Colliers International Group Inc (CIGI) 2005 Q1 法說會逐字稿

Welcome to FirstService Corporation's first quarter financial results conference call. Today's call is being recorded. Legal counsel requires us to advise the discussions scheduled to take place today may contain forwarding looking statements that involve risks and uncertainties. Actual results may materially differ from those contained in these forwarding looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forwarding looking statements is contained in the company's annual report on Form 10-K and the company's other filings with Canada and US Securities Commissions. At this time for opening remarks and introductions I will turn the call over to the President and Chief Executive Officer at FirstService Corporation, Mr. Jay Hennick. Please go ahead Sir.

Good morning and thanks everyone for joining us. As the operator said, I'm Jay Hennick, and I'm the President and Chief Executive Officer and with me today is John Friedrichsen, our Chief Financial Officer. The format for today's call will be the same as on previous calls. First John will begin with the detailed financial results and then I'll follow with the operational highlights for the quarter and then give you a sense on how we think the balance of the year will roll out. If you'd like more detail, please speak up during the question and answer period at the end of the call. John.

Thank you, Jay. Today we announced strong first quarter results that generally exceeded our expectations. We are pleased with these results which reinforce the advantage that our service line diversification provides to our shareholders. Consolidated revenues, EBIDTA earnings and diluted earnings per share for continuing operations were all up in our first quarter compared to last year. Furthermore, we reported a one-time gain of $2.2m on the previously disclosed sale of our company owned lawn chair operations Greenspace Services, which positively impacted diluted earnings per share by $0.14 in the quarter. While this gain is a one-time event, the benefits of redeploying the proceeds into businesses generating higher growth and with a higher return of capital will be ongoing. And finally, the sale also helps to reduce our seasonality. Notwithstanding the gain on the sale of Greenspace, all references to our operating results and my comments today will be references to continuing operations. Consolidated revenues grew 15% to $171m. Tuck-under acquisitions completed after the first quarter of last year accounted for 7% of this growth. On a segmented basis in our Consumer Services segment we experienced better than expected performance across our various franchise systems and company owned operations with particularly strong results delivered by our California Closets franchise system and company owned California Closets franchise stores. First quarter revenues in Consumer Services totaled $30.3m, up 32% over the same period in the prior year, with 13% of this growth generated internally and the balance contributed by the acquisitions completed in the third quarter of last year. Integrated Security Services revenue increased 13% to $34.1m in the first quarter relative to the same period a year ago.

Internal growth contributed 5% of the increase, while the balance was generated by the acquisition last February of a systems integrator operating in Florida and Texas. Internal growth included strong systems sales in Canada and the US and the pipeline of additional systems sales remains strong across our operations. Revenue from our Residential Property Management operations totaled $71.1m, an increase of 15% over the same period last year, with just under half of the growth related to tuck-under acquisitions. Core management operations continued to deliver strong increases in revenues.

Finally, in Business Services revenue was up 7% to $35.4m, all of which was generated internally. Revenues were positively impacted by new contract wins in our fulfillment operations, as well as higher volumes generated from our transaction processing clients. These gains were partially offset by a planned decline in volumes at our textbook fulfillment operations in Dallas during the month of June. This decline was due to a reduction in textbook purchases in Texas caused by a reduction in funding and a cyclical low point in the State textbook adoption cycle.

Turning to consolidated EBIDTA, we reported $18.3m for the quarter, an increase of 17% from the $15.6m we reported in the prior year quarter. We also experienced a slightly increased EBIDTA margin to 10.7% versus 10.5% last year. Now on a segmented basis in Consumer Services EBIDTA increased by 63% to $7.5m in the first quarter from $4.6m last year. EBIDTA margins were 24.9% versus 20.1% last year, with the increase due primarily to the impact of recent acquisitions and also generating higher royalty revenues while limiting increases to our operating costs. EBIDTA contributed by our Integrated Security Services segment in the quarter totaled $2.6m compared to $2.1m last year, while the margins were 7.5% compared to 6.9% in the prior year. The margin improvement resulted from higher security systems revenues relative to security management revenues generated internally and through the previously mentioned acquisition. Approximately 65% of total revenues in the first quarter were generated through security systems sales versus 59% in of the prior year quarter.

EBIDTA in Residential Property Management was $6.6m the same as recorded in the first quarter of last year. EBIDTA margins declined from 10.7% to 9.3% primarily as a result of seasonal factors impacting our commercial pool operations and the operations of the property services company acquired in April. As well a shift in mix due to growth in core management services outpacing other property services which typically carry higher margins than our core management services contributed to the margin decline. The seasonal factors impacting this segment are expected to reverse in the second and third quarters. In Business Services EBIDTA was $3.5m for the first quarter compared to $3.8m in the same quarter last year. EBIDTA margin declined to 9.9% due primarily to low volumes in our textbook fulfillment operations as previously mentioned. These volumes are seasonal and peak during the months of June through August during which time our operations generate higher margins to offset much lower volumes during the balance of the year. We expect these lower volumes to continue in our second quarter this year and return to historical volumes next year.

Turning to earnings, we generated consolidated net earnings for the quarter of $7.2m compared to $5.4m last year, an increase of 34%. Meanwhile, diluted earnings per share were $0.48, up from $0.38 or 26% higher, compared to the first quarter last year. Moving from our operating results to our balance sheet, our net debt position at quarter end was $139m compared to $141m at our March 31 year-end, while our leverage expressed in terms of net debt the trailing 12 month EBIDTA was 2.3 times, well below our operating range of 2.5 to 3 times and our lowest point in several years. During the quarter we successfully renewed our $90m revolving credit facility on favorable terms with our banking syndicate, including a quarter point reduction in the cost of borrowing which further lowers our overall cost of capital. We would like to thank our bankers, TD, Bank One Canada, Scotia Bank, Royal Bank of Canada and CIBC for their continuing support. The full amount of the credit facility together with about $18m of cash in our balance sheet is available to fund our growth. This combined with our strong balance sheet and modest financial leverage provides us with the flexibility to allocate additional capital for acquisitions that represent good growth opportunities for FirstService.

Looking forward on the balance of the year, we are increasing the outlook we presented during our fourth quarter conference call. Based on our operating results to date and expectations for the balance of the year we now estimate revenues to be between $660m and $680m, EBIDTA between $62m and $64m and diluted earnings per share for continuing operations of $1.45 to $1.55. The foregoing amounts exclude the impact of any acquisitions or divestitures that may be completed between now and March 31, 2005, our year-end. I am obligated to remind you that these amounts are forwarding looking and that actual results may differ materially. Now I'd like to turn things back over to Jay.

Thanks John. Overall we're obviously very pleased with our results for the quarter. They came in better than we expected and as a result as John said, we decided to increase our outlook for the balance of the year. At the top end of the new range our earnings will be almost 20% higher than they were last year and that's without the benefit of any further acquisitions we might do. We're also pleased with the acquisitions we completed over the last year, and some of them are doing much better than we anticipated, and our pipeline to new opportunities in Residential Property Management and Integrated Security and Consumer Services is strong, and I hope we'll be able to complete several more acquisitions before the year is concluded.

As I mentioned in the last conference call, our goal for the year is to grow internally at about 8% and to add as much as $10m in annualized EBIDTA through acquisitions. Although both are clearly targets, I'm optimistic we'll be able to achieve them if a few things go our way, which should be very good news for our shareholders. FirstServices demonstrated a strong track record of performance over a long period of time because of our discipline, because of our philosophy of partnership and because of the characteristics of the service lines we operate. For 11 consecutive years now, since we went public in June of '93, we've delivered increased earnings revenues and earnings per share over the prior year, a track record of growth that few other public companies have been able to achieve. I'm confident that this year, fiscal 2005 will be another year in which we extend this strong record of performance.

Now let me take you through some of the operational highlights. Our number one performer this quarter has to be our Consumer Service segment. Earning royalties and other revenues from more than 1900 franchisees across North America and in many other countries around the world is an excellent recurring revenue service business and it's one we're particularly good at. Contributing to our performance was the College Pro and Certi Pro Painters franchise systems, both of which are off to strong starts for the year, and based on seasonal bookings and production numbers to date we expect both to have record years again this year. The California Closets franchise system is also generating very strong results with revenue and system wide sales up substantially over the prior year. And the same can be said of our branchise operations, now totaling more than $25m in annual revenue. We've been able to grow these businesses faster as company owned operations than the average franchisee in our system, demonstrating once again that our strategy of selectively repurchasing California Closets branchise units in markets where we see incremental growth opportunities can not only give us an excellent return on our invested capital but we're also purchasing a business that we know and understand.

We're happy with our recent acquisitions of Pillar to Post, North America's largest franchisor of property inspection services as well as Floor Coverings International, a significant player in the mobile carpet and flooring industry. Both systems are exceeding expectations and we continue to be very excited about the future prospects for both.

In Integrated Security as you know, we streamlined the management at Intercon Security in Canada and Security Services & Technologies in the US under the leadership of Frank Brewer. First quarter results were up nicely and profits and margins were also strong relative to the prior year. Intercon in particular, under the leadership of Rene Gulliver realized impressive year-over-year gains in revenue and in EBIDTA, and the momentum should continue. Our backlog is higher today than at any time in our history, which should translate into another positive year for this segment of our business. Needless to say being in the high-end electronic security business at this time is a perfect place to be given the increase in expenditures in this important area. We have a very strong and experienced management team in place and because of our partnership philosophy we have a real competitive advantage over many of the larger players out there.

I say that because the large clients want to deal with security providers that have the size and resources of a large organization but they also want to know that their security professionals not only have the expertise but the passion to satisfy their unique security requirements. Fortunately we're one of the only players in North America that can offer both and we're finding this a real advantage on the front line. Our acquisition last year of Innovative Security now re-branded as SST with operations in West Palm Beach and Orlando, Florida as well as Houston, Texas is ahead of the plan, and each of these branches are now converted to our proprietary enterprise software system to operate and manage their business.

And many of the other benefits of bringing our operations together are also beginning to pay off. Our US branches have been very successful selling our own access control products and central station monitoring services developed by Intercon Security of Canada and the Canadian branches have capitalized on SST's strong national account program to sell third party products to larger institutional clients in Canada that don't want to purchase proprietary systems. We continue to be very bullish about the opportunities in this segment and expect to be able to continue to post strong results for the balance of the year. Residential Property Management also had a solid quarter with revenues up nicely over the prior year and the leverage we have both in managing and administering our clients' expenditures on property services and having direct access to the expenditures of our homeowners, continues to grow and expand. Our strategy though remains the same, which is to add units under management internally and through acquisition and then leverage our relationship to gain a greater share of the budget that we administer and look for other leverage opportunities that might be available.

Today we manage more than 2800 properties containing more than 470,000 residential homes with 1.7m residents living there, and we administer a budget of more than $1.5b a year in annual purchases to maintain these communities. Revenues from some of the ancillary services we offer like lock box revenues, insurance brokers, property transfers and real estate brokerage among others continue to grow with every new property we add. Earlier this quarter we completed the acquisition of Wolin-Levin, a leading player in the Residential Property Management business in Chicago. Founded more than 50 years ago, Wolin-Levin manages over 300 properties totaling more than 17,000 units and administers more than $100m in rents and other maintenance fees.

Establishing a beachhead in Chicago has been a priority for us, and this acquisition represents a major step forward in our growth strategy for our Residential Property Management business. Consistent with our partnership philosophy we partnered with Wolin-Levin's existing management team, including Bob Levin, the son of one of the founders of the business. We believe that with Bob and his team they provide us with an excellent foundation for growth, and together we expect to be able to build a significant platform in the US Midwest as we have done several times in the past in Florida in the Northeast and in the Southwest.

The other property management acquisitions we completed over the last year, namely Core Management companies in Vero Beach and in Wellington, Florida are both operating to plan, and given the continued growth in both regions we are particularly well-positioned for incremental growth further up the coast of Florida. In Residential Property Management we're the largest player by a factor of three in a market where we only have a three percent market share and many opportunities to grow and leverage our position. We continue to be on the lookout for additional platform players and new markets and we hope to be in a position to add at least one more before the end of the year.

And our new combined management team at Resolve led by Lawrence Zimmering and Tom Aiton are working together beautifully and our efforts to increase cross-selling and provide wider solutions to our clients is gaining momentum. Revenues were up 7% this quarter, all of it from internal growth, which was a great achievement particularly because we didn't expect it. We expected both revenues and margins to be lower than last year for the quarter because of the planned State government funding cutbacks for school book textbooks in Texas, Georgia and Oklahoma. Our textbook fulfillment business is not only seasonal, which primarily impacts the first and second quarter of our year, but it's also highly dependent upon the amount of money these states allocate to new textbooks during the year.

Based on government forecasts for next year, we expect a return to higher volumes in our next fiscal year. In marketing support services, we also added several new pieces of business including large specialty retailer Michael's in our Dallas branch, and we were successful winning another significant contract to manage and fulfill pharmaceutical samples for a new division of an existing client. And we're finally up and running and generating revenue on the large, long-term contract we were awarded last year by Exxon Mobil to administer their Speed Pass program throughout the United States. We're very excited about this new program which could add and expand into a number of new applications as customers and prospective marketing partners become more familiar with how this system works.

In business process outsourcing, we added several smaller direct marketing application processing and customer support service clients, and contracts, for clients like Reward Zone, Best Buy and for Capital One, just to name a few. And the larger programs to manage and administer the new customer loyalty program for Best Western, the largest hotel management company in the world, is now up and running, and could lead also to additional opportunities to gain additional revenue sources from this contract.

Those were basically the highlights for the quarter, and now operator we would be prepared to take questions from interested people.

Thank you. The questions answer session will be conducted electronically. If you would like to ask a question today, please do so by pressing the star key, followed by the digit (1) on your touchtone telephone. If you're joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We'll proceed in the order that you signal us, and we'll take as many questions as time permits. Once again, please press star (1) if you do have a question. We'll pause just a moment as you signal us. Our first question comes from David Newman at National Bank Financial.

Good morning gentlemen.

Good morning.

Great quarter. Just a couple of questions, just in terms of the margins on the Business Services, was I guess a little bit lighter than what I would have anticipated, obviously something to do with the textbook program, etcetera. Just in terms of results overall though, how do you plan to sort of leverage the top line and the bottom line. In other words, is there opportunities for rationalization at all in that group? To get the utilization levels up to where you would like to see them.

In terms of the margin, John can address the margin, but I think the particular issues this quarter all relate to the textbook matter, which is very, very high margin in a short period of time. Usually the 1st and 2nd quarter. And it's all relating to the allocation of funding in those states. So if the governments are advancing money to buy textbooks, it's an open order, we fulfill all of the textbooks in those states, and therefore we have a banner year. In years like we're suffering this year, we have less revenue therefore less EBITDA in those states. So John may have something to add in terms of other areas of margin, but I think basically, John, that's it.

Yes.

So all of the other 7%, in fact, arguably, much more, came from mostly incremental business from existing clients. There was a few new contract wins that we talked about, that I talked about in my comments, David, there was a couple of contracts that we won last year, which are very significant, Exxon and the Best Western among others. There's a setup period of time during which we generate no revenue but actually have the costs associated with that, so they're all up and running and generating revenue, which is a nice place to be. In terms of-I think the other thing you mentioned was utilization rates, in terms of utilization rates we're still not where we want to be. I think we're probably at about 75% capacity, so we've got 25% available which from our perspective is quite positive, because every incremental client we add, we add based on the same cost structure. So, although we have done well in terms of winning new business, we still have too much excess capacity. You generally want to run at about 90%, so 10% excess capacity. We probably have 15-20% too much today, all of which would be incremental margin that we get.

In terms of the textbook business, how much of that capacity would be dedicated to the textbook business? It seems kind of, more of a lumpy kind of revenue stream, doesn't really sort of fit in with your strategy. Is there something you can do with that to leverage that? Is there other states that you can do this for, or is there something you can do with that capacity in the interim?

Well, it's actually a wonderful place, because you have very few clients and you virtually have a monopoly in these particular states. And for the most part, governments have been increasing funding for education and will continue to increase funding for education. We try and operate our branches in those markets-it seems like a bad connection here-but we try and operate branches in those markets where we do both fulfillment and textbook fulfillment. So other than textbook fulfillment and textbook fulfillment. And when we have a banner year of textbooks we are renting off site space. So it's not considered in the capacity issues that we talked about.

Okay, very good.

So it's a wonderful business to have. Obviously you want to have governments opening the floodgates every year, it just doesn't happen in election years, it's just the reality of life. But it sure provides a phenomenal foundation for other fulfillment business in those geographic regions.

Right. And in terms of your acquisition [inaudible] obviously this quarter was a real testament to your diversity and what it can do for you. It sounds like you're backfilling your existing four segments, but is there any potential that you might expand and add another leg at some point to add to the diversity that would be not too far outside of your core strengths?

Yes, we talked about it, I talked about it before. We would love to add, we think we have the capacity both financially, mentally, management wise, to add another platform. And we, for many years, the last platform we added was in '96. And it's only been in the last, probably 3 quarters that we've started to talk about adding another platform. So we'd love to add one. But we're not going to add it unless we can do it our way unless we can do with this new platform the same things that we do with our existing platforms today. So service lines. So if it's not a highly recurring revenue business, if it's not low capital intensity, if there's not lots of opportunities to tuck under management teams that are capable, and leaders in their business, we would not pursue it. But we're absolutely open and we've looked at several, and we'd love to be able to find the right one to add to the organization. And as I said, I believe we have the capacity in more ways than one to handle it at this point in our development.

Very good. And just a reminder, did I hear you way about $80m right now on your lines today?

It's about $90m, and then I think we have $17m on the balance sheet in terms of cash, so there's over $100m available.

Okay, very good. And just one last question if I may, sorry for holding the lines-but any concerns at all with the slowing of the building boom here, and potential higher rates? And how much of your business would be strictly consumer related.

Well, that's a wide question. Obviously our franchise business, our franchisees serve the consumer marketplace, and the results continue to grow in that business, and even a couple of years ago when the rest of the market was under pressure, consumers were spending, they were enhancing their homes, they were refinancing their mortgage, but they were spending more money in their homes, and I think that that is going to continue in the foreseeable future. So I don't see anything there. And in terms of the building boom and property management, yes it's positive for our business if new communities are built, and if you look at demographics, there was just an article over the weekend I was reading, [it was talking] again about demographics, people with two and three different vacation homes, those are all fantastic for our business. But remember, we've only got 3% of the market. So, if the market doesn't grow, we still have a huge opportunity to move from 3% maybe to 4%, 5%, 6%, whatever. So we are in, I think, wonderful segments with lots of room to grow, management teams that I'm really proud of, are stronger today than they've been in years, and feeling good about their business and the opportunities, so I think it's bullish.

Very good. Thanks, gentlemen.

Our next question comes from Kevin Stenky [ph] at William Blair.

Yeah, it's Matt Litfin, at William Blair. Question on net interest expense. It was a little higher than I had modeled, and I'm assuming that's the swaps that you made into variable rate. First of all a) is that true, and b) as you look forward, and maybe as is implied by your guidance, how do you see net interest expense shaking out on a quarter-to-quarter basis?

Yeah, you're right Matt. The swap was less effective in our first quarter. Almost immediately after our year-end, the whole yield curve began to change, and as a result we experienced an uptick and I guess the swap was less effective. So we had an increase in interest rates, of I guess 60 basis points, and our guidance, [inaudible] guidance as outlined in our press release does now incorporate a 100 basis point average in crease in interest rates over the course of the year. This year I think we were 50 basis points, so we've factored that into our guidance.

Okay, one other one if I might, could you give us an update on the percent of your workforce in total that is unionized and whether there's any negotiations or contract renegotiations or anything of meaningful size coming up in the next, say, 3-6 months, or anything like that?

We have virtually no unions throughout the organization today. There may be one or two site specific union contracts in our security manpower business, but they are very small, and we may in fact not have them anymore. So, there are no contracts that we have to worry about in terms of union contracts. But as you know, and everyone else that's in business today knows, unions are active, and they are always trying to organize employees in situations where, particularly where they believe employees are not treated fairly, and we believe that we're an excellent employer, and treat our people more than fairly. So we're always concerned about that, we're always on the lookout for that. And so it's something we live with every day.

Thanks for that, and congratulations on a very good quarter.

Thank you.

And moving on, John Nevus [ph] at Raymond James.

Hi guys. Good quarter, congrats. Just a couple of questions, a bit ancillary, but I wanted to elaborate a little bit more on an earlier one. The Resolve business, you've done a good job of pulling that together, all the business you had, especially on the top line front, trying to cross-sell the business. I wondering if there's any sort of synergies and if you can see the EBITDA margin creeping up due to some cost savings in the back office type of stuff between those business units?

Yeah, there's going to be some opportunities down the road, and Lawrence and Tom are now working together and along with their finance teams and our input there will be opportunities. And we're certainly going to look at those. And we've made some moves already over the last couple of months. But they're small. Our big emphasis in that business as Jay pointed out is driving volumes and utilizing existing excess capacity, that is going to be what really drives margins. The other stuff is pretty small. And that's the big opportunity. And if you look back several years ago, even when we were running separate operations, we were operating at a much higher capacity utilization and the numbers tell the story. We were operating with much higher margins, EBITDA margins. So we're in a situation where if we get some continuous support from the economy, expanding, we're in a very good position to drive margin growth, but it's going to be mainly on the revenue side as opposed to cost savings.

Right, okay. And then turning to the security business, you mentioned you had a record backlog. What is that right now?

We don't publish backlog John.

Okay. What kind of order flow, then, are you seeing there? Especially on the bids put forth by the government, I'm particularly interested in with the increased budgets coming through for Homeland Security, etcetera. Is that starting to move now? Because I know initially, right off the bat, it wasn't-it didn't go gangbusters like people maybe prognosticated that it would.

We're seeing things open up right now, and it's not off the charts. But there is a lot of bidding activity, and it is, a lot of it is directly and indirectly government driven. Homeland Security wanting to protect petrochemical plants, so they're providing incentives to those in that business, to enhance their security needs which is creating opportunities for us, and that's just one example.

Right. And have you folks, or your security folks down there, have they heard anything on the legislative front, that tax breaks might come for installing security systems?

Yes, it varies by industry and it's not fully developed, but there is various benefits, tax credits and other benefits that-but they're different by industry. And I don't have enough of the facts by industry at my level, Frank Brewer would be a great guy to talk to if you want, John, on that one.

Yeah, sure, maybe I'll follow up on that. And then finally, a question for John, just on the cross border tax structure, it seems to be edging down further, and you're at 20-odd percent in this quarter. What do you see that getting to on a sustainable basis? Is it still in the 29-30% range?

Yeah, I think 29% is a pretty good number. Yeah, that's where we see it for the rest of the year.

Okay, great. That's all for me, thanks guys.

And this question will come from Bill MacKenzie at TD Newscrest.

Hi guys. I was just, John, I was just wondering if you could talk a little bit more about the management services margins? I know you addressed it, and talked a little bit about seasonality, but I wasn't sure I understood the reason for the year-over-year decrease, if you had the same seasonality in Q1 of last year. What was it that drove the margins down in that business?

Well, the seasonality is part of our Residential Property Management, you know we operate a large commercial swimming pool operation in the US, and Memorial Day weekend started later in the quarter this year, and that cut out about 5 days worth of business for us during the 1st quarter. We'll pick that up in the 2nd quarter, with the long sort of Labor Day, or late Labor Day this year. So that's basically a deferral. That's the primary seasonal impact in that business. We also acquired a property services company in April, which tends to generate much better margins in the winter months, as opposed to summer. So that was another factor that contributed on the seasonal front.

Oh, perfect. That's great. And then the second question I had was, just getting back to the textbook issue, it sound like you guys are expecting things to pick up again next year. Do you have good visibility on the front-end commitments from those states for next year at this point? Or is that just general expectation that the more cyclical nature of that business next year, we get back into an improved textbook replacement cycle?

Well, we have a pretty good visibility on the adoption cycle in terms of subjects. There's certain years you're going to get core subjects, English, Math, Sciences, which are heavy subjects, and then there will be other years where not every school is perhaps, teaching a [bigger] subject [which is the kids now]. So in terms of the adoption cycle subjects and so forth, we had good visibility because they publish that in advance. The government spending can be a little bit less known, but I guess history has shown that when governments cut back in a particular year, it's usually followed by increased spending, because everybody gets concerned about cutbacks. So we feel very confident next year that we're going to be in a situation we were in a couple of years ago where volumes were up considerable. This is kind of just a bit of an outlier year for us.

Okay, great, that's it for me. Thanks a lot.

And moving on, this question comes from Ron Schwartz at CIBC World Markets.

Thanks. John, first of all, on the cash flow, it looks like working capital took a little bit of a hit, I mean, receivables are up, inventories are up a touch. Is there anything in particular that would have affected that just because the free cash flow versus last year's restated quarter is obviously materially lower?

Yeah, early, I think on the A/R side we had very good results toward the end of the quarter. June was very, very strong, so there was a bit of an uptick in receivables at that point. Inventory as well, which includes work-in-process, relating to activities that are security business is undertaking, in terms of new projects we're involved in, those both contributed to an increase in the Current Asset category, and we well we had a reduction in our payables. A lot of that was related to variable compensation, which was paid out in the quarter related to last year. So we expect those things not to impact us on a go-forward basis, and there should be some [reversal] or improvements in terms of the working capital situation, on a go-forward basis.

Thanks. Secondly, either John or Jay, can you talk a little bit about what the experience has been, I guess, with the re-branding of Resolve in terms of either reception by new customers where you're going into bid, and a little bit on what the bidding activity is for new business now with the group as a whole?

It's easier to re-brand a business-to-business situation than it would be for example, to re-brand a direct-to-consumer business, because ultimately we're dealing with a whole bunch of fewer clients, albeit the size of contracts are a lot bigger. So, in many ways, re-branding it allowed us to go revisit many of our clients, and tell them the Resolve story, which is now not just a business process outsourcing story, or not just a marketing support services story, it's an end-to-end business process, outsourcing and marketing support solutions story. So, you know, it's given us a great opportunity to revisit our clients. And in doing that you get the opportunity to tell them the story about the other services that they might not otherwise be using, and about the incremental value that we could be providing. So, you're starting to see incremental sales, I mean, I have to tell you, I for one was very excited to see the revenue numbers in Business Services this quarter, because I really didn't expect to see it up 7% for example over last year given the fact that we were behind on textbook sales.

So, it's working, the contract bidding process in Business Services is a longer process, so you'll put together a proposal for a client, and it probably takes 9 months to a year to win it, if you're successful, and then it takes 6 months, maybe, or 9 months, or 3 months, depending upon the size of the situation, to get it fully implemented as was the case with Exxon and with Best Western. So, but when you get it in, chances are you will be serving that client for a long period of time, and our philosophy and focus converts to what other services could we be providing to this client around what we're already doing for them. So, it's just a function of the thin edge of the wedge, winning the relationship, proving to them what we can do, and then going back and saying, "these additional things around what we're already doing would be appropriate and we can do them for you cost effectively." So, it's working, and we're seeing some results, earlier probably than anticipated. I don't know whether that will continue, I'm hopeful it will.

It has also given us a great opportunity to retell our story to our people. There's 4,000 employees in that business, Lawrence and Tom went to every single branch, 24 of them, across North America, and told the story again. Many of them knew Tom, because they were on the marketing support side. Many of them knew Lawrence, because they were on the business process side, but they didn't know each other. And so that created a great opportunity. Bringing together the sales forces of all of those organizations into one, created another opportunity to resell our people. And this is a people business, make no mistake about it. And so, having those opportunities to retell the story, reset the compensation programs for sales people, all of those things helped, we're very excited about it. I don't want to over-promise anything, but we think that we're in great shape going forward.

So, just in summary Jay, what's your bidding outlook over the next 6 months? Are there a lot of potential jobs up for grabs that are in the hopper?

Not that much. We are again, there are some interesting opportunities that we're at various stages on, but our business-a different way to look at it would be, what percentage of your business comes from new customer wins, fresh new customer wins, versus existing customers that you sell additional services to. For example, I referenced a comment about the pharmaceutical sample fulfillment-that was a huge win for us, with an existing client. [Ergo], that is not a new client relationship. So if you're talking about new client relationships, yes, there are a few, there's some interesting ones, there's also existing clients that are re-looking at their situation, and there's a possibility that we can win more. There's a possibility we could lose something. You've got to know both things. These are businesses that we run, we think we are as customer friendly as we possibly can be, it's our culture, but we have to take to some degree the good with the bad, but we're quite bullish.

Okay, thank you.

Once again, if you would like to ask a question today, pleas press star (1) at this time. We do have a question from Bill Chisholm at Dundee Securities.

Good morning. Obviously the consumer side is the star in that quarter, and it sounds as though the California Closet business was particularly strong. Was that driven mainly by the economy, or did you initiate any changes in the California Closet business that brought that about?

I think it's a lot to do with the economy. It's a growing market, a lot of people are investing in their homes, closets are a great place to put your money. Anybody listening to this call, we'd love you to buy a closet. But we're seeing some nice gains in our company-owned operations, so, and I can take you down the list, but they're pretty impressive. You think about Boston, we bought it two years ago doing $4m, it might touch $10m. Seattle, it was doing probably $3m, it might do $7m or $8m. These are company owned operations in markets where the existing franchisee was doing a decent job, but we also saw that there was an opportunity to expand and grow the business, and we capitalized on that. So that's helped our system-wide sales, but it's also helped our margin growth-sorry-not margin growth, EBITDA growth. Margin in company owned operations as you can appreciate are lower than they would be from a royalty standpoint. So, we're getting probably, on a percentage basis, the lion's share of it from growth in system-wide sales, but a lot of it is also coming from our own operations doing better.

Is there any opportunity to set up new franchisees? Or is the market, in your opinion, fully covered at the present time?

Well, if you're talking about California Closets, most larger markets are spoken for, there's smaller markets available in that business, but it's a very small part of our business. There's other parts of our organization where there's lots of territory yet un-franchised, and so that's something that we chip away at all the time. But our philosophy, as you know, Bill, you've followed us for a long time, our philosophy is, our franchise systems have typically been around a long time, and so our game plan is to try and increase the revenues per franchise, because that's better for the franchisee, and obviously better for the franchisor which is us.

Okay, very good. Excellent quarter.

At this time there are no further questions, I'll turn the call back over to you.

Okay, thanks again for attending this call and we hope to hear from you again at the 2nd quarter conference call. Thank you.

Thank you. That does conclude today's conference call, thank you all for your participation. You may now disconnect.