Aramark (ARMK) 2006 Q2 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the ARAMARK Corporation's second-quarter 2006 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 listen-only mode. At the request of the Company, will open the conference up for questions and answers after the presentation. I will 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 second quarter of fiscal 2006. 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're referring to diluted earnings per share. As we discuss the results for the quarter that 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 reconciliation of these non-GAAP financial measures to the most comparable GAAP measures, as required by SEC rules.

The various remarks that we may make in this call relating to matters that are not historical facts, including remarks about future expectations, anticipations, beliefs, estimates, plans, and prospects, 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 second-quarter 2006 earnings call. I would like to give you an overview of the second quarter, and then I will turn the call over to Fred for some details on our businesses.

First, before we review the quarter, as you most likely are aware, last week the Company announced that a group of investors, led by me, have proposed to acquire ARAMARK's outstanding common shares at a price of $32 per share. The Board of Directors has formed a special committee of independent directors to consider the proposal. As indicated in the Company's May 1 press release, there can be no assurance that any transaction would be consummated. As I am sure you all understand, we do not plan to comment any further on this situation on this call.

Now moving to our earnings for the second-quarter 2006, total sales were $2.83 billion, up 6% from the prior year's quarter. Organic growth, which excludes acquisitions, divestitures, currency translations, was also 6%. Net income increased 10% to $59 million; and earnings per share were up 14% to $0.32 compared to last year's second quarter.

Year-to-date, sales at $5.76 billion, net income was $152 million, and earnings per share were $0.82. Fred will elaborate further on these results in his remarks.

Sales for our U.S. Food and Support Services segment grew 5% in the quarter and 6% on an organic basis on continued strong growth in our sports and entertainment, education, corrections, and refreshment businesses. Operating income improved in most of our businesses and the margin was 4.1%.

I'm pleased with the progress we continue to make in our international Food and Support Services segment. This segment again had record sales and operating income for the quarter. Sales were up 13% and organic growth was 9%. Operating income was $33.6 million, and the margin improved to 5.2% on solid overall results and ongoing improvement in our UK operations.

Our German team is busy getting ready for the World Cup, where beginning in June; 32 nations will compete in 64 matches before 3 million spectators. People from around the world will experience ARAMARK delivering the high level of service for which we're known throughout the world.

Sales for our uniform rental business grew 7% in the quarter and 5% on an organic basis. Operating income was also up 7%, and the margin was a constant 10.5% despite continuing high energy costs. Our uniform direct marketing business saw a modest decline in sales and reported a small loss for the quarter as this segment continues to face challenges.

We also continued to return cash to shareholders in the quarter by repurchasing almost 2 million shares. Now let me turn the call over to Fred.

Thanks, Joe. Let me start with our consolidated financial performance and then I will discuss our business segments. As Joe mentioned, second-quarter sales were up 6% to $2.83 billion. Organic sales growth was also 6%. Operating income increased 7% to $124 million. Net income increased 10% to $59 million; and earnings per share were $0.32.

Several items affected the 2006 second-quarter comparisons. As you will recall, the 2005 second quarter included a $0.04 per share real estate gain in the U.S. Food and Support Services segment and a $0.02 per share charge in our international food segment to exit the West Africa business and for management separation costs. The 2006 second quarter included $0.01 per share of options expense and reflected a somewhat lower overall tax rate.

Now, turning to our U.S. Food and Support Services segment, second-quarter sales were up 5% to $1.8 billion. Organic sales growth was 6%. As Joe mentioned, this growth was primarily driven by our sports and entertainment, education, corrections, and refreshment businesses.

Providing some more color on the U.S. segment by sector, business services had low single digit sales growth, as corrections and refreshments continued to perform well. Despite positive base business growth in business dining from marketing initiatives to help drive increased participation and spending at client locations, sales for this business declined slightly. We added U.S. Trust, Rockwell International, and International Truck and Engine as new business services clients during the quarter.

The education sector had high single digit sales growth on good base business growth in higher education and K-12, as well as service expansion in facilities. The timing of the Easter holiday, which is in the third quarter of this year but was in last year's second quarter, contributed somewhat to the growth. California State University at East Bay, American International College in Massachusetts, and Huntington College in Alabama were added as new clients in the quarter.

While we saw good base business growth in the healthcare sector, sales were flat compared to the year-ago quarter due to the impact of lost business in 2005. During the quarter, we added The Children's Hospital of Philadelphia, Children's Memorial Medical Center in Illinois, and St. Agnes Medical Center in California as new clients. As I mentioned last quarter, we expect the healthcare sales growth to gradually improve as we move through the back half of the year.

Sports and entertainment had high teens sales growth driven by the return of hockey, but was somewhat offset by the continuing impact of the hurricanes on our convention center business. We added Deer Creek State Park in Ohio as a new client during the quarter.

Operating income in the U.S. Food and Support Services segment, $73.9 million, compared to $77.6 million in the 2005 second quarter, which included the real estate gain that I mentioned earlier. Excluded the gain, operating income was up 9%.

Insurance proceeds of $2.5 million this quarter substantially mitigated the ongoing negative impact of last year's hurricanes, most notably on our convention center business. The current quarter operating margin was 4.1%, which was up about 15 basis points from last year's second quarter after excluding the real estate gain.

Turning to the international Food and Support Services segment, second-quarter sales of $642 million were up 13%, or 16% before the impact of an unfavorable currency translation, on continued strong growth in Canada, Germany, and Chile. Organic sales growth was 9%, which was also helped somewhat by the timing of the Easter holiday. We added several new international clients in the quarter, including Outward Bound in the UK, Mount Allison University in Canada, and Kwandong University College of Medicine in Korea.

Second-quarter operating income of $33.6 million was up sharply from $17.7 million in the year-ago quarter, which included the $7.4 million charge that we mentioned earlier. These results were driven principally by continued improvement in our UK operations, as well as good performance in Canada reflecting strong remote camps business, as well as results in Germany. The operating margin improved to 5.2%, which was up more than 80 basis points after adjusting for last year's charge.

In our uniform rental segment, second-quarter sales of $299 million were up 7% from the year-ago quarter. Organic growth was 5%, which is comprised of -- new business sold of about 13%, with about 60% of the new sales coming from first-time users of rental programs; lost business of about 8%, with about 1/5 of the losses coming from customers that went out of business; price increases of about 2%; and a decline in base business of about 2%. We added Wal-Mart private fleet and transportation as a new rental client in the quarter.

Operating income of $31.3 million was also up 7% reflecting the increased sales. The margin was stable at 10.5% despite continued high energy costs, which negatively affected the margin by about 80 basis points compared to the prior year, and ongoing investment in the sales force.

The uniform direct marketing segment reported second-quarter sales of $103 million, down about 1% from the year-ago quarter, reflecting continued softness at Galls and WearGuard-Crest healthcare. The segment reported a small loss for the quarter as results were negatively affected by lower volumes and margin erosion at both Galls and WearGuard-Crest. We're currently exploring a number of initiatives to improve the longer-term performance of specific parts of this business.

Corporate expenses increased $4.9 million from the year-ago quarter, primarily due to the expensing of stock options in fiscal 2006. Interest expense of $35 million was up 5% from the prior-year quarter, reflecting higher average rates in 2006. We expect to see higher interest expense continue through the year.

The effective tax rate of 33.8% in the 2006 second quarter compared to 35.7% in the year-ago quarter, reflected higher hurricane-related employment and other tax credits this quarter.

Total debt of about $1.9 billion at quarter end is down from $2 billion at the end of last year's second quarter. We repurchased almost 2 million shares of our common stock during the second quarter for $56 million. The total remaining authorization is $138 million.

Looking forward to the balance of the fiscal year, we expect sales for the full year to be between $11.5 billion and $11.7 billion; and for the third quarter between $2.85 billion and $2.9 billion.

We expect full-year diluted earnings per share to be between $1.60 and $1.65, excluding the first-quarter tax adjustment, which is consistent with our earlier annual guidance. For the third quarter, expected diluted earnings per share are between $0.36 and $0.38.

In addition to the impact of stock option expense and the timing of the Easter holiday versus last year, we expect the quarter to reflect the continuing effect of last year's hurricanes, weaker results in the uniform direct marketing segment, higher interest expense, and energy costs. Now let me turn the call back over to Joe.

Thanks, Fred. I am satisfied with our overall growth, margins, and cash flow for the first half of 2006. As we have previously stated, it is best to evaluate our performance on a longer-term basis since there are often quarterly fluctuations in several of our business segments. We expect that full-year 2006 performance will be within our original guidance.

As many of you heard, we recently appointed Andrew Kerin to head our U.S. Food and Support Services segment. Andrew has more than a decade of experience with ARAMARK, serving in leadership roles in our healthcare, education, facilities, and correction business. This change of combining our U.S. Food and Support segment into one segment will make us more cohesive and effective in serving our customers, allow us to better share resources, share best practices, support our employees, and address the needs of new and existing clients better.

Ravi Saligram, who heads our international Food and Support Services business, and Tom Vozzo, who heads our uniform business, together with Andrew will drive our professional services approach to deliver the environments, the experiences, and the outcomes that add value to our clients and customer relationships. Now we would be happy to take questions. Thank you.

(OPERATOR INSTRUCTIONS) Chris Gutek from Morgan Stanley.

A couple of quick questions. Joe, I know you said you are not able to talk about the going-private offer. But maybe just from a logistical perspective, would it be possible to elaborate on what the Company has already said publicly regarding the next steps the Board will take and what the time frame would be?

Chris, I just don't think it is appropriate for us to comment any further on that. I think we are going to stick with that.

Okay, fair enough. A couple of quick ones. Joe, you finished your prepared comments talking about the management change with Andrew Kerin obviously also impacting Jack Donovan. I'm curious for the background there. What wasn't working? Then, to be clear, what is going to change going forward strategically with this management change?

Well, we wanted to combine the U.S. Food and Support Services together into one unit, and that is what we made the change in. Andrew is the person that we wanted to run that particular business. What you will have is you will have the sharing of best practices, you'll have the best platforms, you will have a better flow of information people across one entity rather than two entities.

Okay.

From a strategic point of view, I don't think much is going to change.

Okay, great. Finally in the UK initiative looks like the Company's making significant progress. Where is the Company in that process? How depressed is the profitability in the UK? Specifically, how much further upside opportunity is therefore yet to play out?

Chris, this is Fred. I think we have made very solid progress in the UK year-over-year. While we don't comment specifically on margins at the business unit or the country level, their margins are approaching respectability. Having said that, we think there is more upside.

Any time frame for how that plays out?

I think we expect to continue to see improvement in their performance over the next year or two.

Great, thanks.

Jonathan Shapiro from Goldman Sachs.

I wanted to -- the organic growth in the uniform business and in the U.S. Food and Support, it ticked down from the first quarter just by 1%. Is that really more rounding, or are you seeing anything in the business, like it in the United States' economy, frankly, that is leading to any kind of slowdown? Or are we just talking about rounding?

It is really rounding. Particularly in the uniform business it is really rounding up, rounding down. So no real change. We will have some variations as you know, quarter-to-quarter, based on individual timing of new accounts and lost accounts. But it is more or less rounding.

Okay. If we look at where we are in the economic cycle, you have seen organic growth. In the U.S. it was 7% last quarter, 6% this quarter. Is there an economic environment -- ? You have talked about a long-term 6% to 8%; is that where we are right now? This is sort of the target growth rate you feel like you're sort of hitting where you want and need to be to get those numbers? Or do you think there is still even more that either the economy can do for you or with Mission One or whatever other initiatives you have?

John, I think you really have to separate two things. One is what is what we call the economically sensitive businesses and the economically nonsensitive businesses. One could argue that there is some relationship with the sports and entertainment business and the economy. I would argue with you it has more to do with team standing and the competitive set.

Clearly the healthcare business, clearly the correction business, clearly the educational business -- they're not economically sensitive. Even some of our business-related businesses, our refreshment business I would argue is less economically sensitive than our (indiscernible) business.

So you really got to disaggregate all of this information to have a viewpoint. I would say that we feel comfortable with our longer-term 6% to 8%, but it is not economy driven; it is really executing on our strategy and getting that right.

Looking, just following up on that, on the business dining, specifically you mentioned that it was down, in your prepared remarks. I would imagine at this point this is a function of competition; or is that really the economy still? You're just not able to see a pickup in that business?

It is really a function of the overall competitive environment. As I mentioned, our base business growth in business dining has been very respectable, driven by marketing and merchandising programs that lift participation and lift check averages.

We are going against some lost business that carried into this year. Late last year, early this year, and that is really what is depressing the overall growth rate. I think as we said in the past, this clearly is one of our most competitive segments.

Okay, thanks very much.

Jeff Bourke, Robert W. Baird.

Following up on that last question on the business dining, you talked about the lost business in '05 kind of hurting you. Has that gotten any better in terms of the pricing and competition there in the most recent quarter? Or have you lost more business in that regard?

Our retention rate so far this year in business dining and generally has improved over last year.

Okay, that's helpful. Then Fred, did I hear correctly that insurance proceeds of $2.5 million were included in this quarter's results?

That's right. As I mentioned in my remarks, pretty much it was a wash with the forgone earnings of the operations that are still essentially shut down as a result of the hurricanes.

Is it a wash this quarter or is it a wash with the results of those businesses year-to-date?

It is a wash for the quarter.

Okay. Would we expect any insurance proceeds going forward?

At this point we're not really predicting any.

Okay. Final question, just housekeeping. What do you expect for the tax rate from here?

Going forward, probably closer to our normal overall range, which is in the 37% range or so.

Great, thank you.

Bruce Simpson, William Blair.

Focusing on the uniform business, two questions. First, can you talk a little bit about competitive environment within the uniform rental group? How it is changing specifically over the last year; is it getting more or less price intensive and so forth? Then why don't we start with that and I will have a follow-up on uniforms.

I think the competitive situation in the uniform businesses is, particularly on the rental side, is pretty stable and has been for the last year. We have been fairly aggressive about pushing for price increases particularly in light of energy cost increases. So it remains competitive, but I would say overall it is pretty stable.

Okay. Then just with respect to the overall macroenvironment for uniforms, you're at a 5% organic growth rate. I think some investors are curious about why the industry as a whole has not been able to extend the base business growth at a faster rate than we have seen, given the pretty consistent job growth for the economy.

So my question for you, Fred, it's almost kind of a philosophical one, is -- is this about as good as we are likely to get in terms of organic growth in the overall uniform rental space? If so, why isn't it stronger, given job growth?

Bruce, I think a couple of thoughts on that. One is, you have to look at job growth really by segment, because certain employee categories have a higher propensity to be uniformed than others. You see a somewhat different picture I think if you split by segment. For example, retail in the country, the employment in retail is growing; that does not tend to be a highly uniform category.

Having said that, we think we can continue to improve the amount of new sales that we bring in as we ramp up the sales force. We think we can make modest but meaningful improvements in our retention rates, which have actually improved over the last couple of years, as we further standardize the overall service.

We have increasingly focused on selling programs through our route sales force, which increasingly are focused on our existing client sets, and adding sales through our existing clients as opposed to selling new clients. We think that will help us with the add-stop ratio. So we think that there will continue to be opportunity for improvement in the top-line growth of this business.

So if you look forward, without giving specific guidance, but when you think about kind of a constant economic environment where Bureau of Labor Statistics is reporting about a couple hundred thousand jobs added every month, just as we have for the last two or three years, are we likely to see meaningful improvement from these levels in overall organic growth? Or is it probably stable here in the mid single digits?

Well, you recall that our target was 6% to 8% in the uniform business, also. We thought that was a worthy target and we still think it is a worthy target overall. I think as we ramp up, as Fred said, our sales activities and our sales force and our national sales force, as well as increasingly focus on our route sales activities, which are really building up existing accounts with additional services, we think we can hit that.

Okay. Operating margin within that business, it is flat year-on-year because you're fighting a headwind for energy. Is that a business that is materially below what you think it can get to in its profitability?

We think, Bruce, that we can increase the profitability meaningfully in this business over the next couple of years. Sooner or later, we will lap fuel costs. Now, obviously it is going to be a challenge given where fuel costs are right now, as we look out over the next quarter or so. But it is not going to cost us 80 basis points year-over-year on the margin forever, that is for sure.

We continue to make tremendous strides in improving our overall merchandise cost, as through our sourcing. I think we have mentioned in past calls that we call it a Customer Connect initiative, which is the handhelds which we have now rolled out nationally to our route force, which gives us more control over our route operations.

Then the completion of that by updating all of our financial systems and becoming more efficient in the back of the house also will generate margin improvement. So once we stop fighting this sort of headwind on the fuel side, we think that these other margin improvement programs, which are producing results now, will continue.

Okay, thanks.

Gary Bisbee, Lehman Brothers.

A couple of questions. Can you specify exactly across, I guess, what the amount of pretax option expense was in the quarter? Then what line items does that -- makes up the majority of that cost?

The pretax -- the options expense is reflected in our corporate segment. So you'll see the four segments, the two food, two uniform segments, and then you'll see an expense which is corporate -- unallocated corporate expenses. And the stock options expense is reflected in there.

If you look at that number for Q2, you'll see that that number was up between 4 and $5 million year-over-year. Essentially the vast majority of that was related to the adoption of 123.

Okay. Then when you just look at your P&L, not the segment data, is most of that within the SG&A line?

Yes.

Okay. I guess on the U.S. Food business, you certainly have been getting year-over-year operating margin expansion. But it doesn't seem like it's been a huge amount, given what were some tough comps last year and the hockey is back and whatnot. Is there anything else dragging? Do we have any recurrence of those contracts a couple years ago that were losing money, or anything else going on there? Or would you chalk it up mostly just to continued competitive environment?

I think it is really the overall competitive environment. Having said that, we continue to make progress on our labor costs, on our food costs. We are still taking cost increases year-over-year, as we have talked about in the past.

And workers compensation and healthcare, although we're making terrific progress in terms of the activity in those areas currently with the new programs that we talked about, that we rolled out a year ago. So it is really the combination of those things.

Okay. In the international profitability, you had a very nice increase there. Were there any onetime items? Or is this just really a combination of the UK up against pretty easy comps, and some of the other countries doing better this quarter on the top line?

Of course we had the significant onetime item which was the $7.4 million charge last year, which was the West Africa charge. Even adjusting for that I think, as you're pointing out, there was very meaningful improvement year-over-year.

That was clear improvement UK; continued growth in Germany. This is a quarter where our remote camps business in Canada is a big quarter for that business and that business did very well year-over-year. But it was pretty much across the board.

I just want to add that remote camp business operates in Canada in the second quarter. It operates on frozen ground. It does not operate in summertime. So that the margin the highest in the second quarter.

Right, so that is what part of what drives margin changes from one quarter to the next.

As we think about forecasting the organic top-line growth there, I assume that was one of the factors, that Canadian camps business, that led to this really strong number. When we think about the back half, is it -- do you have any guidance as to how we should think about that? I assume maybe not quite that 9% pace; but is high single digits still a reasonable goal?

Well, we hope that our international business grows faster than our domestic business. So I think it is reasonable to expect it to grow a little faster than the U.S. business.

But your point about the impact of the remote camp business in Q2 is a good point.

Okay, all right. Thanks. Then just we haven't heard a lot in the last couple of quarters about the cross-sell initiatives that you guys talked a lot about, say, a year ago. I guess I wondered if I could get an update there.

Also, we have noticed a couple of acquisitions in this refreshment services business. Is that driven at having another service area to sell into existing base of customers? Or is that a really good stand-alone business and that is why you're doing deals there? Thanks a lot.

Let me try and answer both of your questions. The cross-selling and the Mission One really got incorporated into our base businesses. So we don't separate them. Really if you think about it, it is all about building equity with the clients and then building out relationships within those clients.

They are just so second nature to our team now that they are doing very, very well with it. That is why we just don't break it out. It is very successful. It is doing extremely well, and we will continue to grow it overall. So I don't want you to think that we have forgotten about it or that it doesn't work. It is an ongoing operation for us.

As far as the refreshment business, we're very pleased with that business. As you know, we have a national presence in that business. We're doing it just filling out some small geographies in terms of where we are not and a couple of add-ons.

Those are all small individually, very small acquisitions overall, so they won't affect the overall picture very much. But it's very, very profitable for us. It is part of the office coffee buildout. So they deliver office coffee, they deliver water, they deliver juices and a few other things like that.

That clearly, now back to the overall growth, you can see that job formation in the smaller businesses or enterprises is growing faster than the large manufacturing facilities. That is again why we're focusing in there.

Then let me just add one more on that point. Is this somewhat like a uniform business? In other words, the way it is set up is you have got a route distribution system; and over time if you can sign up more customers and make that a more dense route, that should be more profitable business. But is that the right way to think about how this is set up?

That is exactly right. This is a route-oriented business that is run out of local market centers, if you will, that are covering specific city areas with delivery of coffee and a whole series of related items. In that regard, it is very much like the uniform business. It doesn't have the intensity obviously in the back of the house, because it doesn't have the processing components that you have in the uniform business.

It is both a local business, small site, small business client business. But it also has like the uniform business a national accounts component. We have been increasingly successful in selling larger clients multi-locational across our system.

Great, thanks for the color.

Leone Young, Citigroup.

(technical difficulty) for the next quarter. Granted, you have not given that (technical difficulty) guidance before, but it was a little bit (technical difficulty) consensus. Listening to the various reasons that you expect things to be a little weaker, I was wondering if any of those were really new or had worsened from this past quarter.

Well, the fuel cost spike up is clearly more of a factor in the third quarter than it was in the second quarter. As I mentioned earlier, the hurricane impact from a profit point of view was pretty much mitigated by the insurance proceeds that we received in Q2, which we are not at this point projecting to receive in Q3. Then the timing of the Easter holiday is also a factor in Q3 not Q2.

Thanks, that's helpful.

Brandt Sakakeeny, Deutsche Bank.

Fred, just a quick (indiscernible) question back to that FAS 123 expense. Do you have the exact pre and post tax expense for that?

I don't know that I have that offhand. But as I mentioned, for the second quarter the increase in the corporate segment, the unallocated corporate expenses, which essentially all related to 123, and it fell between $0.01 and $0.02 a share, I believe, on an after-tax basis.

Okay, great. Good, perfect; that's all I needed. Thanks.

Peter Carrillo, Citigroup.

Questions for you on the international business. Obviously it was up year-over-year; and even if you adjust the year-ago period for the onetime items, you still get (inaudible) roughly 120 basis point improvement. What type of a -- going forward the next several quarters, what kind of improvement (inaudible) should we see sort of similar results going forward in terms of year-over-year, or --?

This is Fred. I think that would be an aggressive assumption. Again as we said the remote camp business was strong; and as Joe mentioned that has a higher margin than the overall business. So to the extent that it got somewhat higher growth year-over-year, that tends to drive up the weighted average margin. Having said that, we do expect margin improvement.

I think that is fair. I think the other thing you have to remember, that in many of our countries summertime is not the best time, because a lot of vacations, a lot of slowdowns, so the margins --

Particularly in Europe (inaudible).

(inaudible) a lot of European businesses.

Okay, thanks. The second question is in terms of the uniform business, what things are you doing? What kind of initiatives are you doing across the divisions -- especially really on the rental side, I guess -- to sort of get margins to creep up a bit and eventually try and close the gap with some of the -- I guess your competitor, like Cintas, for example?

Well, we have a whole series of margin improvement programs underway. One of them, as I have mentioned earlier, is to increase the percentage of garments that we manufacture in-house, because there are clear savings when one does that. We have been very successful in that in Mexico, and we're now looking at what is the next stage of that beyond Mexico, and perhaps more focused on the Far East. So that is clearly one.

Number two, we continue to invest, reinvest back in the business in terms of local plant automation, automated sortation systems, automated wash floors, which reduces labor in the plant and improves margin.

Number three, as I mentioned earlier, through our Customer Connect initiative we have now have a 100% rollout nationally of handhelds to our route sales reps. That gives us, frankly, more discipline and control over our pricing and our processes at the route level. If saves the route rep time, which is an efficiency pickup. And eventually, it will allow us to make our back-office operations more efficient.

In terms of the operating the plant, how many -- what percentage, I guess, of plants are currently automated and currently in the process of that? What is sort of your rollout over the next couple years?

It is certainly -- in automated wash floors, automated sortation system, it is at this point a minority of the plants. You have to look at it on a plant by plant basis. It is not an automatic conclusion that every plant would benefit (inaudible) given the trade-off in the capital investment and the labor. But we feel we have a ways to go to continue to get the benefit from that.

The last thing we're looking at is we're looking at computerized rerouting systems as a way to reduce the number of miles that we drive outside, out of the market center, and reduce our fuel cost.

Okay, great. Thanks a lot.

Michel Morin, Merrill Lynch.

On that last question, I was wondering if you could update us on your CapEx plans for the year and how that breaks out between uniforms and food.

We expect our capital expenditures to be pretty consistent year-over-year '05 to '06, consistent with the overall growth in the business. Our capital expenditures for the first half of the year, as you can probably see from the cash flow, are somewhat low. We think that is really timing.

So for the full year, we expect our overall capital expenditures to be pretty comparable as a percentage of sales, in that 3% range that they have been before. We expect, frankly, the split between the uniform business and food business to be again comparable with what it has been over the last couple of years.

On that point, the uniform CapEx, the sales, I think on your fiscal '05 numbers was just under 7%, which is pretty high relative to your peers. Is that something that we would expect to continue, because of the investments you just talked about?

I think going forward, it is a safe assumption to expect that our CapEx as a percentage of sales in that business will continue at roughly the same level.

Okay. Then on the direct sales you mentioned something in your prepared remarks about looking at options. What are some of the things that you might be able to do there?

Well, we're looking at changing some of our sourcing arrangements, for example, and being more aggressive in moving some of our sourcing offshore. We are looking at some ways to potentially restructure the business somewhat to make it more efficient, emphasizing certain market segments over other, that are more profitable, and trying to grow those market segments rather than market segments that currently seem to be less profitable. Those sorts of things.

Okay, great. Thank you.

That is all the time we have for questions. I will now turn the call back over to Bobbi.

Thank you for your interest in ARAMARK, and we hope you have a great day.

A rebroadcast of this conference is available starting today at 12 PM Eastern Time, and will run until May 17, 2006, at midnight Eastern. You may access the rebroadcast by calling 888-203-1112 or 719-457-0820. Please reference pass code 3210304.

This concludes our conference call today. Thank you for participating and have a nice day. All parties may now disconnect.