Aramark (ARMK) 2005 Q2 法說會逐字稿

Welcome, ladies and gentlemen, to the ARAMARK Corporation second-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 (technical difficulty) 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 will now turn the call over 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 second 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 second-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 (inaudible) we mention certain non-GAAP financial measures. The Investor Relations section of the Company's website includes reconciliation of these non-GAAP financial measures to the most comparable GAAP measures, as required by SEC (technical difficulty).

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 Form 10-K and Form 10-Qs. 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 2005 second-quarter results. We reported second-quarter sales of $2.7 billion, up 6% from a year-ago quarter. Net income was 53.1 million, up 14%, and earnings per share were $0.28, up 17% compared with the 2004 second quarter. For the first half of 2005, sales were up 8% at 5.4 billion. Net income 10% up to 125.5 million, and earnings per share at $0.66 up 12% from the first half of 2004. I am particularly proud of our team's efforts which delivered such solid results without an NHL hockey season.

Consolidated sales growth for the quarter was about 4%, after adjusting for acquisitions, divestitures, currency translation, the impact of the NHL lockout, and the second-quarter timing of the Easter holiday. Growth was led by U.S. Food and Support Services businesses which had about a 5% adjusted growth, and our uniform rental business which also had about a 5% organic growth.

You saw the second quarter included an after-tax gain of $0.04 per share, representing the gain on the sale of property by an equity affiliate.

We mentioned during last quarter's call that we intended to aggressively address our UK challenges and we're certainly doing so. A result of our focused efforts to improve our UK operations, we have decided to exit our offshore oil business in West Africa and also incurred management separation costs resulting in a second-quarter charge of about $0.02 per share. Adjusted for these two items, earnings per share were $0.26.

(technical difficulty) our margin improvement progress. We saw a 30 basis point increase in the U.S. Food and Support Services segment excluding this gain and despite the NHL lockouts, and a 20 basis point improvement in our uniform rental segment while we continued to invest in our sales force.

I am also encouraged with our year-to-date new business volume, which was up 15% over last year and included several significant new business wins in our international operations. Our lost business was higher as we encountered an increasingly competitive environment in the U.S. business sector as well as in the UK. While we intend to remain competitive in the marketplace, we will continue to exercise ongoing financial discipline in pursuing business in order to achieve acceptable margins and returns. Our net new business continues to be positive.

Our Mission One initiative continued to provide cross-selling opportunities across all of our businesses. We exchanged more than 750 opportunities in the first six months through our Web-based lead exchange. During the quarter we also connected with more than 2,500 of our front-line managers through five Star Team meetings throughout the country.

In our efforts to improve our international reach, during the quarter we increased our ownership of our Irish affiliate, Campbell Catering, from 45% 90%. As the leading food service company in Ireland, we believe Campbell Catering is well positioned in one of Europe's fastest-growing economies. We continue to look for similar opportunities elsewhere. Let me turn the call over to Fred.

Thanks, Joe. I'd like to first take you through our consolidated financial performance and then I'll discuss our business segments. As Joe mentioned, second-quarter sales were $2.7 billion, which was up 6%; and operating income was $116 million, up 8% from the prior year quarter. Net income of $53.1 million increased 14% from the year-ago quarter; and earnings per share were up 17% to $0.28.

During the quarter we had a $7.8 million after-tax gain which represents our share of the gain from a real estate sale by an equity affiliate. The gain amounted to $0.04 per share.

As a result of our focused efforts to improve our UK operations the current quarter also included a charge in our international Food and Support Services segment of $7.4 million pretax, or about $4.8 million after-tax, which reduced earnings by $0.02 per share and results, as Joe mentioned, from our decision to exit our offshore oil services business in West Africa and for UK management separation costs. Excluding the gain and the charge, earnings per share were $0.26.

As we have mentioned previously we estimate the negative impact of the NHL lockout on the second-quarter results to be about $0.0 2 per share.

Consolidated sales for the first half of 2005 were up 8%, to $5.4 billion. Net income increased 10% to $125.5 million; and earnings per share were up 12% to $0.66 as compared with the first six months of 2004.

Turning to our U.S. Food and Support Services segment, second-quarter sales were $1.7 billion, up 2% and up about 5% after adjusting for acquisitions, the NHL lockout, and the second-quarter timing of the Easter holiday which affected our education business. This growth was especially driven by our healthcare and education sectors.

Second quarter operating income for the U.S. Food and Support Services segment increased 27% from a year-ago quarter to $77.6 million and was up a solid 11% even after excluding the gain from the real estate transaction I mentioned earlier. The operating income margin improved by about 30 basis points to 4%, excluding this gain on strong performances in the healthcare and education businesses as well as good cost control in our sports and entertainment business in the face of the NHL lockout.

Now I'd like to give a bit more color on the U.S. Food and Support Services segment. As you may remember from last quarters' call, we describe this segment along business sectors, so let's begin with business services, which includes food and facilities services to business, conference center, and corrections clients.

The business sector had low single digit sales growth in the 2005 second quarter. It was somewhat negatively affected by the timing of the Easter holiday. The stable employee population and our marketing initiatives like Cafe Getaway (ph) and Just 4U drove base business growth in the quarter. This sector continues to be quite competitive, particularly with respect to significant awards by major corporations. We continue to be financially disciplined and are accelerating our marketing programs to grow our base business.

New business clients added during the quarter included Kinetic Concepts, a Texas-based medical technology company, and the Drug Enforcement Agency in Washington. We're also pleased to have added Clark County in Nevada and Cameron County in Texas as new corrections clients.

Moving next to education, we experienced mid single digit sales growth fueled by strong base business growth. As I mentioned previously, the 2005 second-quarter sales volume was negatively affected by the timing of the Easter holiday. We benefited in the quarter from several new marketing initiatives in our campus operations. We're also pleased to have added Roosevelt University in Illinois as a new client.

Sales growth for the healthcare sector was in the low teens. This growth came from both strong base business growth in food and facilities and new business. We are particularly pleased with the performance of our clinical equipment business, which is back to expected levels of profitability as a result of effective profit improvement programs. During the quarter we added Bayfront Medical Center in Florida as a new healthcare client and added food service to Arkansas Children's Hospital.

As expected, sports and entertainment a sales decline of about 20%. Continued solid performance at convention centers was more than offset by the impact of the NHL lockout. As a part of our focus on the smaller B markets we signed several new accounts during the quarter.

Turning now to the international Food and Support Services segment, second-quarter sales of $569 million were up 20% from the 2004 second quarter, including a currency translation benefit of about 6 percentage points. Organic growth in sales was 2% as good sales growth in most countries was offset by weakness in the UK. We recently added several new international clients including Mid-Hants (ph), the UK Ministry of Defense; FIFA in Germany, which is the international soccer association; Grupo Alianza in Spain; and several large mining accounts in Chile. Operating income in the international segment was $17.7 million, which includes a $7.4 million charge related to our anticipated exit from West Africa and the cost of a management change in the UK.

During the quarter we appointed a new President of our UK operations, Andrew Main. Andrew is an 11-year veteran of ARAMARK, originally from Scotland, who has spent the last three years running our business services operations here in the United States.

Now turning to our uniform business, second-quarter uniform rental sales of $281 million were up 8% from the year-ago quarter. Organic growth was 5%. We continue to be encouraged by the improved performance of this business. The 5% organic growth is comprised of new business sold of about 13%, with about 40% of the new sales coming from first-time users of rental programs; lost business of about 8%, with about one-quarter of the losses coming from customers who went out of business; price increases of about 1%; and base business growth of about -1%.

During the quarter we acquired Associated Textile Rental Services, a New York-based uniform rental company. This acquisition significantly strengthens our ability to deliver a high level of customer service to businesses in upstate New York.

Operating income increased 10% from the year-ago quarter to $29.4 million, as reduced garment cost and solid control of plant operating expenses led to a 20 basis point improvement in the margin, in spite of our continued investment in the sales force and the continuing negative impact of higher fuel and energy costs.

In the Direct Marketing segment, first-quarter sales were $103 million, down about 5% from the 2004 second quarter, as Wearguard-Crest continued to see softness in most of its channels. Operating income for the segment declined to $1.2 million from $4.9 million as a result of the reduced sales and gross margin erosion at Wearguard-Crest, which continued to be negatively affected by costs associated with the rollout of a new uniform program for a major client and competitive pricing pressure. These issues will likely continue through the rest of the year, although we believe at a lesser rate.

Corporate expenses were about $10.1 million, up from $8.5 million in the year-ago quarter. Increased cost related to the issuance of restricted stock units and Sarbanes-Oxley 404 compliance contributed to the increase.

Total debt was $2 billion at the quarter end, up slightly from $1.9 billion at the end of fiscal 2004. Net capital expenditures for the first half of '05 were $143 million, up from $130 million in the year-ago period.

Internal cash flow, which we define as net income excluding unusual gains, such as the second-quarter gain from the real estate sale, plus non-cash charges such as depreciation, amortization, and deferred taxes, less net capital expenditures, was $128 million for the first six months of '05, compared to $143 million in the prior year. As we mentioned last quarter, the decline was due to a lower deferred tax provision reflecting a recent change in tax depreciation rules which will continue throughout 2005.

ARAMARK repurchased 1.5 million shares in the second quarter for $40 million. The remaining authorization is $140 million.

Turning now to our expectations for the third quarter and the full year, we expect to report third-quarter sales of between $2.75 billion and $2.8 billion and earnings per share between $0.36 and $0.38. For fiscal year '05 we expect sales of between 10.8 billion and $11.1 billion.

Excluding the net impact of second quarter's real estate gain and the international write-off, which increased second-quarter earnings per share by $0.02, we expect full-year diluted earnings per share to be between $1.50 and $1.56. This compares favorably to our original guidance of 1.50 to 1.60 before consideration of the impact of the NHL lockout, which again we estimate reduced this year's EPS by about $0.04. Now let me turn the call back over to Joe.

I feel good about our team's first-half performance. We delivered against many of our goals, and I believe the momentum in the business continues to be quite positive. We're winning new business and being recognized by our peers in the industry associations for our innovation, quality services, and value creation.

For example I'm very proud that we have been selected to serve the world's premier soccer competition in Germany. As Fred already mentioned, we added FIFA as a new client in the quarter. This summer ARAMARK will manage food and beverage services at five German stadiums that will host the FIFA Confederation Cup, where expected attendance is about 700,000 people. This occurs every other year.

We also anticipate that ARAMARK will be participating in the 2006 FIFA World Cup where spectator attendance from all over the world is expected to exceed 3.2 million people. It's quite an honor for our German team up to participate in this event.

During the last six months we've won several awards that are testimonials to the creativity of our team, including two awards for excellence in our uniform business, and two awards by the Nation's Restaurant News for our education K-12 proprietary food brands, the 12 Spot and U.B.U. Lounge.

As we proceed through the rest of the year we intend to continue to take a disciplined approach to our business, which balances profitable top-line growth with margin improvement and targeted return on assets to support our historically high levels of free cash flow. While individual business sectors may become increasingly competitive from time to time, we have the advantage of the broadest portfolio of services in our industry. And our financial discipline and superior people resources will allow us to focus on businesses where we see the greatest opportunities for profitable growth.

Our people are committed to value creation for our clients, for our customers, and for our shareholders. We thank you for your interest and we look forward to speaking with you at our investors’ day next week in New York City. Now we will be happy to answer any questions.

(OPERATOR INSTRUCTIONS) Jonathan Shapiro of Goldman Sachs.

I guess I will go ahead and just ask for an update on the troubled healthcare contracts, and sort of where you are on that; as well as if you can give an update on Galls.

As we said last quarter, the healthcare contracts, the multiservice large healthcare contracts are well on their way to achieving their overall profitability objectives. Those contracts in total continue to be profitable. We're confident that the profitability in those contracts will continue to improve. And we really no longer see that as an issue in the business.

With respect to Galls, the federal investigation of Galls continues. We really don't control the timing of that. The Galls business has returned to somewhat more normalized levels.

Labor costs have gotten a lot of press over the last week or so. Can you guys talk about, maybe a little more conceptually, as the year progresses given people's forecasts for payroll growth versus labor costs, where do you guys see more sensitivity? Which would sort -- would labor costs hurt you more, payroll gains help you more, more people eating at your clients and wearing your uniforms? How do think about the impact of those two? And are you seeing better employment and higher labor costs?

Let me try. Certainly from an overall Company point of view we would prefer to see higher employment levels throughout our businesses both here and internationally; and wrestle with the labor and labor-related costs, and I will come to those in a minute.

As far as labor and labor-related costs are concerned, on the labor cost side we are not seeing significant pressures at all. Markets remain very fluid. We have adequate supply of people. We are in very, very good shape.

As you know we have always talked about labor-related costs, and those continue to increase. I think we have adequate programs against them, both on workman compensation side, on the health cost side, as well as the state unemployment costs. We continue to work against those overall. So I think net-net we're in pretty good shape.

As far as our markets are concerned, while we are seeing some increases in some areas I would not call it pervasive yet because, frankly, a lot of the employment growth is occurring at smaller accounts; and some of our larger accounts are coming back, but I wouldn't call it across the board. Certainly it's a little more positive, but I would not call it robust.

Great. Thanks very much.

Gary Bisbee of Lehman Brothers.

A couple questions. You referred to what had been the problem contracts a few quarters ago. But as you have signed new healthcare, new larger healthcare contracts I think you have been focused on maybe risk sharing in the first year and then potentially you taking on all (technical difficulty). Can you give us an update on that? Has that been working and you have signed a lot of those contracts? What is the outlook on the profitability as you enter some of those contracts?

I think as we have signed new contracts, both those and regular contracts, we've not encountered the same issues that we encountered when we initially started those pre-co (ph) contract. As Fred said we think we are past the critical point of those contracts.

You mentioned that healthcare had grown real nicely. Is it safe to assume that you have been successful in signing a number of other large multiservice contracts in that vertical?

We have signed some; but I think that as you remember our intention in Mission One is to grow from inside, not just to grow from the outside. I would say that significant progress has been made in growing existing relationships out.

Outside of healthcare are there any other verticals that you're willing to comment on where you have been successful in cross-selling either the business, the facility services, to existing food customers or vice versa?

I think that clearly exists in both the K-12 education vertical as well as the higher education vertical. I think that it probably is most developed in the healthcare market.

Okay. Just in terms of the organic growth internationally and continued issues in the UK, can you give us any sense as to what a timetable might be for improving the -- returning to more like mid single digits organic growth there?

In the UK our growth is down from where it was say three or six months ago as we work through some challenges there. That is clearly one of the factors in the lowering of the overall growth rate. We also had an impact of the timing of the Easter holiday in Europe, particularly for example in Spain where our business is in the K-12 market. They were pretty significantly impacted by Easter as was Germany. So those were effects in the second quarter.

We are still comfortable that we can achieve reasonable levels of organic growth internationally, consistent with our overall targets. We expect to improve our growth rates internationally as we look forward through the year and into next year.

Let me just add to that, that we are very satisfied with the growth rates in most -- I would say almost all of our other international markets. The UK is the one that drags it down. As you have heard, we are taking steps to correct the issues that we have in the UK. We are very excited about the management change that we have made in the UK. While it will take us a while to work through that -- and I wouldn't expect the growth rates in the UK to come back very quickly -- we think that the international marketplace is a very solid and growing marketplace for us.

Just one last one if I could. We noticed in the uniform rental business there was acceleration year-over-year but no real acceleration in the business quarter-over-quarter. Many of your comps have shown decent acceleration. Do you think there is anything going on there? Are you pretty comfortable that the organic growth there will continue to accelerate as we move into the back half of the year? Thanks.

I think we are pretty comfortable with the components of growth in that particular business. Some of that has to do with the timing of the ramp up of the sales force. We just crossed over on a year-over-year basis, in having a larger sales force than last year, earlier this year. And that sales force is performing very well.

But the impact in a quarter is really a function of the year-over-year comparisons of the sales force over each of the last four quarters as it affects this quarter's revenue. So it takes a while for that to work its way into the quarterly results. We are also pretty happy with the sales productivity as we ramp that up. As you saw, the lost business was pretty constant; and so we feel pretty comfortable with the elements of growth there.

Thank you.

Brandt Sakakeeny of Deutsche Bank.

Can you talk to the add-stop (ph) ratio in the uniform business and also to pricing? Second maybe can you give us a sense too for how the same-store sales progressed within business services through the quarter? Thank you.

The add-stop ratio and the pricing component in uniform services, as you saw, were pretty constant Q1 to Q2. The pricing environment as we mentioned in the second quarter is clearly -- it remains a competitive business and a price-sensitive business; there is no question that the pricing environment is more rational than it was a year ago and we continue to register solid new business wins. On add-stop we continue to bounce around this zero level.

Great. Within business services, on sort of a same-store sales number,

Our same-store sales number has actually been good in business services. So that as we roll out in business services, as we have in some of our other businesses, updated and marketing merchandising programs, very consumer focused, in some cases more convenience focused, we've seen very acceptable same-store sales results in business services.

Let me add to that. We are very excited about the overall effort that the teams have made on same-store sales. We are seeing very positive results, as Fred said, of our both market research activities as well as marketing activities, on significantly improving same-store sales throughout the whole portfolio.

It sounds like, from your comments, that that is principally one of your doing; and not sort of getting a tailwind yet from more employees go through your cafeterias.

I think it is both. Again, you have to understand that employees going through a cafeteria -- again, you are focusing on the business services side. I am talking about the total portfolio. Certainly employees going through cafeterias, if they feel happier about their status in life -- that is to say, they are not worried about layoffs, and they are getting a few more bonuses, and the enterprise itself is doing a little bit better -- then our per-caps will come up with that. And that will give it tailwind also.

To use another example in our education market, at existing colleges and universities there is not typically a big lift in the number of students that are enrolled year to year. They are pretty much constant. So we've seen solid base business growth, same-store sales growth in the higher education market; and that is not being driven principally by an increase in the number of students at are existing accounts. That is really marketing and merchandising.

That is us doing it.

That's great. Excellent, thank you.

(OPERATOR INSTRUCTIONS) Jeff Omohundro of Wachovia.

Just a question on the U.S. Food and Support Services business operating margin expansion in the period. You mentioned that you had good cost control in the sports segment helping that performance. I wonder if you could elaborate little bit further on what drove the operating margin growth.

In the sports and entertainment section part of the business, there are really two components to that cost control. One is very disciplined cost control within our existing arenas, where the margin impact obviously of losing incremental event revenue through hockey is significant. So very disciplined cost control there.

The second is in our parks operations, where the second quarter is very much of an off-season quarter. Essentially almost all the parks are closed. So it becomes very much a process of controlling your costs with very limited revenues during the quarter. The team in sports entertainment did just an outstanding job of controlling and ratcheting down off-season cost.

Let me just add to that. Again, margin expansion comes from two things. One is driving your winners and controlling your losers. What Fred talked about is, again, the team doing a great job on controlling the losses. In our parks when nobody is there, nobody is there; but you got to make sure that you ratchet down your cost. They have done a terrific job of that. Again, they have done that in the arenas also when there was no hockey there.

I think we've done a very good job on the education side in terms of pushing very, very hard on our winners there, as well as in the healthcare side. So the pluses were pushed a little harder and the negatives were worked on a little harder also. That is what caused the gain.

So we got some margin accretion through this same-store sales growth in a couple of our businesses.

Then on the UK business, just one more follow-up there. I heard the leadership shift that has occurred there. Should we expect now further changes? Do you expect further personnel changes there, additional costs on that? How do you see that business evolving?

I think in the UK we have put together a very solid overall management team. We have made a few other senior management team changes, less significant certainly over the past six months, in some of the key functional areas and operating areas. So we feel very good about the overall senior management team right now in the UK.

Thank you very much.

Eric Sledgister of CS First Boston.

(technical difficulty) items in the 2Q EPS guidance of $0.25 to $0.27?

I'm sorry, I missed the first part of your question.

Were either of the onetime items in the 2Q EPS guidance of $0.25 to $0.27?

No.

Secondarily you talked about the issues in the UK. The margins in the international side of the business have been down five out of the last six quarters. Is there anything beyond the UK that might prevent margins from flattening out in the near term, assuming you get that piece of the operation on the right course?

No, in fact outside of the UK margin improvement was generally positive across the board in pretty much each of our other country operations. So once we work through some of these challenges in the UK, we don't see anything fundamental to margin improvement. I think if you look back over a longer period of time, the last four or five years, you'll see that we have had pretty consistent margin improvement in our international business.

Thank you very much.

Chris Gutek, Morgan Stanley.

A couple of follow-up questions here. I guess focusing on the growth in the food service business, even on an adjusted basis you had about 5% growth domestically, and that was down from 7% in fiscal 1Q. You guys have talked about an increase in the rate of lost business and potentially rising competition. Could you just elaborate on that broader theme? Is this a little bit of a timing issue, or do you think that the level of competition is actually increasing? And if so, why would that be happening?

I think some of it clearly is timing, with the addition of new contracts and the loss of contracts as we mentioned earlier, in the earlier call. We lost a couple of sports and entertainment contracts that would have had some revenues in the March quarter. We see competition ebb and flow from time to time in some of the businesses. We are seeing that now, as we said before, in sports and entertainment and in the business side. We still have a lot of opportunities in both of those businesses to drive same-store sales growth. So we don't see it as anything that is really long-term fundamental to the business.

As Joe mentioned earlier with the portfolio that we have really across all sectors of the economy, we have the ability to concentrate in a particular vertical more in base business growth; to concentrate in another vertical more on new sales, or a combination of base business growth and sales.

The pricing environment in the U.S. food service business, it seems as if -- especially in the sports and entertainment segment in recent quarters -- there has been increasing pricing pressure. Is that a fair characterization? Is that spreading outside of the sports and entertainment into other sectors? If so, can you pinpoint where that pricing pressure might be coming from? For example Compass seems to be one of the more aggressive competitors; what about the mom-and-pops out there? What do you see from pricing a perspective?

I think that, as you know, we don't comment on the specific competitors at al. We leave that up to you all to figure out. But I think that pricing pressures come and go. I think that we are very comfortable with the rate of new business growth that we are achieving. As I mentioned earlier it is significantly ahead of last year.

I think that certain situations are very, very competitive. As we look at the economics both of the capital upfront and the subsidy absorption rates, etc., etc., things that don't make sense to us we just don't do from an economic point of view. Having said all that, we continue to obtain new business in all of those verticals on a negotiated basis, not on sometimes a competitive basis. And we will continue to gain new business there as we go along. I think it is not the mom-and-pops that are really driving that part of the business.

I think the last quarter you guys quantified the growth in the sales force headcount in uniform rentals at 20% growth year-over-year. I am curious what the growth rate was in the current quarter.

I think the headcount growth, Chris, in Q2 was in the teens (multiple speakers) year.

Finally, at the risk of beating a dead horse here on the UK operations, those really seem to be one of the trouble spots in the Company. Fred, I think you said that you did not see any fundamental challenges in that market overall. But just to push you a bit on that, it seems as if some of your competitors have had problems in the UK recently; and in that context it wouldn't seem as if these are all just Company-specific problems. But it may be an industrywide problem. But obviously you seem to disagree with that. I am curious on your perspective.

I think there are several components to the answer. When we talk about the UK, part of it clearly is the West African business, which we are not out of yet, but we have, as you saw, provided for an exit from that part of the world. When we talk about the UK that is certainly included in that, and hopefully we will be out of West Africa in the near term.

I think some of the other issues that have been faced by our competitors in the UK, at least as I read the public information, seem to be a bit more company-specific, and either related to expansion into unrelated businesses or related to supply chain or other factors. Now having said that, the UK market, a significant component of that for us or the major component of that for us is the business clients, and that remains a competitive market. So I don't want to imply that the business vertical in the UK is not very competitive and doesn't continue to be so.

We think we are equipped to grow reasonably on that side through base business growth and decent net new business. But it is competitive. Then on top of that we see very interesting opportunities to expand further into healthcare and education. Those markets in the UK are much less penetrated.

Let me just make sure (indiscernible) the issues that we face there, I would say, are primarily our issues. They are not industry issues there. And we think that the issues the other folks face are theirs specific also.

Great, thank you.

(OPERATOR INSTRUCTIONS) Jeff Bourke, Robert W. Baird.

On the West Africa offshore oil issue, a couple questions around that. First the $26 million, for lack of a better term, divestiture that impacted this quarter, is that going to be pretty consistent run rate for the next three quarters? Is there some seasonality there?

I'm sorry, you mentioned a $26 million divestiture. I'm not understanding the question.

I think in the schedule you break out the organic growth in the international business. There is a subtraction of $26 million in the year-ago period. Am I not understanding that right that that is excluding the impact of the offshore oil last year?

I think, Jeff, that that is an adjustment to get it to an organic growth calculation, that we backed out the impact in the quarter of acquisitions.

Right. So divestiture was the wrong word there.

It's an adjustment from our reported growth to arrive at organic growth, and one of the adjustments we make is we eliminate the impact of acquisitions on sales in the quarter. So it's the sales from the acquisitions that we made, which are not part of our organic growth calculation.

So the offshore oil, you exited that business which was presumably losing money. I'm curious as to why the top-end of the guidance range seems to have come down a bit from the 160 number, given that you're going to be getting out of a money-losing business.

The top-end of the -- the original guidance range was $1.50 to $1.60. That range was before the impact of the NHL lockout. And the NHL lockout impact we estimated at about $0.04 a share for the year.

Last quarter, though, didn't you indicate that the $1.60 now included the NHL?

No, the original guidance of $1.50 to $1.60 which we said back in December was before the impact of the NHL lockout, because at that time we didn't know whether it was going to last a day or the full season. So that included earnings from the full NHL season in the $1.50 to $1.60. It assumes the NHL operated for the full season. Our current guidance which tops at $1.56 essentially assumes the reality, which is there was no NHL season, and that is $0.04.

Okay. Then last question, you touched on the national parks and them being dead this quarter. If you look out to next quarter, how are conditions looking at Lake Powell, for example, and what are your expectations around national parks?

The water level at Lake Powell is up year-over-year. It is still below where it has been two or three years ago, but we feel cautiously optimistic because the water level is up.

Great, thanks.

Bruce Simpson of William Blair.

Good morning. I wanted to focus a little bit on organic growth in the core business. I think am I right in seeing that it is 2%prior -- 2% all in, 4% if you strip out hockey, and that is compared to 7% in the prior quarter; is that accurate?

No, I think the adjusted growth number that we gave for the quarter was 5%, and that compares to just under 7%.

Could you quantify how much of that comes from the lost contracts in sports and entertainment?

We don't quantify it, but it is a component of that difference.

I guess the reason I'm trying to get at it is not to get to a dollar amount of the contract, but rather to try to understand the net changes in the business stripping out those particular losses. It sounds like obviously healthcare and education continue to be the best drivers, and there's some increasing competition of business.

But if you had to sort of strip out onetime impacts from lost contracts, should we be concerned that there is a deceleration of organic growth that is sustainable because of price competition? Or is the majority of that sequential downtick in organic growth from the timing of these big lost contracts?

I think we'll see variability from quarter to quarter and it has to do with the timing of new bids, the timing of lost business. I think as we mentioned in the first quarter, we benefited from major league baseball which had more games in the first quarter of '05 than were played in the first quarter of '04, and that was the timing of the major league baseball schedule, and that that was a helpful offset to a portion of the hockey revenues that we didn't get. So you'll see some fluctuation from quarter to quarter because of events like that.

Can the same thing be said about the drop sequentially in organic growth within the international business? I believe it was 6% last quarter and 2% all in this time. Can you try to quantify how much of that is from the UK and West Africa situation?

I think in that case, Bruce, most of the decline in the organic growth from the first quarter to the second quarter is related to the UK. If you look at our international business excluding the UK, overall its organic growth is very acceptable.

Last question just has to do with the uniform direct sale business. Can you kind of talk about overall trends that are beyond on the Galls situation? Are you encouraged that your customers are beginning to come back on purchases which had been deferred over the last couple of years? Or are you discouraged that the total dollar amount year-over-year was down? Or give us kind of a big-picture outlook on that business, please.

In the Direct Marketing business, the core work clothing business at Wearguard-Crest is doing okay. The weakness is principally in our QSR business and the healthcare component of the business year-over-year. The QSR weakness as we mentioned is related mostly to the rollout of a new uniform program from one of our major clients. We're also comparing to revenues year-over-year with that client where we had some very strong results last year, because one of their suppliers went out of business and we picked up some incremental sales.

So we think we've got some challenges in that business to work through, through the rest of the year. But we don't see any real fundamental change in the growth prospects for the core work clothing business.

Thank you for your answers.

At this time we have no further questions. Bobbi, I would like to turn the conference back over to you for any additional or closing remarks.

Thank you for your interest ARAMARK. We hope you have a great day.

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