K. taking the balance of the year, does that -- is that different from what you were thinking at the time of the fourth quarter call, or is that implicit in substantially improved margins?

Well, I think we're still cautiously optimistic about the international business for the year. Having said that, in both of these areas, the offshore oil contracts and Catering Alliance, there's clearly more work to be done, and we continue to, you know, expect that we'll see that improvement through the year.

But it's consistent with what we said in the fourth quarter.

Okay, great. Thanks very much.

Josh Rosen, Credit Suisse First Boston.

Just, first, a quick question on the Mission One initiative. Just curious if you could offer some color in terms of the portion of the new business that you've generated in the quarter, the deposit of 18 percent that would've come from Mission One?

Well, as you remember, Mission One encompasses several elements of it in terms of, you know, retention, existing sales, and new business sales. Mission One -- well, our overall new business increased by about 18 percent for the first quarter, and Mission One sales were lower a little bit in this quarter than the other quarters because a lot of our business was geographic expansion, which we don't count in Mission One, so it really is a question of arithmetic. But, clearly, the example that I gave you in the Mission One overall efforts continued to go very well.

Okay, and then along similar lines on the retention side, would be curious just -- any more granular commentary that you could make on the retention side would be helpful. Last quarter, you talked about attrition picking up a little bit relative to where it had been. Just wanted to see if there's any progress on that front.

I think, you know, again, we don't give quarterly retention rates because I don't think they're meaningful on a quarterly basis, but I think it's fair to say that our retention rates overall look pretty solid, and they track very close to what we did last year.

Okay, and then last question I had was just following up on the international margin question. Could you just review structurally what you expect the international margins to level out at? I know implicit with revenue growth, you expect that you've got to get some growth every year there, but just, you know, what we should look for when we start thinking about '06 and beyond in terms of where that margin would look normal.

Our international margins have historically been below our domestic margins. Part of that is economies of scale on an in-country basis, the relationship between the overhead, for example, on 100 or 200m business versus a larger business. Having said that, if you look over time, we've been able to lift our international margins, although they were down last year. I think our expectation is that we will continue to improve our international margins over time. Whether they will get to the level of our domestic margins, I think the jury's still out on that. But we expect to continue to improve those margins.

Okay, so just when you look at this quarter's results where they were, down 10 basis points year over year but obviously you saw dramatic improvement from the fourth quarter, is that, you know, ballpark [ex] a fourth quarter like you had in '04, you know, are similar margin levels a fair expectation for '05?

Well, certainly, the fourth quarter of '04 is not an indication --

Right.

-- you know, going forward. I think we also said that we have some more work to do in the U.K., and I think the margin that you saw for the first quarter includes in it the fact that we haven't concluded our work in the U.K. Once we conclude that, I think you could expect higher margins in our international business.

So it's outside the aberration of the fourth quarter of '04 then that the margins that you put up in the first 3 quarters are pretty representative of where you could be even with some of the spending that you're making in Catering Alliance and the U.K., the offshore stuff?

Well, again, we will get through that --

Yup.

-- overall, but they clearly are indicative, and we're making significant progress on margins in most of our foreign countries.

Okay, thank you for the color.

Brandt Sakakeeny, Deutsche Bank.

Two questions. First, Joe or Fred, can you talk to the cost environment right now? Are you starting to see improvements in state unemployment insurance rates and worker's comp and starting to benefit from those, as well as I'm curious what's happening with sort of raw materials, fuel and cotton for uniforms and drivers. Thanks.

Okay, this is Fred. With respect to labor-related costs, we have -- as I think we mentioned in prior calls, we've instituted some changes to our healthcare plans effective January 1, and we're comfortable that those should bring down the rate of increase in our healthcare costs. We've spent quite a bit of time focusing in on that with some outside help.

On worker's compensation, we are seeing this year because of new programs that we have put in -- which have been pretty extensive, frankly, across the domestic Uniform and Food business -- we're seeing some pretty gratifying reductions in the frequency of lost-time claims, in our incurred costs, incurred reserves.

Having said that, this is insured, and it's -- therefore, the cost reduction has to work its way through your overall insurance costs over time. That's loss driven, and it takes a while to catch up. So we don't anticipate seeing any big pick-up from that this year in terms of expenses.

And similarly, we've rolled out some programs on state unemployment insurance that we think will help us control those.

On the product costs, fuel costs, we saw in our Uniform business, which is where the effect is, we saw about a 50-basis-point margin impact from fuel costs year over year. So that was fairly significant.

We have not seen any negative impact from raw materials, fabric costs in our Uniform business. As we continue to increase the amount that we self-manufacture, we're continuing to see benefit in self-manufacturing, and that is reducing our merchandising cost.

And then just, I guess, last comment on food cost. The year over year index price on the food we buy is pretty much where it was in the last quarter, in about the 3-percent range year over year. Some commodities that were up before are now down, like dairy products, but others are up, but the overall is about the same.

Okay, great. And is there any update on the Galls investigation?

Well, you recall that the Galls investigation has to do with obtaining certain licenses for certain export sales. We said before that the export sales are about 5 -- less than 5 percent of our total sales, and the vast majority of these export sales don't require any licenses. So we continue to cooperate with the government. These things take a while, but as we said, also, in the last conference call, the further away we get from the actual date of the initiation, the more normalized our businesses get.

Okay. Final question is, Fred, what tax rate should we use for this year?

Somewhere between 37 and 38 is the normal tax rate. Now, you'd have to factor in for the first quarter the 35.7.

Okay, so for the remaining 3 quarters, use 37, 38?

Right.

Okay, great. Thanks. Congratulations, guys, on a good quarter.

Thanks.

Thank you.

Chris Gutek, Morgan Stanley.

Couple questions. I know you guys don't talk about or don't quantify a backlog metric for the U.S. Food business, but could you talk in qualitative terms about what that bid pipeline looks like over the next quarter or 2?

Well, Chris, I think as we said, we're gratified that our value proposition is resonating with our existing clients and our customers. It's very difficult to say. We have a good, solid pipeline, but as you know, some of these decisions take weeks, months, and sometimes years to achieve, particularly the larger they are. So it takes a while to get this, so I don't think we can -- we can give you any specifics on that, but let's just say we feel very good about where we are.

Joe, what about in the sports and entertainment segment? Seems just in the last couple of quarters, kind of intensity's picked up in that sector. Is that a continuing theme, or was that more of a blip a couple quarters ago?

Well, again, those are very discrete events, and some you win and some, you know, we don't win. And we've told you again before that we look at them -- at each one of them as a significant opportunity, and we look at it from a return investment point of view, and we look at it very critically. So we're gratified that we got the Washington business in pretty good shape. But, you know, this is an extremely competitive marketplace, and each situation stands on its own.

Right. And then, Fred, can you give us some sense, rough sense, of what the margin is looking like in the U.K. and was that -- what that looked like -- what a more normalized margin there would be to give us a sense of how much opportunity you have over the balance of this year?

Well, the margin in the U.K. is -- in the first quarter was below our normal margin that we've had over the past couple of years. And we expect, frankly, that the margin there will continue to be through the year lower than our normal margin. Having said that, we don't see any reason why we can't get our U.K. margin back to where it was, and the U.K. margin has -- has been traditionally pretty consistent, maybe a little bit higher than our average international margin.

Okay, and a couple more quick ones on Uniform Rental business. One of your competitors has suggested the pricing environment may have improved modestly in recent months. Are you guys seeing any signs of any improvement there?

Possibly modestly. It continues to be pretty competitive. It's certainly not worse. We believe that we're behind the worst of the competitive pricing pressures, and I'm not sure I would be much stronger than that.

Okay. And then, finally, Fred, I know you guys have been adding salespeople aggressively in the Uniform Rental division. Where are we in that process? Is this kind of the second inning or the eighth inning in terms of growing the sales force headcount much faster than revenue growth?

I think that we will continue over some period of time to grow the headcount faster than the top-line growth because we see a lot of opportunity to add sales reps and for them to be productive. As you know, going back a number of years, that wasn't our model to have a large full-time sales force. I don't know that it will continue -- the headcount will continue to grow at those 20-percent year-over-year rates that we experienced in the first quarter.

Chris, let me add a little color to that. I actually spent some time in a couple of our market centers in the Uniform side. I'm very encouraged by the energy and the caliber of our sales folks, and as you know, we measure not only the numbers that we have but also the productivity. And we're very happy with the productivity, where the expanded sales force keeps pace with the productivity all over the sales force that we had a year ago. So as long as we can continue that, we'll continue to add incrementally to our sales force.

The absolute numbers -- clearly, if you continue to add the same absolute number as a percentage, as Fred said, it gets smaller and smaller over a period of time. So I think, to use your sports metaphor, I think we are in the second inning. This is going to be a long ballgame, and we intend to stay in it for a long time. We think we have -- have a good sales organization, a good sales management organization in place, a very sales-focused team in our -- in Uniform Rental business, and we intend to keep growing that business. Probably, the rate will decelerate over a period of time, but it will not go to 0.

Okay, great. Thanks for the color.

Michael Schneider, Robert W. Baird.

Wonder if on that sales force question, again, it sounds like you're early in the hiring process. Is that why we haven't seen the new business rate at 13 percent accelerate yet within Uniforms?

Yeah, I think that is one of the factors, Mike, and in addition, that is calculated on a higher and higher base as the Company grows.

Okay, so when would you expect and what are your targets, I guess, for that new business growth rate?

Well, we don't have an explicit target for new business growth rates. The 13 percent that we've been performing at for the last couple of quarters, we think, is a pretty strong number. As we add sales reps, we would hope that that number would start to move up even further, but I think by industry standards, it's quite a solid number.

I guess the disconnect for me, though, is if you believe productivity is up, it would imply if you're hiring at 20 percent, your business should be rising much more than 13. So is productivity actually down?

I don't think we said productivity was up. I think what we said was we were very pleased with the productivity --

Okay.

-- overall productivity that we've had. But, clearly, the productivity of the new reps is lower than the existing reps, but we haven't paid a huge productivity price by adding on the new reps.

Okay. And then on add/stops, I guess I’m shocked to see that the number actually improved by 2 points sequentially. That number doesn't move all that much typically. It implies that the December quarter was probably positive in that sense. Could you give us some color there?

We don't really comment on add/stops month by month.

How about for the quarter?

I mean that's also -- that's also a rounded number, right?

Yes.

Three (3) percent is a rounded number; 1 percent is a rounded number.

But the minus 1 is a trailing 12-month number, correct? So the December quarter was probably in positive territory for the quarter itself?

Well, that add-stop number is a year-over-year number, right? And we don't calculate the adds that change versus the fourth quarter; we just calculate it on a year-over-year basis.

Okay, I can follow up on that. And then on the guidance itself, Fred, you mentioned that your guidance was unchanged except for adjusting for the hockey strike. So is the number -- is the range still $1.50 to $1.60 for the year, or have you lowered that a few cents to account for hockey?

Well, I think -- as you can see, we had a solid first quarter. We feel pretty good about how the year's developing. Having said that, it's still early in the year, and while we see encouraging signs, clearly, as we've talked about, we've got our work cut out for us in a couple of areas. So, you know, overall, as we've said in our prepared comments, our expectations for the year are pretty much the same as we express it in a range.

Okay, but implicitly, if you were able to overcome the hockey strike this quarter and the guidance implies you're able to keep that momentum in the second quarter, it sounds like, I guess, the inference is that you've actually raised your expectations a bit for the year.

Well, I think we've got a ways to go for the year, and let me just leave it at that.

Okay, thank you.

Gary Bisbee, Lehman Brothers.

My congratulations on a much-better-than-expected quarter. I guess a couple of questions, if I could.

Could you clarify or comment on exactly what acquisitions were made in the quarter?

And then sort of bigger picture, as we look at your capital allocation decisions going forward the next couple of years, what areas do you think you would be most interested in making acquisitions or most likely to do future deals in?

This is Fred. In the first quarter, there was no acquisition impact in the Domestic Food and Support Services business. The acquisition impact was really in our Uniform business, where we got the benefit of several acquisitions, including one that was a little larger that we made in Southern California a little bit earlier. And we do -- year over year, we have the impact in our international business with the Catering Alliance acquisition. And from a reported revenue point of view year over year, we have the impact of the consolidation of our Chilean affiliate, which we now own 51 percent of.

I think we continue to see opportunities in the Domestic Uniform business. We're cautious because pricing -- acquisition pricing in that business continues to be fairly high, so frankly, we have to pick our spots. We also continued to see some opportunities overseas for acquisitions. So I would say those would be the 2 focuses.

I think -- this is Joe again -- I think those have not changed for us over the last 12 months and probably continue to be with us as we go forward. You know, there's nothing unusual there at all, and this is just an ongoing effort by our teams.

Okay, and now that you've owned Catering Alliance, I guess, for 12 months at this point, can you give us a sense as to what type of integration issues, or maybe not issues, but is going on right now? Has there been higher client turnover there, or is it just taking a while to integrate the management structure? Or what a year later is still, you know, challenging your profitability in the U.K.?

Well, it's the -- it's the integration of the field management teams; in other words, the supervisory management, the district managers, and the regional managers. Their business is a little bit different than our U.K. business. It's more Education focused, and we're in the process of putting those pieces together. It's a pretty substantial acquisition for the U.K. because -- while Catering Alliance, within the context of ARAMARK in total, is not particularly large, it is about 20 percent the size of the U.K. operation. So if you look at our domestic business, for example, it would be like a $1.4b revenue acquisition relative to our domestic business.

And then the second part of it is we are just now starting to combine some of the back office functions. We're aligning our purchasing programs and those sorts of things.

Okay, and then given in the U.S. at least, the large dependence on Sysco as a major supplier, are there -- is there -- are there similar companies internationally that you can, you know, depend on to do a majority of the supplying of the food and, you know, are you at the scale in some markets where you can start to get the kind of scaled discounts that you appear to be getting here? Is that a long-term opportunity, or is that likely to keep, you know, for a long time the margin internationally a fair bit below the U.S.?

I think there are clearly opportunities as we consolidate our purchasing overseas to get economies of scale. The -- on the distribution -- there's sort of 2 questions there. On the distribution side, it's -- I think it's fair to say that the food distribution systems outside of the U.S. typically are not as advanced as they are in the U.S. The U.K. is probably furthest along, and Canada -- Canada would be similar to the U.S. The U.K. would have some larger distributors. But in most other countries, it's a much more fragmented distribution market. But we still have, on the manufacturing side, in the negotiation of purchases for food manufacturers, as we consolidate more of that in country and standardize that, there are clearly opportunities over time to benefit from a buy-in.

This is Joe. Let me just add that I think (a) as we get larger and (b) as the whole marketplace continues to expand, there are being created companies, none of the size or scale of Sysco here in relative terms, but certainly larger than what existed before and more consolidated than existed before in many markets, and we clearly will benefit from that.

Okay, great. Thanks a lot.

Jeff Omohumdro, Wachovia.

Another question on international. The foreign exchange component in the quarter was pretty strong. Just wonder if you could remind us if you're managing that and what your outlook might be.

Well, Jeff, what we do is we try to minimize our overall net asset position in the countries in which we operate, which creates the translation exposure. And like most companies, we do that through local currency borrowings in country to match the net as best we can, to match or deminimize the net asset position.

Having said that, we don't have a lot of inter-country cash flows. In other words, we're not manufacturing a product in Country A, shipping it to Country B for distribution and for sale. Our inputs are all in-country, being food and labor, and therefore, our sales and our inputs are all denominated in the same currency, and that's a great hedge, which actually greatly simplifies our foreign exchange issues.

We do enter into from time to time short-dated forward contracts to the extent that we dividend or distribute cash from foreign countries back to the U.S., and that's pretty much how we run the foreign exchange side of the business.

Very good. Thanks.

Bradley Safalow, JP Morgan.

In your prepared remarks today, you actually -- it sounds like you're no longer going to include metrics specifically for the Facilities segment. I was just wondering, is that indicative of -- sounds certainly in your client-focused remarks, Joe, and certainly in the divisional detail you gave us, Fred, that maybe perhaps internally you've changed how you're organizing each business segment? Is that fair to infer that?

Well, I think, we I've said before, we're really focusing on all this from the client point of view. And from a client's point of view, we try and serve them the way they look at their world, and that's how we run the business. So we have not changed anything internally at all, but it really reflects our current organizations. That's the way we currently do the business.

So [Andrew Caron], who runs the operation that has Healthcare reporting, and [John Babbiar][ph], who runs all of those individual operations on the Healthcare side, when [he] goes to see the CEO or the COO of a hospital, he and his sales team is able to talk about all of our services to that particular CEO/COO, and as I said in my prepared remarks, they're talking to him about the issues that he or she wants to solve, not the way we -- not from a technical point of view that we can do the food service or we can do the facility service or we can do the energy management services. So it's a much higher-level kind of sale, a much higher-level kind of discussion, and as I said, it creates much more value for our clients.

So on a going-forward basis, you're not going to give us the, let's say, growth in facilities?

Right, right. I mean we're going to -- rather than say, "The education market growth was this, but the facilities market growth was that," when in fact the facilities sales include sales to the education market, and since that's not the way we're organized, we think it's much better to talk about it by vertical.

And that's -- as I said, that's how we run the business. That's how we reward our people. And I think that's the right way to report.

Okay. And then on the direct sales side, you talked a little bit about the improvement in performance at Galls, I guess, maybe a little sooner than we were expecting and even based on some comments you made last quarter that maybe came sooner than you would've expected. Was there something specifically that you guys have done to overcome, obviously, the overhang with the investigation, or is it just that time has passed and business has come back to you sort of without any kind of internal targeted effort to address this issue?

I think that we've made a very concerted effort with our customers to have them understand the nature of the investigation. When an investigation like this is initially launched, there's a lot of confusion and misunderstanding about what the scope is, and I think as we've worked very hard and the Gall's team has worked very hard to educate our customers about the scope of this, as Joe said, about the proportion of our sales that are international sales, the proportion of those sales that are subject to license requirements, and we've acted very aggressively in terms of our own internal systems to make sure that we are in full compliance, and we've certainly communicated that, and I think our customers have responded to that.

Okay, and so you expect continued improvement in kind of profitability? I know there's some seasonality to it, but you know, to get back to that -- to levels of, say, mid-single digits of what you've seen historically this year?

We hope so.

Okay. And then just the last question on the U.K., not to belabor this point, but I was just wondering, you guys have commented that you think, you know, by the end of the year you could be back to kind of historical profit levels. It seems that everyone, or at least your largest competitors in the space, have seen a similar type of margin issues within the U.K. Can you guys comment at all on the pricing environment specifically now? Is it -- are your comments based on that you see more kind of -- a more rational pricing environment going forward on new business or renewals?

Well, I think that -- let's first acknowledge that it's a very competitive marketplace and that we're not the largest or the second largest in the marketplace. And, frankly, both Fred and I were there a couple weeks ago for European operating reviews, so we have firsthand information on that part.

We commented, also, last time that some of these issues that we're dealing with are not marketplace issues but our own issues, and they're not related to other people's problems; they're our problems overall. Having said that, we're working very hard against them, and we think that the marketplace is the marketplace. We have lived there before. We'll continue to live there going forward. And the improvement in our margins is dependent upon action that we will take to fix the problems that are ours, not against the marketplace.

Okay, I'll turn it over.

Bruce Simpson, William Blair.

Fred, if I can try to hold your feet to the fire a little bit on clarifying the fiscal year guidance and following it up to a prior question, I believe that you'd indicated $1.50 to $1.60 prior to any hockey impact and had indicated that you thought hockey would be something like potentially 2 cents an impact in each of the first 2 quarters. So the remarks you made about guidance left me a little bit confused about how you expect the rest of the year to play out, and it seemed to me like maybe you're being a little bit deliberately vague, but just so that -- for the purposes of modeling, can you tell us, do you still think $1.50 to $1.60 is achievable even given the impact in hockey in the first and second quarters?

Well, Bruce, I agree with you about the vagueness. I think it's fair to say -- we express our outlook in the form of a range, and, you know, I recognize that you have a specific outlook. I think what we're trying to say is that we had a good start to the first quarter. We have a couple of areas where we have our work cut out for us and a couple of challenges. And so, as a result, our overall expectations for the year in terms of our range are largely unchanged from what we talked about last quarter.

Okay. And on free cash flow, can you tell me what your expectation is for the full year on that measure?

Well, we don't typically talk about -- well, I guess it depends on your definition of free cash flow. We talk about internal cash flow, which we define as net income, depreciation, amortization, deferred taxes, less net capital expenditures. We don't typically project that out on a year-by-year basis.

As I mentioned, the growth in that in the first quarter was held down by -- and you can see, I think, on the cash flow that's attached to the -- in the financials attached to the press release, the deferred taxes were clearly less than they were last year because of a change in tax depreciation rules. We continue to expect that that will have an impact on our definition -- on our internal cash flow year over year. Having said that, the other elements, you know, that's really the tax law. The other elements, the real operating cash flow of the Company, we expect to continue to be pretty strong.

Okay.

And exhibit the same characteristics exhibited before.

Okay, and could you quantify the expectation for deferred taxes' impact on operating cash flow for the year?

Well, typically, it's been a -- last few years, it's been a source of cash, and we don't -- we see it being somewhere probably in the breakeven to a slight source of cash this year.

Okay.

But we see that as really a one-time adjustment because of this change in the tax laws.

Okay. Can I talk for a moment about returns on capital? Two thousand and four (2004) had to be a little bit of a disappointment to you given your target of 15 percent after-tax returns on capital, and what specifically do you think you can do in fiscal 2005 to push that back up to that level? Was it purely just an issue of raising margins throughout the business, or are there kind of capital deployment strategies that you will change this year in order to try to increase returns?

Well, our overall return on invested capital is below 15 percent, but it's still in the teens. And I think it's changed, you know, maybe by 1 percentage point or so. And I think we don't really -- I don't think we really plan to do anything much differently than what we've talked about, which is to be prudent about our capital expenditures. As you could see in the first quarter, our capital expenditures were a little bit ahead of last year but well in line with last year. Our use of working capital in the first quarter, which is a seasonal use, was actually less of a use in the first quarter than it was last year. And, obviously, if we improve our overall profitability for the year, which is implied in our guidance, that improves our return on investment, too.

Look, it's very simple. If we improve our margins and use less capital in deploying the business, our returns will increase, and that's clearly what we try to do each and every year. In some years, we're more successful than others in achieving it. But we're quite confident that the model still works extremely well for us.

Okay, the last question that I have is can you quantify -- it seems as if there's a number of sort of non-common or non-sustainable shifts here, and I'm trying to back them out to get an adjusted organic growth rate. So can you quantify the impact in your S&E business of having the World Series in there or perhaps netting that against not having hockey? Is there, you know, a net adjustment there, as well as in the Education business about the calendar shift with [Campus][ph]? I'm trying to -- you mentioned it a couple of times, and I’m trying to tell if that's a big deal or a little deal in terms of the improvement in organic growth.

I think as a matter of practice, we generally don't comment on the impact, for example, of the World Series on our growth rate, what our sales were at the World Series. We did have -- as I mentioned, we did have more regular season baseball games in the first quarter because the regular season actually fell slightly into the first quarter this year, where it did not last year. And, of course, we had the World Series. And the -- that effect partially offset the impact of hockey, so it was -- it partially offset the impact, and it was certainly worth commenting about, we felt, so --

Okay.

-- probably the best way to describe it.

And I think in the prior call you might have indicated that hockey might be something like 1 percent of sales, total aggregated consolidated sales for the year. Is that one-half of 1 percent a reasonable barometer for how much was sacrificed by no hockey in the first quarter?

The hockey -- our hockey revenues, as you say, we have said are somewhat less than $100m. That falls very roughly 50/50 in the first and second quarter. Actually, it's a little bit lighter in the first quarter. The hockey revenues were slightly higher in the second quarter. And there's a small tail in the third quarter.

Okay. And just on the Campus, Fred, can you quantify, or would you be willing to quantify, this calendar shift impact on that growth rate within that business?

We really can't do that precisely because it really depends on the individual -- we have over 400 college accounts, and it depends on the individual schedule. It's not an overall effect for the business. It's a function of when the school year starts college by college. So some colleges had a shift in when their school year started, and some did not.

Okay, thanks for the color.

Okay.

That's all the time we have for questions. I'll now turn the conference back over to Bobbi.

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

Thank you. You may access the rebroadcast by calling 888-203-1112 or 719-457-0820. Please reference passcode 7490141. This concludes our conference call today. Thank you, and have a nice day. All parties may now disconnect.