UniFirst Corp (UNF) 2003 Q4 法說會逐字稿

Welcome to the Unifirst Corporation fourth quarter, year-end results conference call.

During the presentation, all participants will be in a listen-only mode.

Afterwards, we will conduct a question-and-answer session.

At that time, if you have a question, (OPERATOR INSTRUCTIONS) I would now like to turn the conference over to John Bartlett, Senior Vice President, Unifirst Corporation.

Thank you and welcome to Unifirst's conference call to review our fiscal 2003 operating results and to discuss our expectations (technical difficulty) forward.

My name is John Bartlett, and I am the Chief Financial Officer.

Joining me are Ronald Croatti, Unifirst's President and Chief Executive Officer; and Dennis Assad, Senior Vice President of Sales and Marketing.

This call will be on a listen-only mode until we complete our prepared remarks.

This call may contain forward-looking statements that reflect the Company's current views with respect to future events and financial performance.

These forward-looking statements are subject to certain risks and uncertainties.

The words anticipate and should and other expressions that indicate future events and trends identify forward-looking statements.

Actual future results may differ materially from those anticipated depending on a variety of factors including, but not limited to, performance of acquisitions; economic and business changes; fluctuations in the cost of materials, fuel and labor; and economic and other developments associated with the ongoing war on terrorism; price and unemployment levels; demand and price for the Company's products and services; improvements and underperforming rental operations; and the outcome of pending and future litigation and environmental matters.

Now I will turn the call over to Ron for his comments.

Good afternoon and thanks for joining us.

We are pleased to report that 2003 was another record year for the Company.

Revenues grew 5.1 percent to 597 million on a 52-week to 52-week comparative basis.

Earnings grew 9 percent to $1.53 per share.

These financial results were accomplished despite a continuing economic slump that resulted in difficult market conditions throughout the year. (indiscernible) job losses in a number of areas impacted us directly via customer attrition and wear reduction and made our growth goals tough to achieve.

In spite of this, the Uniform Rental Group managed to write new sales at a rate that was 10.5 percent better than the fiscal year 2002.

A good part of this was manpower related.

To counteract the economic slowdown, we increased territory sales reps by 7.5 percent over the 2002 level.

Thus, our true productivity gain was more like 3 percent.

But even that isn't bad in a sluggish market that was generally avoiding new expenses and that (indiscernible) was delaying purchase decisions of all kinds.

As previously noted, we were hurt by reductions.

Nevertheless, we were able to improve our customer attention over fiscal year 2002.

So while wearer shrinkage moved up somewhat, actual customer launches came down and that proved a benefit.

It wasn't without effort, though.

The focus we placed on staying close to the customers and finding ways to work as partners to assist them through their slow times with their businesses paid off.

Our UniTech Services Group again had an outstanding year, with record sales and earnings, largely due to the unusual high number of reactor refuelings which were scheduled in fiscal year 2003.

We don't anticipate the same level of shutdown activity in fiscal year 2004, so it's likely that our numbers in this area will tail off somewhat.

Our Green Guard First Aid and Safety Division made some modest drives during the year by setting up for additional market increase in fiscal year 2004, and that should help to accelerate our growth.

During the year, we invested 38 million in capital additions and improvements.

A substantial portion went to maintenance and improvement of current facilities, the construction and outfitting of two new laundry plants, and information system upgrades in both hardware and software.

We currently expect to see a similar level of spending during the fiscal year 2004.

Our earnings for the year were up, primarily due to a strict control of our labor expenses, continued manufacturing and distribution center efficiency improvements and a reduction in interest expense.

These positives were somewhat offset by higher energy costs, increased (indiscernible) merchandise expenses, and adding spending associated with our sales force and activities.

We anticipate that market conditions will remain soft through the first two quarters of fiscal year 2004.

To counter this, we plan some additional expansion of our professional sales force.

At the same time, we will continue to push our route sales organization for more sales of ancillary products and services to our current customers.

Both the market and the competition have been particularly tough to deal with over the past 12 months; we don't expect to see that change in the short term.

As we previously reported, just days after the end of fiscal year 2003, we acquired Textilease Corporation, with its dozen uniform service locations in the mid-Atlantic and southeast states, and with additional facilities involved in first-aid services and medical product wholesaler.

This is a solid business, which will directly impact revenue results in fiscal year 2004.

We currently are estimating our total revenue for 2004 in the 700 million to $710 million range, but we don't expect the acquisition to have a significant positive impact on earnings the first couple of years.

We'll be working due diligently to fully assimilate the Textilease operations into ours by the end of 2004, and of course, to retain all the customers they brought with them.

As we move into the new year, we continue to aggressively pursue new businesses at all levels, but also maintaining our tight rein on spending and our careful oversight of all operating costs.

And all things being considered, we are optimistic about what we will be able to achieve and we are looking forward to meeting the market's new challenges.

And now for more specifics associated with our financial results, here is John Bartlett.

Thank you, Ron.

As Ron explained, 2003 was a solid year from a financial standpoint considering the economic times.

Last November, we provided guidance that we expected revenues to be between 585 and $595 million and earnings per share to be approximately $1.60 per share.

As the year progressed, we maintained our revenue guidance and provided revised guidance in our third-quarter conference call that we expected income per share before the cumulative effect of the accounting change required by a new FASB would be between $1.50 and $1.55 per share.

We are pleased report that we exceeded our revenue forecast, as the revenues for the year were $597 million, or 3.1 percent greater than in fiscal 2002.

It should be noted that the revenue increase was actually 5.1 percent on a comparable year-over-year basis, due to the fact that there were 53 weeks in fiscal 2002 versus 52 weeks in fiscal 2003.

Also, this revenue increase was primarily from internal growth, as we had no significant acquisitions in fiscal 2003 and minimal price increases.

Our income before the cumulative accounting change was $29.3 million, or $1.53 cents per share, versus $26.9 million, or $1.46 per share in fiscal 2002.

Overall, we were pleased with our operating results in a difficult economic environment.

There were a number of factors which impacted our operating results.

Some of the primary factors in 2003 include, we continued to benefit from the transition to manufacturing in Mexico, which resulted in lower garment merchandise cost.

Some of this benefit was offset by increased amortization from other rental products, including mats.

Another effect was that merchandise expense as a percent of revenues was about the same as in the prior year.

Our cost-cutting effort resulted in a headcount reduction, which controlled our labor costs.

Our production labor cost was the same dollar amount in fiscal 2003 it was in fiscal 2002, in spite of the additional revenue and related poundage cleaned.

Our delivery labor remained the same as a percent of revenues, while our (indiscernible) labor expense increased as a percent of sales due to the success of our sales efforts.

The net result for the payroll as a percent of revenues increased slightly from fiscal 2002 to fiscal 2003.

Our UniTech/Nuclear business had an excellent year and exceeded our expectations.

Energy costs, including natural gas and vehicle fuel, increased approximately $2.5 million year-over-year.

The overall results of the income from operations declined slightly from $52 million in fiscal 2002 to $48.8 million in fiscal 2003.

As anticipated, our net interest expense decreased significantly in 2003.

Interest expense declined from $8.7 million in fiscal 2002 to $1.3 million in fiscal 2003.

This was due to lower interest rates, lower amounts of debt, a $2.3 million interest charge in the second quarter of fiscal 2002, which related to an Internal Revenue Service adjustment which was resolved in that period.

Interest income was approximately the same in both fiscal years.

As anticipated, the amounts related to a $40 million swap, which we marked to market in fiscal 2001, resulted in a credit of $1.3 million in fiscal 2003, as opposed to a charge of $1.3 million in fiscal 2002.

A further credit will be recognized in fiscal 2004, which we estimate to be approximately $2 million.

Our tax provision increased slightly from 38 percent in fiscal 2002 to 38.5 percent in fiscal 2003.

Income before the cumulative effect of the accounting change increased 8.9 percent, from $26.9 million from $29.3 million, and income per share before the cumulative change in accounting increased 9.3 percent, from $1.40 per share to a $1.53 per basic share.

This result was in line with the guidance we had given in previous conference calls.

Our balance sheet continues to be very strong and improved substantially in 2003.

As many of you know, Unifirst made a significant acquisition just after the end of the fiscal year.

Accordingly, the balance sheet will change substantially in fiscal 2004.

We are in the process of obtaining an appraisal of the assets of Textilease Corporation as of the acquisition date of September 2, 2003.

This will result in new valuations for long-term assets, such as property and equipment, and for intangible assets, such as customer lists, which will need to be amortized in the future.

We do not yet have estimates from the appraisal firm for these amounts.

We will be filing a Form 8-K in the near future, which will include Textilease's recent financial statements as well as pro forma statements which reflect the combined operations for recent periods.

These pro forma statements will reflect a decrease in the annual income of the combined company of approximately $5 million, or about 26 cents per share.

These pro forma statements will not reflect the expected cost savings and synergies which we believe will result from the combined companies.

The Company is moving rapidly to achieve these cost savings.

The Textilease corporate office has been closed and Unifirst has assumed the administrative functions of payroll and accounts payable.

We have moved one branch to a Unifirst operating plant and have an aggressive schedule to combine all operations by the end of 2004.

We expect to realize a significant benefit from the steps we have already taken and expect to take during the balance of the year.

However, it will take two or three years to fully realize the benefits of the combined operations, as we consolidate plants, close branches and reroute the business to make it more efficient.

Once all of these steps are taken, we believe we will see a significant benefit flow into the bottom line, and we continue to be very positive about the acquisition.

At this point, it is difficult to forecast the impact on our operations for fiscal 2004.

Our best estimate for fiscal 2004 is that revenues will be between 700 and $710 million, and that earnings per share will be between $1.50 and $1.55, or essentially flat.

We will have a better view of our expectations once we complete the first quarter.

Now, Dennis Assad, our Senior Vice President of Sales and Marketing, has a few comments.

Thank you, John.

As you've already heard, we faced some selling challenges during fiscal year 2003.

Despite that, as we've gone (ph) through the year, we were able to sustain new sales acquisitions at a rate that averaged about 10 percent ahead of the previous year.

Even in the fourth quarter, which is traditionally a slower sales period for us, we were able to maintain the same positive comparison.

We finished the year 10.5 percent ahead in new sales as compared to fiscal year 2002.

As Ron pointed out, more of that increase was due to additional manpower allocation than to productivity improvement, but that didn't surprise us.

We were expected to be facing market conditions that weren't going to be favorable double-digit sales improvement, so we planned for extra sales and resources as a countermeasure.

As a result, the total rep hours worked were up.

At the same time, though, real sales productivity did improve compared to fiscal year 2002, and I credit that mostly to better-trained people and higher activity levels.

Weekly averages were up and turnover continued to trend down -- a good combination.

Faced with a stifling economy and buyers who were uncertain about the future and tentative about making commitments to new programs, we simply exhibited good, fundamental selling.

We pushed database discipline with all our reps, and sales managers focused on making sure we were sticking to the contact processes we've proven work best.

We know what's critically important to make the numbers work in our favor, and in addition to higher activity levels, we also made sure reps were concentrating on the type and size of the prospect that would give us the best return for our effort.

That meant de-exercising (ph) categories like manufacturing, which was showing consistent net job losses, and spending more time with categories like services, wholesaling and transportation, which were demonstrating more resilience.

Nothing came easy.

But we saw a lot of that "refuse to lose" attitude we hear about so much in sports, and it made a difference.

It wasn't just our professional sales organization that did the job, though.

Our other selling resources, including national account teams, our route sales organization and our facility service sales reps helped out.

National accounts in particular had a strong year, with over 50 percent improvement in new sales compared to fiscal year 2002.

I credit that to finally having the prospect pipeline full and to being extra smart about which opportunities to pursue over this time.

Route reps' weekly averages continued to improve, largely as a result of our ongoing power (indiscernible) customer promotions.

And our facilities service reps benefited from specialized training and began to ratchet their averages up toward target levels.

All in all, our combined sales team produced pretty much the same way we hoped to, and did it in a reassuring consistency.

As we head into the new fiscal year, we continue to pursue the sales and (indiscernible) initiatives we have been working on during fiscal year 2003, including new training materials, improved presentation tools, target account contact discipline and sales force automation tools and techniques.

All this should help support further sales performances as we move ahead.

Combine that with a good economy that's on the rebound, and I'm looking forward to a good year.

John.

Thank you, Dennis.

And now we'll turn it back over for some questions from you.

(OPERATOR INSTRUCTIONS) Rick Datori (ph) of Columbia Management.

I have a couple.

Hi, guys.

UniTech in the quarter -- I think you talked about it in the year.

Can you talk about how they did in the quarter?

I really don't have the numbers for the quarter, Rick.

Typically, the fourth quarter is not a strong quarter for Unifirst, and so there was not a significant performance by them in that quarter.

It's really strong in the fall and the spring, and the winter and summer is normally pretty weak.

So it was, I think, a little bit better than last year but not significantly.

The second question is related to the Textilease acquisition, were there any expenses incurred related to -- I know it didn't close until after the quarter -- but expenses incurred related to the deal that were realized in the fourth quarter?

Just some small things like travel and the due diligence effort -- and the legal fees really weren't billed until after it was concluded.

So, nothing significant.

Nothing to account for the shortfall against the street's estimates?

A couple pennies -- (indiscernible) a couple pennies in there.

No.

Lastly, you talk about -- I don't think we have the line item -- at least I don't -- I haven't pulled up all the disclosures yet.

But what were sales and marketing as a percent of revenues in this quarter and the prior year.

Do you have that handy?

I don't think we've ever really broken out sales and market separately from SG&A, Rick.

I'm just wondering are we getting our money's worth?

I understand Dennis's team is making sales.

But is it costing us $2 to make a dollar of sales?

You talk about that expense being one of the areas that has ramped up.

It sounds like you are continuing to commit to spending more money there going into the new year on sort of a flat guidance on earnings. are we getting a return on those people?

I think what were doing is we are trying to hold the same percentage that we held in '03 in '04.

So it's not going to ramp up 7.5 percent like we did in '03.

So, '03 was 7.5 percent more than '02?

We put on 7.5 more percent reps.

Oh, in numbers.

Okay.

That's all I have for now.

Thanks.

Bruce Simpson of William Blair.

Hi, Ron and John.

A few things for you.

John, the press release that I have anyway just kind of lumps in a number of line items without breaking it out.

Can you give us line item detail for cost of sales, SG&A and the depreciation and amortization?

We held off on that.

There were some 11th-hour entries and we want to make sure we have them in the proper categories, so I guess we're going to have to wait until we file the 10-K in a couple of weeks for that detail.

Is that also true of the interest income versus interest credit and the impact of the mark to market (multiple speakers)?

We can tell you that if you like.

The swap -- I'm kind of going from memory here, but I think it was one million 250 charge a year ago, and it was about a $1.3 million credit this year for the full year.

So it was $2.5 million swing.

And the -- I don't have it -- I had it --

You don't have that in the quarter, by any chance -- the dollar amount of the swap impact in (multiple speakers) --

The swap was big in the quarter.

I think it was something like a $600,000 credit.

And that's really -- as interest rates ratchet up a little bit, it has a fairly significant effect on that.

There's about $2.2 million left, which we will recognize in the quarters between now and October of 2004.

I can tell you it will come in between now and then -- I don't know which quarter it will come in.

To get the exact number in the quarter, will I have to wait for the K?

I'm pretty sure it was $606,000 in the quarter.

606.

And so, even backing that out, the total interest impact in this quarter is pretty dramatically different than the prior quarter.

Yes, it is.

And give me a little more detail, if you can, on -- forgetting the 600 credit from the swap, just the balance of interest.

We have interest income from our regular receivables that on an annual basis, I think it was about 200,000 year-over-year, but not much different.

And the rest was really just interest on our line of credit.

So the --

I have it in the next room if you want me to go and get it.

I'm just looking -- interest expense -- it's an income of $452,000.

That was really two pieces -- it was (multiple speakers) from the swap in the quarter, and about -- I think around 400,000 from interest income from customers -- maybe a shade more. so about $1.1 million.

And the rest was interest expense on our debt.

But, for example, in the prior quarter, when you back out the impact of the swap, you guys were still a net payor of interest of maybe $1.5 million.

I think including the swap it was $800,000.

Not in a quarter, I don't think, Bruce.

John, I had it at -- interest income including the benefit of the swap was 585,000.

The interest expense was 1 million 304.

That nets out to a total expense of about maybe $700,000, including the credit of 300,000.

So if you throw away the $300,000 credit, maybe like $1 million going out the door in interest expense in the third quarter.

But it sounds to me like in this fourth quarter, if you (multiple speakers) --

That seems a little high.

I mean, the interest expense was roughly less than 4 percent on a -- well, you have to figure these swaps -- the other swap figure is then (ph) through June, so we're paying a little higher in that.

It was in the neighborhood of about -- I'm trying to do this mentally, it was really 6.38 percent of $40 million and a very small percent of the balance.

So it's like 1.5 percent of $50 million a quarter.

So moving forward, you've got your balance sheet as of August 30, 2003, so that is prior to the funds dispersed for the acquisition; is that right?

That's correct, yes.

So at that time it was -- looks like $67 million in long-term obligations.

And should we anticipate a balance sheet when you file that?

Well, I guess we won't see it until the next quarter, but generally, the purchase price I think was disclosed was just over 180; is that right?

It was 178, actually, a little bit less than that.

I will estimate that the debt at the end of November will be about $240 million.

And it -- currently, it will be a floating rate and probably a little bit under 4 percent, with amortizing the fees.

If you want to model it, it will be about 4 percent of -- a little bit less than 10 million a year of interest, excluding the swap and excluding interest income.

Okay.

And you said the swap should be a total impact of $2.2 million over the next four quarters in your favor?

It will be about $2 million -- I mean, that's through October of 2004.

So I'm saying about $2 million of the 2.2 will come in in fiscal 2004.

Okay.

And so when you give an EPS guidance -- or your expectation maybe is a better word than guidance -- of roughly flat -- I think you said 150 to 155, what is the implicit interest charge that falls into that?

This what you said of just of roughly just under 10 million outside of the swap?

That is correct.

And that assumes that interest rates stay about where they are, and we considering whether we want to fix some of that with the private placement, which would change it.

But assuming interest rates stay where they are, that is correct.

And we don't do a private placement.

Can you talk a little bit about the economics of Textilease?

I mean, for example, when you say 150 to 155, and you assumed what you have on interest expense, have you assumed either a certain amount of accretiveness or dilution in that factor, or are you just sort of assuming it's generally neutral to your fiscal '04?

Well, there were a lot of assumptions that went into that.

I mean, we looked at what we thought the Company could do without Textilease.

Then we looked at what we thought we could achieve from Textilease from an operating standpoint less the cost that we feel we can take out in the near-term.

And then we factored in estimates, which are really the biggest thing that we don't know until we get these appraisals, because we will have to appraise their property and equipment, and presumably those figures will come in at higher amounts than they had on their books, which will result in additional depreciation.

And then you have to appraise both amortizable and tangible assets, so assets such as customer lists, contracts, anything that has a life, we still have to capitalize and amortize, and we really don't have a good feeling yet what the appraiser is going to come back with values on that.

We made some ballpark estimates in doing this.

There's a lot of things that go into the mix and we're really a little struggling because we kind of have half the accounting on our system and half on theirs.

Until we bring a little more of it over -- that's why we're a little less certain, I guess, of where we're going than we have been in the past.

We feel right away we've taken close to $5 million out of their corporate overhead.

Now, there's going to be some increases in ours, but we have closed that office and basically closed that operation.

We're moving aggressively, I guess is all I can say.

That's an annualized number -- $5 million?

Yes.

And just sort of thinking this from a view from 35,000 feet, it seems like if you take sort of a baseline revenue growth number for '04, outside of Textilease, over '03 -- perhaps 5 percent, something like that -- that gets us to something like $625 million in revenue X Textilease for fiscal '04.

So I'm guessing that your ballpark is maybe something like $80 million to take the midpoint of your range?

We anticipate selling some of the linen business that came with Textilease.

Some of the what business?

Linen.

All right.

Well, what I'm trying to get at is, I'm just anticipating what run rate at what operating margin covers what interest payment and how that impacted the 150 to 155 estimate?

In other words, is it possible to say, well we sort of expected to have been X cents plus or minus and then the balance is what we're looking for out of our core business or is it too well integrated to be able to do that at this point?

I think it was sort of a combination of both.

I mean, it is kind of an integrated thing, because we are -- we are taking over some of the responsibilities right away of, as I say, the payroll, the Accounts Payable, and we're moving operations.

It won't be long where Textilease really won't have a separate identity, because it so intertwined with our operations in North Carolina and South Carolina and Virginia.

What we're saying, it's going to take probably three years to really fully integrate it and do the rerouting, and so we'll have a Textilease truck stopping next door to a Unifirst truck in the near term, but eventually we'd like to obviously put that in one route.

John, is that the reason why -- you mentioned there is some sort of 11th-hour changes in estimates and so forth that prevented you from having line item detail.

Is that -- ?

This year's results really had nothing to do with Textilease.

The auditors are even more diligent than the past.

I guess the last thing I have is, can you break out the impact of how you get to -- I'm sorry, not the impact, but rather the organic growth components -- share a little bit about what's going on in pricing, lost business and so forth -- and shrinkage?

I'll give you those.

The sales organization wrote about 13.5 percent of our weekly volume.

The service sales organization ran about 4.4, so that's 17.9 percent.

The lost customers was 8.6 percent, of which 38 percent went to competition.

Thirty-six percent was what we call out-of-business or financial.

Thirty-six percent was a variety of reasons from buying their own, not utilizing their service (indiscernible).

Our shrinkage (indiscernible) internally in our customers was basically 7.2 percent, of which 4.5 was (indiscernible).

So we had shrinkage in the air freshener, paper, (indiscernible) and so forth.

And that gives us basically a net 2.1.

2.1 organic growth, and that's a full year, not a quarterly number?

That's correct -- full year.

Pricing was relatively minor, and there were no acquisitions.

Ron, can you just give some comment on the tone of business overall?

A couple of your --

I think between Dennis and I, we (indiscernible).

I think what we're seeing out there was a very competitive year, particularly at the national account level.

We're still watching the pricing on the national account level.

We don't understand what's going on.

We've seen sporadic pricing in these treats the maybe moved back.

It's sporadic pricing move-ups and the street -- for maybe every two that move up, maybe a half a one moves back.

So, it's sporadic.

It's as competitive as ever; that's all I can really tell you.

And in terms of the whole industry environment, or I guess as it impacts your shrinkage, Cintas and GNK (ph) gave some halting signs that perhaps things really increased, but maybe (multiple speakers) --

I can give you the first eight weeks -- it's right in front of me.

It's been up and down.

The wearers were certainly better than last year at this point.

But we are behind $2000 a week in wearers for the first eight weeks.

Lest year at this point, we were behind almost 12 for eight weeks.

Ron, are these the 8 weeks of the November quarter?

This is all the way through October (indiscernible).

So when you say lost $2000 a week, that means the --

It's negative.

It's negative compared to fiscal 2003, but it's only two grand a year negative, whereas at this point last year, it was 12 grand a week negative?

That's correct.

Okay.

So it's sort of flattening out, is what it appears, although it has not yet turned into your favorite (multiple speakers) --

We have one week positive, one week negative, two weeks positive, two weeks negative.

We're relatively happy with it, believe me.

That's all I have.

Thanks a lot for the answers, guys.

Mike Schneider of Robert W. Baird.

Good afternoon, guys.

Maybe we can first just start with Textilease and what your assumptions are for '04.

We got into the revenue and expect to sell some linen.

My understanding is linen is about 8 to 10 million of the business -- is that about right?

That is correct.

Is it fair to say you're going to try and sell it all or are there just some minor accounts that you want to get rid of?

No, I think we're going to be moving portions of it through the course of the year.

And then, I guess in terms of your schedule now for integrating the business in '04, you made the comment you intend to do it aggressively.

Can you give us a sense of how many plants get impacted, how many branches get impacted, and do you really get all the moving parts done by the end of '04?

It does sound aggressive.

It's how you interpret integrate.

There's really two steps --

There's really two or three steps.

The first step we're engaged in is the pickup of the accounting and the payroll and closing the home office.

We basically have that concluded.

The next step is the billing, putting them on our system so they can order from our distribution center, so we get the gain on their using our merchandise.

That will happen basically -- we did our first plant this Monday.

The game plan calls for basically one a month.

Whether we can adhere to that schedule remains to be seen.

But that is our strategy.

The second part of the plan once they're on our billing system is certainly to get them on what we call our stockroom system and get them ordering using a Unifirst (indiscernible).

That follows 30 days after the billing system.

Once we get the operations on our system, we will then go back and start consolidating operations.

Initially, we're consolidating the branches, but some of the plants have to be moved around and boundaries removed around, and that's going to be a little more time-consuming.

Hopefully, we'll get into that phase at the end of our fiscal year, by doing our first one during the summer.

That's when John basically says it's a two to three year process.

We have three or four operations that are plants that overlap that we will be either phasing out their or phasing out ours and consolidating over (ph) and so forth.

So at a high level, that's basically it.

So you don't really get to the plants and the branches until next summer and beyond?

Hear me again -- the branches we're doing now.

As we put them on our billing system, we're shoving them into the nearest plant.

The plants -- if you have two plants in the same city, you want to consolidate those two plants.

We won't get into that phase until after they are on the billing system, after they're on our ordering system, and after we have the mechanical changes in the buildings to accommodate the volume.

And then we will shut down one or the other.

And that won't happen until third quarter, fourth quarter.

Ron, do you do all three to four simultaneously or do you try to tackle one at a time, like you do the branches?

We basically move them through the operation to get our hands on it to know what is going on.

And the way we feel -- get the feel for it is to get it on our system.

We got it on our expense system; we need to get on our revenue system, and that's the billing system.

And we want to get it on our garment-ordering system to save those monies.

So we will put them on a billing system one location a month.

Twelve locations, 12 months.

And you had mentioned three to four plants ultimately impacted.

Textilease brought you was it seven or eight plants?

Eight.

And the cost of doing this now, as you run through fiscal '04, John, could you give us a sense of what the accounting regulations let you do in terms of specify what the integration costs are and break them out, or if you've got the solid plan in place, can you actually take a onetime charge in the first quarter?

There is sort of a combination of things, Mike.

The accounting rules basically allow us when we allocate the purchase price to recognize known items that come about as a result of the acquisition -- for example, severance costs.

Any items that we can basically put on our books the way we would keep our books -- things like accrued vacation, so forth, that will be kind of in the opening purchase price allocation.

There are things that we're planning to do, such as they had an operating plant in Puerto Rico which we are going to shut down -- in fact, we've already given notice to shut it down.

Whatever costs are associated with shutting that down can be considered then a reserve or a part of the initial purchase price allocations.

Now, as I understand the actual combination of plants, it gets a little trickier.

For example, we have two plants in Richmond, Virginia.

It is our intent to close one of them and go forward.

Now, if we close their plant, it's our understanding that we can consider that as a part of the acquisition and kind of reserve the cost to close that plant.

On the other hand, if we close our plant, we have to treat it as an operating cost.

We are not going to let those decisions affect what going to do -- we are going to do what makes the most sense.

But we are going to keep the plant that is the best facility and going to work the best for us.

But depending on how you do these things, it's my understanding there are different ways that they have to be addressed from an accounting standpoint.

I don't know if that --

What have you then baked into the guidance, is what I'm driving at?

What type of Textilease-related cost do you have baked in there?

Very few from the combination.

We're anticipating that most of these unusual costs such as severance or the onetime cost to shutting down in Puerto Rico will not be in the operating results.

They are outside of that guidance.

So it's probably to view the $1.50 to $1.55 guidance as somewhat of a pro forma number and clean from the acquisition?

For the most part, yes.

Okay.

Then I guess just specifically on the quarter, Ron, you gave us numbers for fiscal '03 in terms of sales force.

Do you happen to have those for the fourth quarter?

Number of people, you mean?

I'm just trying to dissect any organic growth rate.

I don't have it for the fourth quarter.

Okay, I can follow up with John.

But on those numbers, Ron, the sales force up 13 percent, the route salesman up 4.4.

What do you mean by those numbers?

That is that amount of new business written?

Right.

In other words, you are doing $9 million a week, and you're up (ph) 13.5 0 in business.

On a weekly basis.

On a weekly basis.

That's the way our competitors are giving them.

Yes, I'm just being clear (ph).

And then the add stop number, does that include sales of ancillary items to existing rental customers, or is that included in the route sales number?

I gave you two numbers for new sales.

New sales was 13.5 percent from the sales organization, 4.4 percent from the service organization.

That is customers that they are assigning the stop next door program, or they are putting a new service into an existing customer.

Okay.

And then UniTech specifically -- you mentioned it is a seasonally weak quarter, I know, John, but the growth -- even the momentum of the growth has slowed in the fourth quarter?

Because it's been up every quarter for the first three quarters significantly.

Yes, that's true.

And is does that lead to your comments about next year, that business being up a lesser amount?

I think what we were trying to say is it probably won't be up next year; it will be down year-over-year.

We had a very good year and it was sort of an abnormal year.

We watch the outages and how often the reactors refuel.

And there are less scheduled refuelings during 2004.

What rough dollar amount do you expect that business to be down?

(indiscernible)

Yes, somewhere in that neighborhood.

$2.5 million, you said.

Yes.

Okay.

That's all I have for now.

I'll get back in line.

Thanks.

Alex Paris of Barrington Research.

Hi, guys.

Just a couple of follow-ups.

In the press release, you gave a pro forma statement of income for the year ending August 31, 2002, that includes the impact of Textilease.

Was that meant to be August 31st, 2003, the year just complete, or is that a year ago's fiscal year?

That's an interesting question.

When we actually file the 8-K, which we have to file in a couple of weeks, we will have to file for our most recently completed year before we file our 10-K, which will be August of 2002.

So that's really what our auditors recommend we put in there.

So we will file pro forma statement for the year ended August 31, 2002, as well as one for the nine months ended May 31 of 2003.

That will be combined with Textilease's operations from really the year ended September of 2003 and the nine months ended June of 2003, because their numbers are kept on a quarterly basis.

So yes, it was intended to be August of 2002.

Do you have an estimate of what the dilution impact would have been on fiscal 2003, just complete?

It should be pretty much the same.

That includes just combining all the revenues, all the expenses --

The SEC requires you just to add the two businesses together and then go back to the beginning of the year and include the interest costs as if the companies were together for that period, and also to include the amortization for the additional values for the write-up in the values for the intangible assets and the depreciation.

And those are still sort of estimates.

We haven't gotten those appraisal numbers yet.

They don't include any synergies, obviously.

There's no synergies in that.

That's just adding the numbers together.

And you've already said on this call that you've already taken $5 million out of operating costs?

For the most part.

We have some offsets that we have -- there's some computer lines and some things that we have to add back in on our side, but we have taken substantially that out, yes.

Under those numbers given in the press release, what was the operating contribution margin of Textilease for that year ending 2002?

It wasn't large.

It was in the neighborhood of, before interest, $3 million.

They were not a very profitable company.

That obviously included the salaries of the people who have been terminated as a result of the acquisition?

Exactly.

Yes.

So to that number of $3 million EBIT, I could add $5 million?

I realize you're going to have some additional corporate overhead costs of your own, taking on a bigger organization.

But that's sort of apples-to-apples?

That's not a bad guess, yes.

If we're going to have sort of a flat year in earnings per share, this year, seasonally or by quarters, does that mean we have a couple of down earnings quarters ahead of us, maybe getting to a flat quarter by Q3 and a slightly up quarter by Q4 -- would that be how you would imagine the progression would be?

There won't be flat quarters each and every quarter?

I'm really sitting here guessing.

I think it's pretty much flat quarter by quarter.

I don't envision a different trend and I don't envision us to be negative in the first quarter and positive in the fourth quarter, if that's really what you're saying.

I think it's (multiple speakers) ratable over the year. (multiple speakers) we hopefully will start improving or seeing some benefits, but --

Just as you take out costs or (multiple speakers) --

A lot of the costs we're going to take out for this year for the most part are already taken out.

I mean the next step, as Ron tried to explain, is to put it on our billing system, our accounting system, so we really understand better what we have.

And we are not really doing any rerouting or merging of plants -- we're basically converting their system to our system, which really will not result in much dollar savings that first year.

Fair enough.

And just a last follow-up question.

UniTech, for the year just ended, what percentage of total revenue did it represent, ballpark?

It was around 9 percent.

Thanks very much, guys.

I'll talk to you soon.

Rick Datori of Columbia Management.

Textilease impact.

I thought I had my answer, but now I'm unsure.

In round numbers, 5 million in savings, and the way you've disclosed it, it would have been 5 million dilutive before savings.

If I kind of use those numbers and work it with your $3 million number, that just covers the interest, right, at roughly 4, 4.5 percent on a hundred -- well, you know, I guess assuming that it were all financed with 4.5 percent debt.

It sounds like all in, it will be dilutive in fiscal '04?

I think that's what we're saying with flat earnings.

I mean, absent Textilease, we would certainly hope earnings would be up in fiscal '04. (multiple speakers) in fiscal '04 will be a little dilutive from Textilease, yes.

When you guys did the deal, did you assume that then, too?

Yes.

That's all I have, thanks.

Mike Schneider of Robert W. Baird.

Could you just let us know when exactly the headquarters was closed?

Well, there are still three people there.

But I think -- I think October 27th was when the telephone was switched off, and there's basically -- there are three people there that are still helping us.

But other than that, it was last week.

John, how do you get to a flat quarter in the first quarter if you had the expenses of Textilease for basically the months of September and October?

Well, most of those costs are really part of the contemplation to close it down can be put in that reserve.

The fact that we -- basically the day we acquired them, we gave notice to the people and many of those people is included in that reserve.

Those are not -- some will be included.

For the most part, those costs will not be included in the operating results.

So even though they were employees during the quarter, because you had given notice fairly quickly, they are run through the purchase price adjustment?

That's my understanding, yes.

And then I guess, Ron, you don't sound as optimistic (technical difficulty) heard from some of the other employers that the market does seem better.

Even Jean Case (ph) expressed that September and October were seemingly markedly better.

Am I reading you correctly?

I think you're not.

I think that what I'm trying to tell you is that our numbers show that the adds versus reductions in the accounts are still slightly negative, but it's a large improvement over last year.

So we're positive on that.

On the sales side, I expect the new comps to continue to pick up the way they picked up last year.

We have more feet on the street and I expect sales to continue.

We had a good year in sales last year and I expect that to continue.

I think Ron is right.

I think pricing is slightly coming up.

It's certainly competitive out there; there is no question about it.

I think that we will continue to improve our productivity as we go along and we continue our recruiting and training program.

And I think the market is slightly easing so that we expect better results next year.

Dennis, on no programmers, do you have any sense of where the fourth quarter shook out in no programmer accounts?

To tell you the truth, I still think we're laying right in the 40 to 50 percent range, to give you a ballpark.

I don't think that's picking up much.

What do you expect to grow the sales force in fiscal '04 -- a similar 7, 8 percent?

I'd think more like 4 to 5 percent.

And can you give us a sense of what turnover is doing in the sales force?

We don't give the turnover number out, but it is coming down; it came down about 4 percent last year.

One final question on add stops.

Ron, you mentioned they're down $2000 weekly year-over-year.

That's year-over-year, though.

Can you give us a sense of what the progression was through the last fiscal quarter, through the fourth fiscal quarter?

I don't have the fourth quarter in front of me.

I have the last eight weeks in front of me.

And the last eight weeks were -2000 dollars, and we had 4 up weeks and 4 down weeks.

And presumably that's better than it was during the fiscal fourth quarter?

$12,000 in as we measure it weekly rental volume difference from '03.

From '03.

Okay, so you ended the year --

No, the same eight weeks last year -- year-to-year.

But then again, presumably just looking at it week to week through the fiscal fourth quarter and through the last eight weeks, things have been steadily improving?

Steadily closer to zero.

Great.

Thanks again.

Alex Paris of Barrington Research.

Just a quick one, guys.

You gave your CAPEX number at 38 million.

Can you give us a D&A number for the fiscal year?

I think we will wait until we file a 10-K.

I don't have it in front of me, Alex.

At this time, there are no further questions.

Thank you very much.

We appreciate the interest in the Company and we hope to have your support as we struggle through getting our hands around this acquisition.

We are still very optimistic about it, but we have a lot of work to do.

Thanks again and we look forward to talking to you next quarter.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation and ask that you please disconnect your lines.