Aramark (ARMK) 2008 Q4 法說會逐字稿

Good afternoon, and welcome, ladies and gentlemen to the Aramark Corporation fourth quarter 2008 earnings conference call. At this time, I'd like to inform you this conference is being recorded for rebroadcast, and that all participants are in a listen-only mode. At the request of the company, we will open up the conference for question-and-answers after the presentation. I'd now like to turn the call over to Chris Holland, Senior Vice President and Treasurer. Please proceed, Chris.

Thank you, and welcome to Aramark Corporation's conference call to review the results of our fourth quarter and full-year fiscal 2008. Here with me today are Joe Neubauer, our Chairman and Chief Executive Officer, and Fred Sutherland, our Executive Vice President and Chief Financial Officer. Joe, Fred and I will present an overview of our fourth quarter and full-year results and business operations, after which there will be an opportunity for phone-in participants to answer questions. I would like to remind you any recording or other use or transmission of this audio may not be done without the prior written consent of Aramark. As we discuss the results, you may want to refer to the Form 8K we filed earlier today which contains our fourth quarter and full year results for fiscal 2008 and can be found on our website www.aramark.com. In today's discussion of results we mention certain nonGAAP financial measures, and as required by SEC rules, reconciliations of these nonGAAP financial measure to the most comparable GAAP measures are included in the Form 8K and they're on our website.

Our discussion today of our full year results will compare our fiscal 2008 results to the sum of our results from the predecessor and successor periods from fiscal 2007. Although this presentation of the 2007 results does not comply with GAAP, we believe it provides a meaningful method of comparison. These combined results for the 2007 period have not been prepared as pro forma results and may not reflect the actual results we would have achieved absent the going private transaction. As a reminder, organic revenue growth excludes the effects of acquisitions, divestitures and currency translation as well as the impact of the 53rd week in our current fiscal year. Also, please note that we have renamed our domestic food and support services segment. It is now known as our North American food and support services segment. Our discussion of operating income during today's call will in each instance exclude the incremental intangibles amortization and property and equipment depreciation expense resulting from the going private transaction, as well as the impact of stock option expense under FAS 123R, the impact of the divestiture of SMG in 2007, and certain transaction-related expenses that were incurred in 2007. All of these items are detailed in the form 8K we filed and which was posted to our website before this call.

Various remarks 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 and D&A and other sections of our Form 10K and Form 10Qs, we disclaim any duty to update or revise such forward-looking statements whether as a result of future events or otherwise. I would now like to turn the program over to Joe Neubauer.

Thank you, Chris, and good afternoon, ladies and gentlemen. Thank you for joining us for this conference call. I'd like to take this opportunity to share some thoughts with you and then turn over the call to Fred and Chris, who will go through more detailed operating and financial results for the quarter and for the full-year. First of all let me thank our management team and the entire Aramark family which now constitutes more than 250,000 people around the world for their continuing commitment to our clients and to our customers. The quality, dedication and incredible service mentality of our people have always been at the core of what has made Aramark successful and it remains the key to our continued success moving forward, regardless of the challenges that the macro economic environment is presenting.

Secondly I would like to reiterate that I continue to see that our ownership structure is a source of strength and stability for Aramark. Being a privately held company with more than 250 owner/managers with significant investment who collectively own more than 70% of the company allows us to remain more focused and have longer term orientation than if we were a public company especially in today's more volatile market environment. For our management buyout last year we have been able to reestablish the deep owner/manager culture which has recited a highly focused and, that is more committed than ever to delivering results. The goal of this broad group of leaders remains unchanged to grow and improve our profitability by winning in the marketplace, and adding value to our clients, through our people, and service programs, and to be disciplined as stewards of our capital, to generate strong cash flows and returns.

We also have the luxury of having as partners four of the leading private equity firms in the world. As Mike said in addition to the top 250 owner/managers who collectively invested $350 million in the company as part of the going private transaction, we have further broadened the ownership opportunity to hundreds of additional Aramark managers around the world. While I can assure you that we continue to take our financial responsibility to all of you very, very seriously, we are also less burdened by the short term focus that Wall Street imposes on public companies and as a result, we are able to take a longer term view of the many opportunities in front of us. We have all recently witnessed the unprecedented disruptions in the global financial system which are having implications for economies all around the world. While this is no doubt an increasingly challenging environment in which to operate, Aramark's accomplishment this year have been many and I am proud of our overall performance.

One of the proudest accomplishments this year was our success in providing food services to thousands of athlete, coaches and media at the Beijing Olympic games during the summer. During those games our staff of over 7,000 on the ground served over 3.5 million meals, peaking at a daily rate of 100,000 meals per day the Sunday after opening ceremonies. By all accounts our performance was outstanding, and to quote the deputy mayor of the Beijing Olympic organizing committee, and here's the quote, "Aramark will be a force in its industry in China for years to come." As we grow our business in China where we now employee nearly 12,000 people, up from zero just four years ago, this certainly is our long-term goal.

Now, for a few comments on our financial results for the year. I am pleased to report that 2008 full-year sales were a record $13.5 billion, up 9% of 2007. Our operating income adjusted to exclude items that Chris mentioned earlier was $713 million, up 10% from 2007. As you know, fiscal '08 included the extra week compared to '07, which Fred will discuss in some detail with you in a minute. While our consolidated operating margin was essentially flat for the full year, I am proud of our teams efforts to mitigate the impact of unprecedented levels of food and energy inflation which we faced during the year. We also had solid new business results this year, and our client retention levels were consistent with our historical performance and overall targeted range. Cash flow was solid in the challenging environment, as we continued to demonstrate discipline in our deployment of capital and continue to grow the business organically and to make the appropriate acquisitions. We're also very, very proud of the fact that our credit profile continued to improve throughout the year, and as we sit here today, we enjoy a solid and stable capital structure with a significant amount of committed liquidity going forward. Now 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 will discuss our business segments. We reported fourth quarter sales of $3.6 billion, up 13% from the prior year quarter and up 5% on an organic basis. The lower organic growth rate is principally due to the elimination of the impact of the 53rd week, which increased sales by approximately $247 million, and adjusted operating income by approximately $16 million. Our adjusted operating income was $203.7 million, up 8% compared to the year ago period, with the 53rd week accounting for all of the growth in the quarter. For the full year we reported sales up $13.5 billion, up 9% over last year and up 5% on an organic basis. Our adjusted operating income was $713 million, up 10% from 2007.

Now turning to our North American food and support services segment, as reported, fourth quarter sales were up 10% to $2.4 billion, with organic growth in the low single digits. Growth in the quarter was led primarily by our higher education, refreshment services and stadiums and arenas businesses. For the full year, segment sales were up 6% to $8.9 billion, with organic growth in the low single digits. Full year results were led by the performance of higher education, health care and sports and entertainment business. I'd now like to make a few comments about the major sectors within the North American business, for compatibility, my comments on the growth ranges for the sector within the North American and food support services segment exclude the impact of the extra week this quarter. Our business in industry sector had flat sales for the quarter low single digit sales growth for the full year, with solid refreshment services growth in both periods being somewhat offset by softness in business services. Our education sector had low single digit sales growth for the quarter and mid single digit sales growth for the year, with very solid growth in our higher education food and facilities business in both periods being somewhat offset by sales decline in the K-12 business, primarily due to lost business. In our health care sector we realized low single digit sales growth for the quarter and mid single digit sales growth for the full year, led primarily by solid based business growth in both facility services and our Canadian health care services.

Our sports and entertainment sector had low single digit growth for both the quarter and full year, led by solid base and new business growth in stadiums and arenas, offset by softness in convention centers particularly in the fourth quarter. Operating income for the North American food and support services was $144.4 million in the quarter, up 3% from the prior year period and would have been down slightly if we were to eliminate both the positive impact of the extra week and the negative impact that Hurricane Ike had in the quarter on our significant operations in Texas. Solid profits performance this quarter in our education sector and refreshment services business partly offset profit softness and corrections in sports, entertainment and business services. The corrections business in particular, continued as in prior quarters of this year to be negatively effected by higher food costs and the restructuring of a large contract. In convention centers, this quarter was negatively effected by declining levels of business and consumer spending as a result of the weakening economy. For the full year, segment operating income was up 8% to $484.3 million, profit growth for the full year was led by the education, business in industry and health care sectors, offset by profit declines in the convention centers and corrections businesses.

Turning to the international foods and support services segment, fourth quarter sales of $730.1 million were up 26% on solid growth across most of our individual country operations as well as sales impact from our role in the Beijing Olympic games. Organic sales growth was in the high teens for the quarter driven primarily by strong growth in the UK, Chile and Ireland, as well as the impact of the Olympics. For the full year, segment sales were up 22% to $2.8 billion, with organic growth in the mid teens. Segment growth for the year was primarily led by the UK, Chile and China with solid contributions from a number of other countries. Fourth quarter operating income was $24.7 million, up 10% from the prior year quarter, the 53rd week accounted for the majority of the growth more than offsetting the impact of certain expenses from acquisition related due diligence efforts, increased pension expenses and certain countries in the quarter. The UK, Chile and China did have solid profit growth, the food cost pressures and the impact of a weakening global economy did negatively affect margins and profit growth during the quarter. For the full year, segment operating income was up 17% to $105.2 million including a positive currency impact of about seven percentage points. Full year results were driven by by profit growth in the UK, Germany and Chile.

In our uniform and career apparel segment, fourth quarter sales of $461.5 million were up 11% from the year ago quarter with organic growth in the low single digits. Uniform rental business led the segment in the quarter with organic growth in the mid single digits. For the full year, segment sales are $1.8 billion, up 5% from the prior year driven by 8% growth in the rental business. Organic growth for the full year was in the low single digits for the segment led by the rental business which grew in the mid single digits organically. Segment sales growth in the fourth quarter and the full year were negatively affected by the continued softness and demand across several of wear guard sales channels.

Uniform segment operating income in the quarter grew 20% to $42.8 million with strong operating performance in the uniform rental business. Adjusting for the extra week which contributed about eight points to the reported growth which the impact of an impairment charge and last year's quarter, profits would have been about flat as a very strong performance by our rental business was offset by continued weakness in direct marketing. The rental performance was even more impressive in light of the negative impact of fuel costs. For the full-year, operating income was up 4% to $156.2 million, driven by improved margins in the rental business which offset losses in our direct marketing operations. Excluding the items Chris mentioned earlier, corporate expenses were $8.1 million in the quarter compared to $9.1 million in the year ago quarter. For the full year, corporate expenses were $32.7 million, compared to $36.1 million in the prior year. The decreases in both periods reflect reduced staff spending.

As Joe mentioned earlier, we had a good new sales year with more than $950 million in annualized new business signed during fiscal 2008. And while our loss business was up somewhat over last year we did reach our target client retention rate for the year with the retention rate of 94% across the portfolio of food, facilities and uniform. We're pleased with the level of base business growth we generated in certain sectors during year most notably our higher education. Now let me turn it back to Chris for additional details on the quarter and year.

Thanks, Fred. I'd like to now comment on our financing, capital structure and cash flow. For the trailing 12 months, ending October 3rd, 2008, our adjusted EBITDA was $1.108 billion, compared to $1.090 billion at June 27th 2008 and $1.03 billion at September 28th, 2007. Interest and other financing costs were $132.3 million for the fourth quarter, and $514.7 million for the full year. Approximately 85% of our debt is at fixed interest rates, and our overall weighted average cost of debt is approximately 7.08%. Total reported debt at the end of the year was $5.86 billion, and our secured debt as defined in our credit agreement totaled $4.06 billion, including a term loan balance outstanding of $3.732 billion. As of year end we essentially had the full $600 million capacity of our revolving credit facility available to us in addition to having approximately $70 million in invested cash on our balance sheet.

As you know, we are entering our seasonal cash use period so we would anticipate that the excess cash would be used in the ordinary course to fund business operations and acquisitions. Based on our EBITDA growth this year, and somewhat lower debt level, we are very pleased that our secured debt ratio has now improved to 3.60 times, as of October 3rd. That's down from 3.89 times as of a year ago, and down from an initial level of approximately 4.5 times, when we went private in January of 2007. Capital expenditures for the full year were $364 million, up from $330 million in fiscal 2007, and comparable on a percentage of total sales basis, as we continue to be disciplined in our deployment of capital. Consistent with our expectations and historical patterns, working capital was a significant source of cash for us during the fourth quarter.

And for the full year, as we expected, working capital was the use of cash overall. Our working capital requirements for the year were impact by the 53rd week, the Beijing Olympic games contract, as well as strong new sales driven growth in Chile which required an incremental investment in working capital. As we now move into fiscal 2009, we need to maintain an intense focus on growing the business without requiring significant amounts of incremental working capital. Cash flow for the year was solid as we generated before spending on acquisitions more than $140 million in free cash flow. During fiscal 2008 we spent a total on a number of $55 million on a number of smaller acquisitions across several of our businesses, as we continue to look to invest strategically, but prudently in certain sectors. Now let me turn the call back over to Joe.

Thank, Chris. So in summary I am pleased with our performance during fiscal 2008, as many of our businesses delivered solid results in an increasingly challenging environment. We have seen an increase in the level of new business in 2008, and achieved quite retention rates consistent with our targets. Our teams continue to select to be very selective in terms of the type of new business we pursue and we remain very disciplined in our deployment of capital. Our time proven business model generated solid EBITDA growth, and free cash flow this past year, resulting in a credit profile that has consistently improved since our going private transaction back in early 2007.

As we look forward, while we are operating in a challenging and quite competitive environment, we believe that Aramark remains well positioned to grow and succeed over time. As we have highlighted in the past, we have the good fortune to benefit from several key strengths including an excellent committed and motivated management team, and broad integrated group of professional service offerings deployed across a diverse set of sectors and geographies, a deep knowledge of our client businesses by sector and increasingly sophisticated marketing, consumer focused capabilities, and the ability to positively impact our clients' experiences, environments and outcomes. We anticipate that the near and medium term economic outlook will prove even more challenging than before. However over time we consistently repositioned our service portfolio so that today nearly 2/3 of our food and support services operating income in North America comes from sectors such as education, health care and corrections, which we believe to be economically less sensitive to the environment. Our uniform group is much more focused now on the service economy than the manufacturing group. And our international business is more diverse by geography and by sector than ever before.

So we believe that our strength and diversity along with fundamentally attractive industry dynamics and the strength of our great people position us well for continued growth and profitability in the years ahead. And finally and maybe even most importantly, Aramark's broad management team with a significant ownership stake is very focused on delivering results. I can assure you that we will continue to work hard to seize the many opportunities we see across all of our businesses around the world, while remaining disciplined about investing our capital in the difficult and challenging macro economic environment. Thank you, again, for your time this afternoon, and for your continued support of Aramark, and we will be happy to take any questions that you may have.

Thank you. Today's question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) We will turn first to Reza Vahabzadeh with Barclay's Capital.

Good afternoon.

Good afternoon, Reza.

So, Fred and Joe, as you look to the slowing economic environment, US and overseas, would you generally anticipate organic growth to be positive but slower than recent trends, or are you concerned that they would actually slip into the negative territory?

Reza, this is Fred. As Joe mentioned we've got a fair amount of diversity now, both geographically and by market segment across the portfolio. We certainly would expect some markets to have the potential negative growth potential. Potentially, the business markets related markets for example but hope to have continued excessive organic growth in the nonsensitive sectors, and our hope would be although it is very difficult to say in this uncertain environment, that the blend of businesses we operate in would lead us to have modest positive organic growth in a very economic environment.

Okay. And how do we think about the impact of Euro and other currencies now weakening against the US dollar and it's impact on consolidated EBITDA?

Well, as a matter of policy, we finance our operations locally with local currencies, we have a meaningful course of our own debt in Euros, sterling, Canadian dollar, yen and the like in support of our operations to minimize our investments. And the operations themselves are self sustaining because they generate positive cash flow. The expenses, income, revenues and expenses are typically all in local currency. And essentially the profit stream is by in large, flows back to the US in the form of dividend and the like. To the extent that the dollar strengthens the dollar equivalent of those profit streams is negatively affected. But that's pretty much the extent of it.

Okay. And it looks like the SG&A in this quarter was much lower than last year. I don't know if that was a reversal of expenses, if it had an impact on EBITDA or not. Can you touch on that?

The corporate expenses were down in the quarter. It was about $1 million, Chris, in the quarter, and there's nothing particularly significant in that. If you look at corporate expenses quarter by quarter, they've been more or less flat with prior year to slightly down, and that's really more timing than anything else.

I guess I was referring to SG&A expense in totality, which is down more than a couple million bucks.

Yes, the SG&A expense in totality, it is really, it is hard to draw make a general comment in that expense, it is really across all of the business. And frankly when we look at our business profitability and the breakdown of the expenses, we look at it at unit level overhead, regional overhead, division and group overhead and corporate overhead. I wouldn't draw any conclusion on that.

Okay. And then how do we think about tension expense in 2009, whether it hits the P&L, or in terms of cash contributions?

Again we are pretty limited in terms of exposure to define benefit plans, we have a couple outside of the US but again overall not significant in size compared to the size of the company. I think there will be relatively modest impact on the P&L in '09 versus '08, but no material impact from a funding perspective.

Okay. And then my last question is would you anticipate more acquisitions going forward than in the past just given more opportunities, or not really?

I think as we said we are always looking for opportunities that fit strategically and make sense economically, and I don't think it has changed. Obviously the financing environment is a little bit different today than it has been historically, and obviously that will factor into our consideration but we have flexibility with the credit facility to pursue the things we have been doing both in refreshments and office coffee, and the uniform rental side domestically. And we'll continue to look for opportunities in markets around the world for us to continue to grow in. So I don't think our appetite has changed other than again having to live within a financing environment that's a little bit different.

Thank you.

Next we'll turn to Bryan Hunt with Wachovia.

And along those lines, what Reza was just asking given the current environment, do you have the abilities to tweak down your CapEx to maximize cash flow as the business base slow organically and what would you call your maintenance CapEx? What dollar amount?

Bryan, it is Chris. I think, as we think it is a little hard for us today with a lot of specificity given the nature of the business and growth versus maintenance within an existing account where we might be building out our presence through additional convenience stores on college campuses or additional points of sale, but I think probably in the 60% range as we look across the portfolio is really maintenance-related and then the rest of it is going to be growth related around the signing of new business, or fundamentally changing our footprint within an existing account and needing to invest capital to drive much higher top line. So, I think somewhere in that 60% range is probably the rough way to think about the maintenance portion of the capital at least over sort of a shorter period of time.

I think it's fair to say that's not really fixed, but semi-fixed, certainly in the short run that's not some number that's locked in that we have no discretion with respect to.

So is it fair to think into next year you all may tweak your targeted CapEx down a little from the current run rate?

I think we would expect the overall capital expenditures to be pretty much in line as a percentage of sales, typically runs just under 3% of sales, and in this environment with expected relatively modest sales growth, that's pretty much puts one into a relatively flat to slightly up capital expenditures position. We do have a couple of meaningful stadium arena contracts we won the last six months that's required investment and those tend to be somewhat larger, but not all that's significant in the context of the capital budget.

Okay. When I look at the, there has been a lot of action in the stadium and arena area with the Dallas Cowboys and the New York Yankees who are forming a joint venture, you had center place that was sold during the period. Is that generating your opportunities with those transactions taking place or could you talk about what's leading to the business wins?

This is Joe. I think as you know we have been in the stadium/arena business for a long, long time. We think we have a leading position in it not only in terms of size and quality and innovation. Those are long-term relationships and it is a very, very focused group of owners and managers that operate those facilities, and we have an excellent reputation there. And we're selective in terms of partners we choose to partner with, because that's not a short-term relationship. It is a very, very long term relationship and we are very fortunate Philadelphia won the World Series and that's just typical what it's all about. We maximized sales for them and maximized revenues for ourselves, and we just terrific experience. I don't think that competitive landscapes has changed much. By the way, as you probably are more aware than I am, center plate sale has not closed and the financing there is not exactly certain at the moment. And the Yankees and the Cowboys forming the joint venture under the YES Network is two companies, two self-operated groups coming together, center plate had the Yankee contract has you recall, and doing it themselves. We think if they're going to compete in the marketplace, that's not going to affect us much at all because there's already plenty of competition in that marketplace.

Okay. And then I was wondering if you could talk a little bit about the Beijing contract, and there was a lot of meals served, I don't know if it is an effective contributor to sales and even earnings, or do you look at that type of opportunity as an investment or an expense to grow your reputation and to grow your network? Could you just talk about that event?

Sure. I would be happy to talk about that. This was our 14th Olympic event. We started serving the Olympic games in 1968 in Mexico City. So we have been at this for a long, long time. To us every time we serve particularly the summer games which are the most complicated, the most comprehensive games. It is like winning a gold medal for our people, secondly for all of our clients, around the world. And that's what we do it, we do it as an investment in the reputation, and in the professional skills of our 250,000 employees around the world, that's why we do it. We do it as an investment, we try to not to make a lot of money, we also try not to lose a lot of money. This was a very, very [Herculean] task for us particularly in Beijing, the Chinese did an outstanding job at putting on the Olympics, for them it was really a world event, and a national event not just Olympic event as it was for our people. So, we don't expect to make a lot of money, we don't expect to lose a lot of money, and as Fred said, the revenues flow through our P&L. So they just expanded our sales particularly the international side in the fourth quarter, but they didn't have much effect on the bottom line.

And last question, as you were pinched on some food inflation during the last fiscal year, we have seen a lot of major costs wane including fuel which we have heard on probably surcharges into your business. Could you talk about the tempo in which some of these lower costs may flow into your P&L?

We are hopeful we will see some benefit as we move through the fiscal year. As probably with most purchasers of food, we were pretty stringent and resisting food price increases as food prices started to rise at faster rates, and although some of the indices have dropped dramatically recently, it will take some time really to work its way through the supply chain. But we are cautiously optimistic that if grain prices, fuel prices which have fallen significantly in world markets recently, if they stay down that will eventually work its way downstream.

All right. Thank you.

We will take the next question from Carla Casella with JPMorgan.

Hi. One housekeeping item. On the AR facility, did you say how much was outstanding?

It was $250 million it was included in the secured debt I gave you of $4.06 billion.

Okay. Great. And then on Bryan's question, the food costs, do you have a sense for how long it would take for lower costs to start filtering in? Is that something we could possibly can see first quarter or second quarter?

That's a hard question to answer. We are cognizant of what's happening in the commodities markets for those food items where their indexed and where they're traded, and as you would expect we are in discussions with our supplier partner on what that effect would be on us. It doesn't happen overnight.

Okay. Then on the fuel side as well, now that we've seen gas coming down, how much have you hedged in? When will we start to see the lower gas prices in the results?

Yes, clearly like a lot of companies we hedge over a period of time, so certainly some hedges that were done six or nine months ago don't look so good sitting here today, but as we look out over the fiscal '09, clearly the first half of the year will be a little challenging year over year comp for us, but certainly given what we've hedged and given where spot levels are now as we get into the second and third quarter, we get into a much easier situation.

And are you trying to hedge in any greater percentage given the current rates or --

We are probably getting up to the high end of where ultimately we are comfortable in the 80% to 90% range as you look out over the course of '09 and into '10 as we look out on a rolling 18 month basis. So certainly we have been averaging the positions down over the recent weeks here and again really looking to get some predictability obviously into a P&L item that has been volatile for us the last two and a half years.

Okay. And then your retention rates were very good and I am wondering if it varies from one sector to another.

In 2008 the variance from one sector to another was the same as it typically has been, at the top of the range, the retention rates are 98% and at the bottom of the range they're in the low 90%s.

Okay. And then I am wondering if you can give us any color in terms of coming off the World Series in Philadelphia, are you seeing any change in patterns at either the stadiums or your -- probably more stadiums than conventions, in terms of buying patterns or slow down in sales or are people not using their tickets in any of the stadiums, anything that could affect as we start to see the winter and worry about the NBA?

Well, let me try this. The World Series is a difficult example, because remember Philadelphia didn't have a winning team year here since 1980, so in 28 years, and a lot of doom and gloom people celebrated.

That's true.

As you would remember there was an unusual pattern of games, the first one had a rain delay for an hour and a half. The fifth one was a game played in two halves, so it was very unusual and it was very, very good for us and very good --

Right.

-- for the Phillies, but seriously clearly on the consumer side we are seeing patterns. Let me address the second part of your question with the convention center. We are seeing fewer conventions, we are seeing fewer conventioneers coming to conventions and when they come we see them spend less money. It is a triple effect of people and as I'm sure you've seen in consumer retail sales as I'm sure you all follow, the consumer is feeling pinched and they're not spending as much money as they have in the past and that is going to affect us overall. And we are prepared for it and we have plans to address that aggressively overall, but no, it is affecting us for sure.

Okay. Great. Then just one last question, on China, post the Olympics, are you finding that there is adequate business to offset the Olympics as this that you moves out and you have got the infrastructure there or do you think that you may need to cut back in China?

The infrastructure that was there was enormous, so we're not going to leave that in place. And frankly many of the people who were there -- there were about 300 Aramark folks from around the world and we hired about 6,500 locals, so all 300 people, most of them have jobs, what I'll call day jobs, whether they came from the campuses, whether they came from the businesses, whether they came from all around the world and they all have come back. So no, we have a very large infrastructure existing in China. We will supplement it with a few more people, actually we kept a few people around from the Olympics, the halo effect as you can imagine from the Beijing Olympics in China is very, very big and we intend to capitalize on it.

The employees there, the 6,500 employees that Joe mentioned, they're essentially all hired as a part of the build up to the Olympic game, typically college students, hospitality school students and that's really one of the logistical challenges of this, ramping up from zero, bringing all of those folks on board training them, and they understand that this is a temporary assignment, so when the Olympics are over, we basically ramp down to zero and as Joe said, the management, which we pull in from all four corners of globe basically go back to permanent positions, and it is ramps back down to that operation itself more or less ramps back down to zero.

Okay. Great. And I lied. One question I forgot to ask. Can you just talk about the P&L contracts versus management fee contracts? What can you do with each of them in this type of an environment to try to manage your margins?

Again, the mix overall is just 75% P&L, 25% management fee, and on the P&L side, obviously to the extent you are seeing in a business location for example, reduced head count and reduced spend, clearly the food component of that contract is obviously very much a variable expense for us and then it is a question of managing our onsite labor as aggressively we can in the face of whatever the demand environment is what we are seeing. So that is, that is a focus. And certainly from a mix standpoint as well, I mean this is part of the business fundamentally but to Joe's point very aggressively trying to around marketing and merchandising programs, value oriented programs that try to drive maybe not necessarily the per caps hire, but actually the incremental margins higher, by selling more beverages in conjunction with a food item etc. So there's a lot of things on location that we can do and are doing. And certainly this is something we have talked a lot about, making sure we are aggressively managing the food costs as it relates to commodity changes that we are seeing coming down through the supply chain and managing the menu in a realtime basis to try to avoid or mitigate price pressures that we are seeing on the food cost side.

Let me just add something, to what Chris said. Look, even in a fee kind of situation, we are working very close with our clients to minimize and reduce their subsidies, because we understand every enterprise today both for profit or not for profit side is feeling the pinch of the economy around them. So we are trying to adjust to achieve their objectives consistent with the kind of service operating and the variety and the quality they choose to offer to their customers. That's what we do for a living, that's what our 6,000 profit centers do for a living day in and day out and they're very, very skilled at that. They have a large portfolio of many offerings that they put forth and that's how we have absorbed the product cost increases throughout the whole year and end up with a slightly higher profit than what we started. That's what we do for a living every day.

That's great. Thanks. That's all I had. Thank you.

Thank you. And now we'll move onto Janet Sung with Loomis, Sayles.

Hi. Most of my questions have been answered, but I would like to pose one more question and that is, I have been following your company for close to 20 years, and I have seen you pull out of some pretty bad downturns, very admirably including post 9/11 in 2001. And how would you compare the current downturn today against the early '90s and the early 2000 in terms of how it has impacted you? And also specifically, have you seen a lot of deterioration post the quarter ended September which we are seeing now which has been very good?

Well, that's a -- I guess I have been around for 28 years, so I get to answer this one.

I have only been here for 27 years.

Well, yes, I am looking at data from even early '90s.

Right.

It's amazing how consistent your execution has been and your margins have held in. Everything has been superb, but everybody is saying this time around is different.

Well, I think, I agree that this time around is different. Look, 9/11 was an event. We know the event, we knew where it came from, we knew what to do, it was geographically somewhat isolated. After about several weeks the country came right back again and bounced back again, and we had a lot of stability in other regions of the country etc., etc.

Yes.

And it was really a US event, not an international event.

Right. Exactly.

All of those rules are different today, completely different today.

Yes.

And it is much more pervasive. I think its root causes are much deeper.

Yes.

I personally think it is going take a heck of a lot longer to come out of it than certainly 9/11. This is like '81, '82, remember that very difficult period also.

Yes.

And that was an inflationary period that had some other things to do with it, but at the end of the day, that's what you pay us for is to try to figure out. The plus side as I said in my comments is that we have adjusted the portfolio over a period of time so that much more of our business is now what are in what we call the economically less sensitive areas and also the level of sophistication on the service delivery side, the marketing side, the merchandising side is significantly higher than what it was before, and we have a larger portfolio of facility services than we have on the food side. So we have changed all of those things than we did before, and I am particularly very, very proud of the uniform group which had a very solid year. Our rental group had a very solid year in what probably is the most difficult environment they have seen in a long time.

Yes. Do you think that is the worst sector or the sector that might be the most vulnerable to an economic downtown or do you think it's sports entertainment, or conventions, or your corporate services for the financial sector, for example?

Well, certainly you guys are not helping us much.

Okay.

Goldman Sachs lays off a lot of people, Citi Corp adjusted when all financial services clients not only here but also in Europe, in London in particular, are cutting back that's not helpful.

Right.

The automotive industry is part of our client set, but that's on business side, and I would say on the business side particularly our large corporate business side is vulnerable. I also have to tell your our refreshment business that Fred mentioned in his comments were just part of what we call the business services side which really serves smaller business today has held up much better than large businesses and again that's a much larger percentage of our bottom line today than it was back then. And certainly AUS is the rental side again is affected because of the large number of small clients they have and their shrinkage certainly is increased, but fortunately their cost structure is a little more efficient today than it was before. And the new rate -- the rate of new sales they're bringing on the top is all stronger. So we have more than one lever to pull at each one of these and I cannot overemphasize the mix change that has taken place in the portfolio over the last 10 years.

I hope you continue to I stay on with the organization to pull them through a very tough period ahead.

Well I am trying every day, but I have wonderful colleagues here doing most of the work.

Okay. Well congratulations on a very good quarter.

Thank you.

Next up is Reade Kim with Merrill Lynch.

Hi. Thanks. Just trying to get a hold on the cost structure a little more. I was curious if you can say what percentage of your employees in the US business were unionized and also what percentage currently have health benefits.

On the union side, in terms of breaking the food and support business versus the uniform business, the uniform business is largely unionized, and if we look at the North America business overall, between 25% and 30% of the employees are currently unionized today. So, again that's through hundreds of locations through hundreds of contracts around the country.

Okay. And just given the soon to change political situation in DC, I was wondering with the more labor friendly administration coming in, do you anticipate that percentage going up? And related to that is there maybe any kind of a number you can give us. And then, if it is going to go up to over the course of the year, to what that might do to your cost structure?

Well, this is Joe again, look I think that the employee free choice act, if it gets passed, would certainly encourage a larger percentage of union workers in our work force. We have seen that increase over a period of time anyhow, and I think that it has some effect ordinary reason cost structure, but not significant effect on our cost structure, and again as you have seen our performance over the last several years, we were able to absorb it, as long as it is applied equally, in the marketplace to all of our competitors, I think we will more than hold our own.

And remember, our union contracts are local contracts, location by location.

This whole thing is in an account by account issue.

Got you. When we think about broadly similar contracts within say the domestic food business, that are unionized or not unionized predominantly, there's not a really big difference in operating contribution right now?

No, generally, no.

Okay. Great. Thanks a lot.

Thank you. Next we will turn to Reza Vahabzadeh with Barclay's Capital.

Just when the economic environment slows down like this, is it your experience, either in this cycle or prior cycle that competition heats up on contract renewals, or what trend are we seeing there or what are you anticipating to see on that front? Thanks.

I think this time around we are early into the downturn. So it is difficult to predict. If you look at the 2001 to 2002 period, we did see an increase in competition particularly in the uniform business. And we will just have to see if over the next year or so we see -- or months, six to 12 months if we see a meaningful change to help the landscape. At this point I think to be fair we haven't seen much, it has always been a competitive business, it continues to be a very competitive business, but we have not seen any significant change in the basis of competition of the competitive landscape in last three months or six months.

Thanks much.

Marianne Manzolillo with Angelo, Gordon, please go ahead.

Yes, hi. Regarding again your economic sensitive businesses, you mentioned the weakness on the convention side, then also on the sports entertainment on your business side, is it reasonable to expect then negative kind of same-store sales in fiscal '09 in those businesses?

It is certainly possible in the business segment and in uniform rental business with what we call shrinkage, that we can see negative same-store sales year-over-year. In past cycles when that has happened it hasn't been a significant negative number, that is the bottom of a recession it has been a modest negative number within those market segment.

Right. And then internationally, I mean are you seeing similar kinds of trends, or is it not as significant or noticeable there as it is domestically.

I think it is fair to say that in the international side of the business, we see, today the same trends. But that those trends develop some strength later than they did in the US. So I think we would have said six months ago, seven, eight months ago, that the international -- we weren't seeing the same down trend in international but that's not the case today.

I am not sure if you mentioned this or not, but how much did the Olympics add to the international business?

In terms of overall growth rate in the quarter, probably on the order of maybe 5% to 7% in the growth rate?

Was attributable to the Olympics. And was it solely in the fourth quarter?

Pretty much. A little bit in the third quarter, but mostly in the fourth quarter.

Okay. And then working capital was a use as you had said in fiscal '08. What do you expect for fiscal '09?

I think we were just, as we typically say, the model is to have working capital as a relatively modest use of cash, that's typically what we're working toward, again because of timing of payments and accrueds and some of the one-offs that we talked about in fiscal '08, you'll see it swing between negative and positive but we would expect it to be a more modest use of cash for fiscal '09.

Okay. Great. Thank you, very much.

That is all the time we have for questions today. Chris, I will turn the conference back to you for additional or closing remarks.

Great. Thank you, very much. Thank you all for your attention and attendance today, and have a great evening.

And a rebroad broadcast of this conference is available starting today, November 12th, at 6:00 PM eastern time and it will run until November 19th, 2008, ending at midnight eastern time. You may access the rebroadcast by dialing 888-203-1112 or 719-457-0820. Please reference pass code 9146360. And that concludes our conference call for today. Thank you for your participation, and all parties may now disconnect.