Aramark (ARMK) 2005 Q4 法說會逐字稿

Good morning, and welcome everyone to today's Aramark Corporation fourth-quarter 2005 earnings conference call. At this time I would like to inform you that this conference is being recorded for rebroadcast and 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 will now turn the conference 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 fourth quarter and full year 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 full year and fourth-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're referring to diluted earnings per share. As we discuss the results for the quarter and full year 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-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.

Good morning, and thank you for joining us for our fourth-quarter earnings call. Let me start this morning with a review of Aramark's full year 2005 performance. Fred will then discuss the fourth-quarter, and we will then outline our financial expectations and key areas of focus for fiscal '06.

I am pleased to report that '05 full year sales were at a record of nearly $11 billion, up 8% from 2004. Net income was up 10% at $288 million, a record from continuing operations. Earnings per share were $1.53, 13% up. Full year organic growth, sales growth which is adjusted to exclude acquisitions, divestitures, currency translations was about 4% for the total Company. This was consistent with our expectation in light of a calculation of the 2004 2005 NHL hockey season.

Organic sales growth was also 4% for the U.S. Food and support services segment despite the NHL lockout. Now within the U.S. food and support services our healthcare and education businesses experienced high single digit growth as our value proposition continues to gain traction. Our business sector experienced mid single digit growth as our corrections business continued to gain strength with more state corrections systems finding our capabilities quite attractive. Our refreshment services business also had solid growth while our business dining continued to face a challenging competitive environment.

Overall our consumer focused marketing initiatives are delivering solid results. Our new Philadelphia-based innovation center where our talented team integrates our latest advances in marketing, merchandising, culinary and space design opened this past quarter. We believe that these ongoing investments set us apart competitively. Coupled with our consumer-based approach, our teams generated strong base business growth during the year across our U.S. food and support businesses.

You will recall that in almost all instances we only have a portion of the total potential business in existing client locations. Our objectives of increased growth at the same location is quite profitable and usually leads to higher client retention rates. I continue to be very positive about the potential for our base business growth opportunities as we expand these initiatives around the world.

Our international sales were up 25% over 2004 with fully organic growth rate of 6%. We achieved strong growth in Germany and Canada, offsetting our challenges in the UK. Our strengthened in UK team is now fully in place, and we expect to achieve progress in the UK in 2006.

Our uniform rental business which generates the majority of our overall uniform and career apparel sales grew by 8% in 2005. I am very pleased that it more than doubled this last year organic growth to 5% as we continue to focus on sales productivity as well as customer retention. Our uniform direct marketing business, while challenged, showed an improving top line quarter to quarter as we moved through the year.

Our new sales for the full year were also solid. Overall Aramark generated more than $950 million in new business during the year, which is up from prior year. We saw significant wins in our corrections, sports and entertainment, education and uniform rental business, as well as most foreign countries. However, lost business was also up year-over-year due primarily to competitive pressures in the UK and select U.S. sectors.

We are pleased that after a challenging year in 2004 we improved our overall client retention in the U.S. to mid '90s. Sports and entertainment in particular rebounded nicely with a 90% retention rate -- I'm sorry -- with a high '90s retention rate and significant new business. As we mentioned several times before, we will continue to take a disciplined approach to achieving appropriate levels of profitability and returns on both new, as well as retained business.

Our cash flow generation remained quite strong with cash flow from operating activities exceeding $600 million. As a result in 2005 we were able to invest almost $300 million in the business, complete a $120 million worth of acquisitions, return over $200 million for shareholders in the form of share repurchases and dividends, while somewhat reducing our debt and as a result improving our credit profile.

We continue to build our global footprint during the year as we move to a 90% ownership of Campbell Catering, the largest foodservice company in Ireland. We shortly expect to complete the acquisition of a foodservice company in China. In combination with our existing facilities management capabilities in China, we will have an increasingly significant footprint in that country with nearly 9000 Aramark employees and over 150 client accounts. With a balanced portfolio of both food and facility services, we will be well positioned for growth in what is rapidly becoming an expanding economy.

Our Japanese joint venture AIM Services also continued growth and expansion in 2005. During the fourth quarter AIM completed the purchase of the 47% minority interest of a foodservice company called Mepos (ph) which has significantly increased our presence in Japan's healthcare and education sectors. And finally we are continuing to enhance our Uniform Rental footprint in the United States and in 2005, we made strategic acquisitions in Southern California and New York State.

As you know from the announcement this morning, our Board of Directors approved a 27% increase in our dividend to $0.28 on an annualized basis. The Board also authorized an additional $200 million for open market share repurchases, bringing the total authorizations to about $250 million. These actions demonstrate the Board's continued confidence in Aramark's business model, our growth prospects, our strong and stable cash flow generation and our ongoing commitment to delivering shareholder value.

Now before we turn the call over to Fred, let me share a few thoughts on the fourth quarter. As you know on September 29th we announced that there were several factors that we expected to impact our fourth-quarter earnings. These include two hurricanes, significant spike in energy costs and the bankruptcy filing of two major U.S. airlines. We estimate that these items reduced fourth-quarter earnings per share by about $0.03 from our previous expectations.

Aside from the financial impact, the Aramark team rose to the occasion and once again delivered in the fourth quarter. I am very proud of how our people performed in a very difficult aftermath of Hurricanes Katrina and Rita. They worked tirelessly on our clients' behalf to restore operations at affected facilities. They also provided some much-needed normalcy to those who were left homeless by the storms.

During the hurricanes, we served more than one million meals for tens of thousands of people on 24/7 basis at more than 20 locations across the country, including the Reliant Astrodome in Houston. What a great feat performed by the Aramark team. With that, let me now turn the call over to Fred.

Thanks, Joe. I would like to first take you through our consolidated financial performance, and then I will discuss our business segments. We reported fourth-quarter sales of $2.8 billion, up 6% from the prior year. Organic sales growth for the quarter was 4%. Operating income increased 10% to $176.4 million, net income was $91.6 million and earnings per share was $0.49.

Several factors influenced the EPS comparison for the fourth quarter of 2004. The prior year quarter included the previously disclosed effects of the management change and a favorable litigation settlement. 2005 fourth quarter included several offsetting items, specifically the hurricane and airline bankruptcy impacts, a modest asset disposal gain, and a favorable interest impact from the repayment of a client note receivable. Many of our clients that were affected by the hurricane have now been able to return to a more normal level of operation. However, we are continuing to experience some lingering impact into fiscal 2006, particularly at some client locations in our convention center and higher education businesses in Louisiana and Mississippi.

Turning to our U.S. food and support services fourth-quarter sales were $1.8 billion, up 3% on an organic basis. This growth was primarily driven by our education and corrections businesses and as I mentioned was affected by both a loss last year, two baseball clients that we had previously discussed and by the two hurricanes which led to the closing of a number of our client locations.

Fourth quarter operating income for the U.S. food and support services segment was 133.1 million compared to 136 million in the prior year quarter due to the items I mentioned before, partially offset by a modest asset disposal gain. I would like to give a bit more color on the U.S. food and support services segment, starting with business services which includes our corrections clients. The business services sector over all had a mid single digit sales growth for the 2005 fourth quarter driven by solid growth in our corrections and refreshment services businesses. And continued success of our consumer focused marketing initiatives and business dining which helped to offset an increasingly competitive environment. We are pleased to have significantly expanded our relationship with Hewitt Associates and added Clear Channel and Cox Enterprises as new refreshment services clients during the quarter.

Moving to education, we experienced mid single digit sales growth fueled by strong based business growth and higher education as we continued to benefit from our consumer oriented marketing initiatives, such as on campus convenience stores and increases in voluntary meal plants. During the quarter we added the Philadelphia School district as a new client where we are providing food services to more than 100,000 students at 115 schools in the district.

Sales growth for the healthcare sector was in the low single digits due to a recent shift towards a greater mix of management fee type business which can be just as profitable but delivers less topline sales and somewhat higher loss business. We are very pleased to have added the University of Texas M.D. Anderson Cancer Center, one of the world's top cancer hospitals, as a new client.

Sports and entertainment had a low single digit sales decline as solid across the board performance of parks and resorts, convention centers and our existing stadiums and arenas was not able to offset the loss of two major league baseball clients late in 2004, and a somewhat weaker amphitheater concert schedule.

Turning now to the international food and support services segment, fourth-quarter sales of $565 million were up 22% from the 2004 fourth quarter, including the currency translation benefit of about 4 percentage points. Organic growth was 7%, driven by strong growth in Germany, Canada and Chile. We added several new international clients in the quarter including Airbus in Germany, Franken Stadium, a German soccer stadium, and Epson and St. Helior Hospital in the UK.

Fourth quarter operating income in the international segment was $17.9 million compared to $7.8 million in the prior year quarter. As reported last year the 2004 fourth quarter was negatively affected by the UK results, which included losses from offshore oil services operations and several accounting adjustments.

Now turning to our uniform businesses. Fourth quarter uniform rental sales of $286 million were up 8% from the year ago quarter. Organic growth was 5%, which is comprised of new business sold of about 13% to about half 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 that went out of business. Price increases of about 1% and a decline in base business growth of about 1%. Operating income increased 10% from the year ago quarter to 34.5 million as increased sales and lower garment costs offset a significant increase in our energy costs during the quarter. The resulting margin increased about 20 basis points to 12%.

In the direct marketing segment fourth-quarter sales were flat (technical difficulty) as an increase in quick service restaurant demand at WearGuard-Crest and increased sales at Galls were offset by softness at WearGuard-Crest healthcare and work clothing channels. The segment reported a small loss for the quarter due principally to costs related to the opening of a new West Coast distribution center.

Corporate expenses were $8.1 million, down from $15.5 million in the 2004 fourth quarter, which included the management separation charge of $10 million. Total debt was about $1.8 billion at year end, down from about $1.9 billion at the end of fiscal '04. Fourth quarter interest expense included a favorable impact resulting primarily from the repayment of a client note receivable. At fiscal year end about 70% of our reported debt was at fixed interest rates. In anticipation of the rising interest rate environment, subsequent to year end we have taken certain actions to further increase the percentage of fixed rate debt to about 80%, which we believe was prudent. The increase in this fixed rate portion of our debt along with higher market interest rates will lead to higher interest expense in fiscal 2006.

Annual net capital expenditures of $294 million were slightly higher than 288 million for 2004 as we continued to exercise discipline in our capital investment program. Our net capital spending continues to approximate depreciation and amortization expense. Cash flow from operating activities, as Joe mentioned earlier, was 612 million, up 18% from 2004.

Total share purchases for 2005 were 6.5 million shares for $173 million. We repurchased 1.3 million shares for $36 million in the fourth quarter. As we mentioned, our Board of Directors approved an additional $200 million authorization for share repurchases bringing our total remaining authorization to just over $250 million.

Now I would like to provide you with our 2006 guidance. Our guidance assumes a steady economic environment and stable employment levels. We also expect that higher gasoline and natural gas costs will continue to affect our uniform rental business. We expect to report full year 2006 consolidated sales between 11.5 and $11.8 billion. We are targeting 5 to 7% organic growth in our worldwide food and support services business and 4 to 6% organic growth in our combined uniforms business. Diluted earnings per share for '06 are expected to be in the range of $1.57 to $1.67, which includes an estimated $0.08 per share impact of expensing employee stock options. Or stated another way between $1.65 and $1.75 without giving effect to expensing employee stock options.

First quarter 2006 sales are expected to be between 2.75 and $2.85 billion, and diluted EPS to be between $0.38 and $0.41 per share, including an estimated $0.02 impact from expensing employee stock options. Or stated another way between $0.40 and $0.43 without giving effect to expensing employee stock options. Now let me turn the call back over to Joe.

Thanks, Fred. I am very pleased with our team's accomplishments in 2005 as we continued to build on our solid performance. Since going public almost four years ago, we have increased our sales and earnings per share at an average annual rate of 10% and 14%, respectively. We have consistently generated strong cash flows allowing us to invest prudently back into the business, make ongoing acquisitions while returning over $725 million to our shareholders and improving our credit profile.

As I meet with clients and employees I continue to be impressed with our opportunities to build on our existing portfolio of services as well as to add new clients throughout the whole world. The momentum of the business continues to be quite positive.

Let me spend a couple of minutes taking you through five key areas of focus for us in 2006. First, we will continue to focus on increasing client retentions. While we improved our retentions in our U.S. business, and our overall retention remained unchanged between 2004 and 2005, this remains an opportunity for us. We've expanded and strengthened our client retention teams in most of our businesses to communicate our value propositions to our clients and to make them even more aware of the benefits of our portfolio of offerings. Retaining clients is our number one priority.

Secondly, we will continue to expand the opportunities to grow our existing businesses. We've seen good results with our consumer focused marketing initiatives in education, business dining and healthcare. We believe that we have tremendous growth opportunities within our existing clients to gain a higher share of their total business. Our mission one initiatives are clearly helping drive this strategy.

The third area of focus is increasing our new business. We believe that our people, our marketing programs and our consumer focused approach and our demonstrated success with our existing satisfied clients increasingly set us apart from the competition. And our new innovation center will certainly help in these new business efforts.

Fourth, we will continue to focus on margin improvements. Our performance in 2005 despite the NHL lockout and other factors that we discussed, were quite gratifying and we're looking forward to improving that in 2006. And lastly, we will continue to return cash to shareholders. As you know, we have returned over $725 million since our IPO, over $200 million after last year. We hope to continue and improve on that record in 2006.

These five strategies support our teams focus on delivering value to our clients, to our customers and to our shareholders in 2006. Throughout 2006 we will continue to take a disciplined approach to all of our businesses, balancing top line growth, profitability, return on investment and cash flow. While these individual measures may vary from quarter to quarter, we believe that it is best to evaluate us over a longer time horizon rather than a focus on quarter to quarter performance. We remain confident that this longer-term approach will maximize shareholder value in the longer term. Now none of this is possible without a broad and talented and dedicated management team. I want to take this opportunity to salute our management team, to thank all of our 240,000 plus employees for their contribution throughout 2005 and wish them the best of luck for 2006. Thank you very much. We will be delighted to answer questions now.

(OPERATOR INSTRUCTIONS) Michael Schneider, Robert W. Baird.

I wonder if you could just spend a minute on pricing. You said several times during the call again this quarter that the competition remains very tough in this corporate dining sector. And you guys have data I know up-and-down your businesses; can you give us some sense of how much pricing I guess has either eroded on a standard corporate account during fiscal '05? Or maybe in a corollary how much you've actually walked away from as a result of the price competition?

Well, again we said several times that this continues to be a very competitive marketplace for us. Because we operate across the board particularly in the food and support businesses, it varies from sector to sector over time. We commented on the sports and entertainment last year; we commented on where we are this year and we're very pleased with that. Clearly on the business services sector this year the competition was a little more keen then it was before. We have lost several accounts that we wish we had not lost but frankly, the economics just didn't appear reasonable to us. On the other hand, we have gained significant major accounts. Fred mentioned Hewitt account. So it depends really what people are buying. As you know we've always gone to market as a value proposition not as a price proposition. And will continue to do so. You to have to be in the price zone but you don't have to have the lowest price overall, and it also depends what people are trying to sell for. We think we solve people's problems on a broader sense as opposed to just what's the price.

I guess trying to put some numbers around it, given the fact that we really didn't see any operating leverage in the domestic food business this year despite the mid single organic growth, does it mean that even though -- even that the new business you are bringing in is on the margin? I guess coming in at lower than average profitability? Which explains why we haven't seen the operating leverage. I am trying to get a sense of how much pressure this is actually putting on the domestic food business both revenue and margins.

As Joe said I think it really varies by market. I think that we have been satisfied overall with our pricing and overall profitability across most of our market segments. Probably as Joe mentioned as U.S. business services are the ones we're seeing the most pressure. And I think it is fair to say that because of that when you add new business and compete for business, you always have pressure on the margins versus your base, but I would say that is not the rule across the business at all. It is particular to that individual market sector. And I think in terms of overall margins, of course, we had the impact of the hockey strike early on in the year which had a disproportionate margin impact because of the drop through, and then of course the hurricanes at the end of the year. So business services continues to be a challenge from profitability point of view but the rest of the businesses, the profitability is good.

I guess during the course of the year if you just look at your U.S. corporate book of business, did profitability actually decline in that business?

Again, if you exclude the hockey piece I don't think it did.

Okay and switching gears to the healthcare space, low single digit growth this quarter. I am just wondering if I am thinking about this correctly. As you roll forward down into the first and second fiscal quarters you're going against extremely tough comps when last year you signed up these big campus healthcare contracts. Should we actually expect that healthcare growth turns flat or even negative against those comps in the first half of the fiscal year?

No, I don't think we would expect those to have negative growth in that business. The growth is going to vary from quarter to quarter based on the pace of new business versus lost business. And as I mentioned earlier, to the extent to which we take on accounts where we take on the full spend or we take on accounts on more of a management fee type basis, which doesn't really affect the bottom line so much but effects the top line. But we are still very comfortable that we will see very solid growth in healthcare as we move forward.

I would say that we're very excited about our business proposition in the healthcare space. We think we have the most innovative set of offerings in the marketplace. I think they resonate very well with our clients. These are longer-term sales as we've said before. Some of them take as long as a year or two to accomplish. And they vary from quarter to quarter. I guess I want to encourage you not to look at us on a quarter to quarter basis, but look at us on a longer-term basis as we achieve that.

Thank you, guys.

Brandt Sakakeeny, Deutsche Bank.

This is Adrienne Colby for Brandt. I was wondering if you could give us some guidance for operating cash flow and CapEx for 2006.

In general I think you can expect our cash flow in 2006 to remain strong compared to 2005. Obviously we are projecting our -- expecting our net income to go up, and that is one of the key elements of the overall cash flow. And I think with respect to capital expenditures if you look at our performance over the last four or five years, our capital expenditures have been pretty consistent with our overall depreciation and amortization expense, sometimes a little higher, sometimes a little lower. And I think our expectation is that that general relationship will continue, as well.

I was wondering, too, if you can provide a little bit more color on the direct marketing uniform segment; you indicated that results reflected the opening of a distribution center?

Yes. Late in the year 2005 we opened actually our first combined distribution center, which in the West Coast services our rental business and our direct sale business. And there were startup costs, ramp up costs associated with that distribution center. And we are not operating at the full level of volume there, which gets you down to the standard cost per unit, cost per unit is higher because the volume hasn't built up yet there. And that had an impact on the profitability of the direct marketing businesses in Q4.

Do you expect that to abate in the first quarter of '06?

We expect that to gradually improve as we move through the year. The West Coast DC is open; we're pretty much on track in terms of how that facility is ramping up and our overall cost structure. But it takes some time for it to achieve the right unit level profitability.

Great. Thank you.

Chris Gutek, Morgan Stanley.

Could you please quantify or take a stab at what you think the hurricane impact will be for the next couple quarters? Both on the negative side as well as the positive with the insurance recovery proceeds?

I think, Chris, overall there will be some lingering impact from the hurricanes. And as I mentioned, it is really in two market segments. Its in our convention center business, as you know we do the New Orleans Convention Center; we provide the foodservice there so a very solid account for us, pretty large. And in the education -- higher education business where we have several colleges that are shut down for at least the first semester. And in healthcare a little bit as well. We have been a longtime provider of services at the Tulane Medical Center. So there will be some lingering impact. Frankly, we don't see it as being material on the Company in the first or second quarter. And with respect to insurance recovery, that is a hard thing to forecast. I mean, we, like lots and lots of other companies will be -- we are covered to some extent -- we're not covered to the extent that in some cases where there is flood damage, and then a flood zone, there is a high deductible. But we are clearly pursuing insurance recovery, and again, that is a hard thing to project both in terms of amount and timing.

Fair enough. With the UK it does seem as if there is a difficult environment there and also seems that maybe there are some company specific issues or challenges as well. Could you guys elaborate a bit on what exactly is happening, how much progress if any is being made and what you are expecting over the course of the next year?

I think you're right. I think it is company specific. To us. I think we have the management team in place now; we're very pleased with them. We think we have to stabilize the business. We have lost some business there in the last two quarters. Some of it we are quite pleased that we lost because it didn't really make a lot of sense to us. I wouldn't expect significant growth topline out of that marketplace but I think I would expect continued improvement on the bottom line there and ongoing retention rates of the existing business.

It sounds like still a difficult environment, not a lot of progress near term, is that appropriate interpretation?

No. I wouldn't characterize it as that. You know, I think.

I think on the top line as Joe mentioned, the business that we lost towards the end of the year its going to have obviously -- work its way through the '06 numbers. And affect the year-over-year sales comparison. But we do expect to see I think some meaningful improvements in profitability.

Okay, great. And finally you guys mentioned recent deals in China and Japan; I am curious were those one-off opportunistic deals or conversely are you guys getting more aggressive strategically in Asia and should we look for additional deals maybe (technical difficulty)

I apologize for the crackling on the line. I don't know where it's coming from. (inaudible) Markets, clearly in China we are quite aggressive in terms of looking for opportunities, and I was actually in China in the last month and a half. It is a fantastic market. We've got great teams there, and we are growing there very rapidly. And we are very excited about being in the marketplace there. And we will see what else we can add. The companies exist there are small but we will have a significant presence there, both on the facilities side and on the food side. And we are very excited about particularly on the healthcare side which is where the facilities are focused.

As far as Japan is concerned as you know we have a joint venture there. With our partners, the Mitsui Group there. Its a very large company; this acquisition has been in the works for quite a while. And the Mepos acquisition -- we are finally going to complete it I think by the end of this calendar year overall. And there are some additional opportunities there, and the Company is doing quite well, grows quite nicely and has improved its margin overall, so we will continue to grow in those markets and you also know that we are in Korea and Korea is doing very well also. So yes, Asia is clearly a marketplace that we are targeting.

Great. Thanks.

(OPERATOR INSTRUCTIONS) Jonathan Shapiro, Goldman Sachs.

I wanted to ask about the expectation for revenue growth next year. I think when you guys talk about 6 to 8 percent in your longer-term growth model, does that include acquisitions?

No.

So I guess what I am trying to find out is where we are in the economic cycle? Sort of when do you think this cycle we might see sort of the 6 to 8 versus 5, 5 to 7, at what point do you get maybe earlier in the cycle, can you do better later in the cycle? It slows down -- how do you guys think about that?

I think, John, that we are still comfortable that we can operate in that 6 to 8% range. There are a couple of factors that are putting us right now if you average it out at the low end of that range. One is as we've mentioned, a particularly competitive environment in a couple of our individual sectors in the food support services side. One would hope over time that that evens itself out, and we seen these cycles before, and in fact it has evened itself out. Joe mentioned our challenges in the UK. Some of that was frankly self-inflicted, and we think we can work our way through that. And we continue to think that in the uniform side we will see gradual improvement to at least zero or slightly positive base business growth as uniform wear stabilize, which will really put the uniform business solidly in that range.

I think let me just add to that; I think if you look at our mix of businesses as our healthcare business continues to grow, our education business continues to grow, our correction business continues to grow and frankly our refreshment business which is really focused on smaller businesses continues to grow, we are less and less dependent upon the economic cycle which is again not an accident. We designed it that way, and we're pushing towards that side. The uniform business clearly is more dependent on employment levels, and frankly we are surprised to continue to see it growing negatively. I think Fred mentioned 1% or thereabouts in existing accounts. Usually in economic cycles this far into the cycle you wouldn't expect to be negative but it still is negative. Maybe it has to do a lot more with the manufacturing mix base that that business carries with it. And hasn't switched completely yet to the service side. But I think that as Fred said, we are -- think we are going to be within the zone; whether we're going to be at the low end, the mid end or the high end, we are as usual cautious about it.

Fair enough. On the manufacturing, can you -- roughly what portion of your revenues and maybe if its U.S. revenues, whatever is easy for you to come up with, what portion of revenue do you think comes from manufacturing now versus maybe five years ago, plus or minus?

John, that is a difficult question to answer. I think we typically don't break down our sales by sector, although we did as a part of the IPO prospectus I think we broke it down between business, sports and entertainment and the like. I think it is fair to say that the business sector has been growing more in the zero to 5% range and education, healthcare have been growing more in the high single digits, low double digits. So there is a gradual shifting of the mix away from noncyclical sectors. I wouldn't say it has been a radical shift, but I think it is a pretty clear shift.

If you take the ServiceMaster acquisition by itself most of that was focused on healthcare and education.

Three-quarters of it.

So that by itself shifted the mix again by design for us towards the non manufacturing side.

Thanks very much.

Having said that we still think that in the, particularly in the business market we are driving very respectable same-store sales growth, and we have again a small percentage of the overall spend. So we continue to think that there are terrific opportunities to grow our existing business in these sectors. They are just a little more cyclical.

Thanks for the color.

Gary Bisbee, Lehman Brothers.

I guess a sort of big picture question your operating margins overall, I know the Company has talked about a 10 to 20 basis point long-term margin expansion goal. And when I look at the last few years the margin has come down each of the last four years. I guess two questions as it relates to that. Number one, are there any factors that you foresee at this point that could put pressure on the margin in '06 beyond what we've been talking about here? And secondly, it would seem like the comps growth (indiscernible) are much easier with hockey back, having the lost baseball contracts and the hurricane at the end of the year and fairly easy margin comps in the international business and the uniform direct sales business. Is it possible you could be above the high end of that 10 to 20 basis points next year?

I think that we still firmly believe that we can get margin improvement in the business. And as we've talked about, we've been hit the last couple years by disproportionate increase in some of our costs, particularly our labor related costs. And we're making progress on that through a number of programs that we've talked about in past meetings. In past discussions. We do have I think some opportunities to help us with margin improvement looking at '06 versus '05. Hockey -- it is sort of hard to say -- it is fairly early in the season as to how strongly hockey will come back, given that they have made a lot of changes to the game. So we will have to see.

Probably one of the biggest challenges in the other direction is our overall energy costs. And while that is not a huge impact on our food and support business, it is pretty significant in our overall uniform business. Our uniform energy costs in the fourth quarter were up roughly 30% on a year-over-year basis. And it is now in the range of 4 to 5% counting fuel in that business. And if you look at where natural gas costs are for example today they are significant, even though they have come down some in the last couple of weeks or months or so, they are significantly above where they were. And the same with the price of gasoline which also affects our food and support services business. So I would say that that is probably where we will see a source of margin challenge as we move into '06.

Okay. but it sounds like you're comfortable that you think you can see margin expansion this year.

We certainly target it.

Okay. And then could you quantify just a couple of small things for us? First of all, what was the impact of the airline bankruptcies? Was that writing off a receivable outstanding or what exactly is the impact?

We haven't talked specifically about the various elements of the preannouncement, which you remember had three elements in it. One was the impact of the two hurricanes. The second was the incredible spike up in energy costs from late July, early August through the end of the quarter and then the third the bankruptcies. The bankruptcies related to longtime contracts that we've had principally with Delta; a smaller contract with Northwest, where we provide cabin cleaning and other related services to them. As a part of that we generate a receivable, and as a part of their Chapter 11 filing it was obviously prudent to take a reserve, an appropriate reserve against that receivable.

Okay, and I guess just a last question you mentioned there was also an asset disposal gain. I wonder if you quantify the size of that or maybe in relation to that write-off, the thing you just talked about for the airline.

That was a relatively small gain. When we bought ServiceMaster, contained within ServiceMaster was a very small staffing company, a company by the name of Quantum. We've been working for some time to dispose of that. It is a good business. It just doesn't fit with our overall business, and we were successful in disposing of that business, relatively small in the fourth quarter. The overall gain there you might remember in the fourth quarter of last year we had a favorable pickup from the settlement of a litigation matter in our school support business, which was I think in the 3, $4 million range. This gain was roughly comparable to that on a year-over-year basis.

Great. Thanks.

JPMorgan, Michael Fox.

Most of my questions have been answered. I just have one last. Can you talk about the trend during the quarter on the uniform rental side and new business and pricing?

I think the trend during the quarter was relatively constant from beginning to end. So I don't think we saw any deterioration or any improvement, significant improvement.

Okay, and have those rates continued throughout the first quarter that using so far, or is it too early to tell?

I think it has been pretty much as it was in the fourth quarter.

Okay. Thanks a lot.

Citigroup, Pete Carillo.

A couple questions for you. In terms of overall rental growth rate, it has been sort of trending at 8% or so last several quarters, so things are expected to occur in the coming quarters, sort of gotten more stable now?

I think clearly the rental business has stabilized. And yet we are certainly operating at a 5% organic growth rate is a very respectable growth rate. Our target clearly is to continue to improve that gradually over time.

Okay, so those acquisitions done recently over the last few quarters, that would tend to I guess on top of the 5% organic?

Yes, the 8% is as reported which is 5% organic and then 3% impact from acquisitions. The acquisition impact is going to ebb and flow based on the timing of those, and as you probably know in that business the acquisitions tend to be smaller add-on acquisitions but to fill in our geographic structure.

We clearly intend to continue the acquisition. So one would expect that on top of whatever the organic growth rate is organic growth through acquisitions that it should be in about the same range it was this year.

A couple other questions for you. In terms of '06 I noticed tax rates spiked up a little bit this last quarter -- I am not sure if it is onetime situation in there -- tax rate tend to be still in the 36, 36.5% range or should it be a little bit higher more like the fourth quarter, about 37.5 or.

The normal tax rate is in the range 37.5%. I believe if I recall it correctly we had a tax credit in the fourth quarter last year which dropped down our overall tax rate slightly. But the fourth quarter of this year is a good approximation of a normalized rate.

Okay, and a couple other things. Corporate expense for '06, how should we think about corporate expense for the year? Is there some kind of guidance you can give us for that? It’s all over the place a little bit.

I think if you look at -- if you look at this year versus last year in the fourth quarter, as I mentioned, the management charge that we took in the fourth quarter last year is reflected in the corporate expense line, which is why the corporate expenses in the fourth quarter this year are below last year. I think the best way to look at it is to look at our overall corporate expenses for the full year, for this year and then assume a normal growth rate off of that.

Okay and finally you mentioned that you guys I think you said that your fixed debt from 70% -- I wasn't sure what period if that was for the year, average or whatever but 80% by the end of the quarter -- end the year. What is the average cost of that roughly working out now, and I guess including your receivables facility and all that?

Its in the range of 5 to 6% overall.

Currently?

Right, and as I mentioned earlier with the increase in interest rates year-over-year we do expect to see some increase in interest expense as we move into '06.

Okay, great. Thanks a lot.

Michael Schneider, Robert W. Baird.

I wonder if you could just spend a minute on new sales. You guys did another great job adding 950 million you said in new sales this year, but lost business was up as well. Do you have the net number as to what you guys believe you secured on new sales minus lost business during the year?

I don't have a net number for you, Mike, but the new sales varied all over strong experience, as we said in the sport and entertainment business. Our international business overall did very, very well. Our correction business did very well. And the markets are competitive, we talked about earlier, and we lost some business there. I think overall our net new business was slightly lower this year than it was last year.

Does that just reflect maybe somewhat the maturation of the mission one program that has been a couple years now in force. Is it just tougher now to generate this cross selling?

No, I don't think so at all. I think it become actually part of the fabric of the organization, and it just goes on all the time. I think that loss is just a specific to certain marketplaces, specific to some large accounts. I don't think it is reflective of anything.

Okay, and on mission one, tell me I guess how you analyze what metrics you're looking at to judge the success of that business or that program and then maybe you can give us some indication of how it performed in fiscal '05 versus fiscal '04.

I think, as I said, once you get programs ongoing for more than two or three years they become part of the fabric, and therefore differentiating between what is normal organic, and what is mission one becomes a little more difficult throughout. The fact that we have encouraged coordination among the various businesses, the fact that we are seeing significant growth in existing accounts, the fact that we are seeing significant geographic expansion in existing accounts is very encouraging to us. I think most of it is still in the United States; I think we still got a ways to go internationally.

Okay, and then Joe, maybe you could just update us on the succession plan given your return to the business and I think you had promised three years to the company. Just what we should expect kind of in the coming 12, 24 months.

Well, you can expect me in the next 12 to 24 months. The way I count its 13 months into a 36 month mission. So stay tuned.

Okay, is there an executive search underway already or a screening process underway already that we will hear about in the coming quarters?

There is a -- there is no search underway at all. There is obviously ongoing discussion with the Board and with various committees of the Board, and they are in charge of it.

Okay. Thanks, Joe.

Chris Gutek, Morgan Stanley.

Could you elaborate a little bit on what you're expecting in terms of increased weighted average interest rates, given the changes you made in the quarter and subsequent (technical difficulty) the quarter?

We're having a little drop out on the connection. Hopefully you can hear me. The year-over-year increase in interest rates is north of 100 basis points between some of the fixed-rate debt that we put in place and then the general increase in floating interest rates. That is the increase in interest rates as it, to clarify that, that is really principally effecting the floating portion of our overall interest portfolio.

There should be also an impact because you had a mix shift away from floating towards fixed, so there wasn't a step up on that portion of the debt. Is that correct?

Yes, and essentially we've locked in on the fixed side interest rates that are somewhat comparable to the increase in the floating rates year-over-year. So if you think of starting in the year let's say 30% or so of our debt being subject to floating rates, and you think about the fact that the interest rates in general are up let's say 100 basis points and probably will go up a little more during the year, that part is the part that is driving some increase in interest rates. Whether it is either continuing to be floating or whether it is a portion that we converted to fixed.

And one other to follow up on Michael's earlier questions on competition in business services, where is that competition coming from? Is that Sodexho, Compass or local competitors?

We don't think it is local competitors, Chris. And as you know, we don't comment specifically on competitors. But you guys can figure it out.

Fair enough. Thanks, guys.

Mike, I didn't mean to be quite as off the cuff as I was about the management issues. You clearly understand that we have a management committee here that consists of the four group executives, two of whom run the U.S. business, one runs the international business, one runs the uniform business. They're very strong executives. They run the business day to day. We have four staff executives in terms of legal, corporate affairs, human resource and finance. That is the management team. That is who runs the companies day to day. And I am quite comfortable with that. So as you saw we had a very good year, you saw we are setting ourselves pretty aggressive targets for 2006. So things are in good shape here.

Gary Bisbee, Lehman Brothers.

One quick follow-up at your analyst day this past spring you spent a lot of time reviewing strategies that increase I think what you were calling the share of stomach at your clients at both driving higher purchases and in the sports contracts but also within the business segment. Is it too early for you to share a lot of results from that, or are there any sort of concrete data points or numbers you can give us as to how that is helping drive the organic growth of the business?

No, I think we have a lot of data points to show. I think a lot of the growth in, as Fred mentioned earlier, in existing accounts where you have mid to high single digit growth rates in existing educational accounts. That is all coming from precisely, as Fred said, convenience stores, more meal plan sales and a lot of cash sales. That is really overall. So we are driving it significantly, and frankly, the reception to all of our marketing programs again particularly in the higher education -- its easy to measure in the higher education because everybody started at the same time and you can measure it, is very, very strong. And as I said earlier also, the consumer focused approach which this is part of can expand to several other parts of the U.S. business but most of the opportunity continues to exist in the international side.

Okay. Thanks.

And Bobbi, I will turn the conference back over to you for any closing remarks.

Thank you and we thank everyone for your interest in Aramark and we hope you have a great day.

A rebroadcast of this conference is available starting today, at 12:00 PM Eastern time and will run until November 23, 2005 at midnight Eastern. You may access the rebroadcast by dialing 888-203-1112 or 719-457-0820. Please reference pass code 6148588. This concludes our conference for today. Thank you for participating, and have a great day. All parties may now disconnect.