UniFirst Corp (UNF) 2004 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the UniFirst Corporation third quarter earnings release conference call. During the presentation, all participants will be in a listen only mode. Afterwards we will conduct a question and answer session. [Operator Instructions] As a reminder, this conference is being recorded Wednesday, June 30, 2004. I would now like to turn the conference over to John Bartlett, Senior Vice President. Please go ahead sir.

Thank you and welcome to UniFirst's conference call to review our third quarter operating results for fiscal 2004 and to discuss our expectations going forward. My name is John Bartlett and I am the Chief Financial Officer. Joining me is Ronald Croatti, UniFirst's President and CEO. This call will be on a listen-only mode until we complete our prepared remarks.

Before I begin I would like to give a brief disclaimer. This conference 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 events 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; economic and other developments associated with the ongoing war on terrorism; strikes and unemployment levels; demand and price for the Company's products and services; improvement in underperforming rental operations; and the outcome of pending and future litigation; and environmental matters. Now I will turn the call over to Ron Croatti for his comments.

Thank you John and welcome to all of you who are joining us for the review of our third quarter results. We are pleased with the numbers we have to share. The financial details will be provided in a few minutes by John so I'll start with just a quick recap. Revenues from third quarter were a record 183 million, a 19.1% increase from the 153.7 million in the same period a year ago. Acquisitions, primarily Textilease, account for over two-thirds of that; with the balance resulting from a combination of price increase and internal growth. UniFirst Laundries accounted for 5.5%. Third quarter net income was 9.9 million, a 3.5% increase from the 9.6 million recorded in the same period last year. Net income per basic share was 52 cents as compared to 50 cents in the same period a year ago. During the quarter we sold a large portion of our Textilease business, linen business, something we had planned all along as one of our acquisition integration steps. Through three quarters revenue totaled 541.3 million, or a 20.5% increase over the first three quarters of fiscal 2003.

Income before the cumulative effect of accounting changes for three quarters was 26.1 million, an 18.2% increase over the comparable period a year ago. Income per share before the accounting change, after three quarters, is $1.26 compared to $1.15 for the same period last year. New uniform service sales continue to lag behind comparable period of a year ago. Reps’ weekly sales average are off a bit and we credit this to ongoing market uncertainty. The Institute of Supply Management Index still indicates an expanding economy; but consumer confidence continues to be off from its January high. Global good orders declined in May, jobless claims rose for the month at sharper-than-anticipated rate. Overall, both the manufacturing sector and the labor market are weaker than expected. We believe we are seeing some effect of this in the prospects’ response to our sales efforts. As we've noted in the past, the same sort of buyer uncertainty is also impacting our route sales organization. Our ongoing Power Roots promotional program continued to have positive impact, but both new and rental route sales and add-on services are behind last year’s pace. We're not yet seeing the kind of wear (ph) additions that typically come as customers’ businesses start to expand during a period of economic recovery. So even though we are benefiting from some internal growth, we aren't seeing the sort of increase we'd normally anticipate.

To help boost sales, we have run special combinations of direct mail and telemarketing programs at generating more appointments for our reps and continue to roll-out our handheld, computer-based sales force automation system. And continue to supply new sales tools, introduction of additional targeted marketing selling programs. We hope these steps plus a gradual rep head count expansion in key areas will begin to make a measurable difference. Offsetting the softness on our on-the-street business, our national account team continues to produce good results by delivering some important major account wins. Some of this is preferred vendor business which requires us to utilize our professional sales team for local sales contact and selling through, while some are central purchase deals which wrap up all customer entities under a single contract. In both cases though, actual installation of business is incremental; it takes place over time. Consequently, the effect of revenue tends to be gradual rather than immediate.

Our subsidiary businesses are progressing well. UniTech has introduced some new products and services and appear to be heading for another good year. Green Guard had done well integrating the acquired Textilease first aid and safety business and developing strategies for increasing penetration in select markets. And while sales are off slightly from last year, again we believe related to the economy, and they are compensating through the addition of more full-time professional sales people.

The overall integration of Textilease acquisition continues to proceed on target. We presently have five locations converted to UniFirst systems and our schedule for having the changeover complete by the end of this calendar year should hold. We're impressed by the way their personnel at these locations have adapted to our processes and procedures; and we expect excellent productivity from them in the months and years ahead.

Through the balance of the year, we plan to be very careful with additional capital spending and are holding back on certain projects we originally expected to initiate. With new sales acquisitions remaining tougher than anticipated, we think it makes sense to be cautious with our investment dollars that promise a longer term return. In the sales area, however, we're already starting to build head count and will continue to add extra reps. Both to help support new sales growth and to better prepare locations for the more favorable selling environment we anticipate in the new fiscal year. Now for the details of our third quarter financial performance, here is John Bartlett.

Thank you, Ron. As Ron explained, we were pleased with the results of operations for the third quarter of fiscal 2004. Revenues for the first 39 weeks of fiscal 2004 were a record $541.3 million, a 20.5% increase over the prior year's first 39 weeks. Of this increase, 14.8% arose from acquisitions, and the balance of 5.7% from internal growth and price increases. The acquisition of Textilease accounted for substantially all of the growth from acquisitions. For the quarter ended May 29, 2004, revenues were $183 million, a 19.1% increase over the prior year. Of this increase, 13.8% was due to acquisitions, and the balance of 5.3% was from internal growth and price increases. Again the Textilease acquisition accounted for substantially all of the acquisition growth. The pricing environment continues to be difficult and the revenues from price increases were less than 1% in all periods.

Revenues from the laundry segment of our business increased 20% in the first 39 weeks, 19% in the third quarter of fiscal 2004. Of this increase, 13.7% and 12.8% were due to acquisitions in the 39-week period and 13-week periods, respectively. The balances of 6.3% for the 39-week period and 6.2% for the 13-week period were from internal growth and price increases.

During the quarter, we successfully completed the sale of certain linens business acquired as part of the Textilease acquisition. This will decrease future revenues by approximately $5 million per year. No gain or loss has been recognized as a result of this disposition.

The first-aid business nearly tripled in both periods due to the acquisition of Textilease. This segment is performing well, and we're optimistic will make a positive contribution to our operations as we move forward.

Finally our UniTech business was essentially flat during the 39-week period, but declined 3.2% in the 13-week period ending May, 2004.

Operating costs increased from $288.2 to $347 million, or 20.4% over the prior 39 weeks. As a percent of revenues, these costs were 64.1% of revenues in both periods. For the 13 weeks ended in May, the operating costs as a percent of revenues increased slightly from 63.1% to 63.5%. The primary driver of these decreases was lower merchandise costs. These decreases were offset by significantly higher energy costs and the fact that Textilease laundries have higher production costs than the existing UniFirst facilities.

During the quarter, the company made the decision to close it's Richmond plant and transfer the processing to the Richmond plant acquired as part of the Textilease acquisition. As a result of this decision, the company has written off value of machinery and equipment at this facility which is not expected to have continuing value. This pretax amount of approximately $600,000 was recorded as a cost of operations in the third quarter of fiscal 2004. It is anticipated that the actual transfer of the operations will occur over the next few months, and that we will incur some additional costs as a result of the consolidation. One of our long-term goals is to reduce these costs as we assimilate the former Textilease operations over the next couple of years. As previously noted, we do not expect any significant benefit from this consolidation until fiscal 2005 or 2006, when we will have fully integrated the two entities.

Selling & administrative costs increased 18.1% from $93.6 million to $110 million for the 39 weeks ended in May; and from $30.1 to $36.8 million, or 22.1%, for the 13 weeks ended in May of 2004. As a percent of revenues these costs declined from 20.8% to 20.4% for the 39 weeks ended and increased slightly from 19.6% to 20.1% for the comparable 13-week period.

Depreciation and amortization increased 15% from $29.9 million to $34.4 million for the 39-week period, and 14.1% from $10.2 million to $11.7 million in the third quarter. The primary driver of these increases was the impact of the Textilease acquisition; however, as a percent of revenues, depreciation and amortization declined in both periods. For the 39-week period depreciation and amortization declined from 6.7% to 6.4% of revenue, and for the 13-week period it declined from 6.6% to 6.4% of revenues.

The net result of the above factors was that net income from operations increased 31.1%, or $11.7 million, from $37.6 million to $49.3 million for the 39-week period; and 12.3%, or $2 million for the 13-week periods. As a percent of revenues, income from operations increased from 8.4% to 9.1% for the 39-week period.

Net interest expense for the first 39 weeks increased from $1.7 million to $6.9 million, and for the third quarter from $0.7 to $2.2 million. These increases are substantially due to the additional debt arising from the Textilease acquisition.

On June 14th, 2004, the company completed a major restructuring of its debt. The company entered into private placements with a group of insurance companies to borrow $75 million for a seven-year period at a fixed rate of 5.27%, and $90 million for a 10-year period of floating rate debt. The proceeds of these borrowings were used to repay and reduce it's bank line of credit. The interest rate on the new floating rate debt is significantly lower than the prior bank rate and should moderate the impact of expected rate increases.

The provision for income taxes remained constant in all periods at 38.5%.

Finally, income before the cumulative effect of the accounting change recorded in the first quarter of fiscal 2003, for the 39 weeks ended, increased $4.1 million, or 18.2%, from $22 million, or $1.15 per basic share, to $26.1 million or $1.36 per basic share.

In the first quarter of fiscal 2003, the company recorded an expense of $2.2 million net of tax, or 12 cents per basic share, as a result of implementing FASB 143 regarding long-lived assets. Accordingly, net income for the comparable 39-week period increased 31.6%, or $6.3 million, from $19.8 million, or $1.03 per basic share, to $26.1 million, or $1.36 per basic share. For the third quarter, net income increased $334,000, or 3.5% from $9.6 million, or 50 cents per basic share, to $9.9 million, or 52 cents per basic share.

Total debt for the company at August 30, 2003 was $69.9 million, or 17.3% of total capital. As a result of the Textilease acquisition, the company's debt increased dramatically from the $69.8 million to approximately $250 million as of the acquisition debt of September 2, 2003. However, the cash flow of the company remains very strong, and we have reduced total debt to $203.8 million at May 29, 2004 or over $46 million since the acquisition. We expect to continue to reduce the debt level significantly over the next couple of years.

The company has moderated it's capital expenditure spending and anticipates capital expenditures to be approximately $33 million in fiscal 2004 as opposed to $39 million in fiscal 2003.

Finally, in our March conference call we provided guidance. We expected fiscal 2004 revenues to be between $710 and $720 million, and basic income per share to be between $1.65 and $1.75 for fiscal 2004. We continue to believe these are reasonable estimates for the balance of the year, and are hopeful we will come in at the high end of these ranges. That completes our prepared remarks, and we would now be pleased to answer any questions you may have.

[Operator Instructions] And our first question comes from the line of Bruce Simpson with William Blair. Please proceed with your question.

Good afternoon, guys.

Good afternoon.

Can we walk through the elements of organic growth, whatever detail you can break out in terms of new businesses and lost business and so forth?

All right. Bruce, I'll do that for you. The new business is running at a 15.5% rate. The lost business is at 7.6%. The adds versus reductions are at a negative 3.2%. Pricing was at 1%. And that gives you your net there at 5.7.

That excludes the acquisition of Textilease.

Okay. And can you give us just sort of any more commentary on the hot issue du jour, of course, what's going on at the work forces in your clients? It seems as if you're still fairly cautious about the pace of head count additions. How do you match that up with the --?

I have a week by week here, Bruce, for the quarter; and, again, I got it separate UniFirst/Textilease, a little different. But for the 13 weeks as a total, the company had four plus weeks, and there were nine negative weeks. Now, the Florida region seemed to take a large impact in April, you know, the snow birds go home, and all of that, so the -- I guess you call it the southeast, the month of April was hit pretty heavy. But that -- you know, we're not seeing continuous positive weeks. That's all I can tell you. And at the Textilease locations, I think it's a combination of -- you know, obviously our losses are a little higher at the five locations. We are starting to change the procedures and, you know, whether we're affecting some of our wares or not (ph) -- we do have a little higher run rate on reductions at Textilease.

Okay. And if I can jump down to the interest line, John, for a moment.

Sure.

Looking out, can you help me in anticipating a little bit where we are in the mark to market of the swap; as well as, now that you've restructured the overall debt package, what kind of interest expense you're anticipating over the next few quarters?

Okay. Well, it's actually going to get relatively simple. The swap will mature in October, so there's one more quarter which will be approximately another $500,000 credit, but really what that does, it just kind of offsets the additional interest we're paying for it, so it kind of offsets, but --. So that'll be another month or two of that, so that will be a 6 or $700,000 credit, but the actual interest expense we're going to be paying, we have $75 million at a fixed rate of 5.27%. We have total borrowings now of slightly over $200 million, and we have 2 or $3 million of miscellaneous debt from acquisitions or whatever, but the bulk of the rest of that is floating rate debt, and our new agreement is at LIBOR over, primarily, 70 basis points; which is about 1% less than our old deal. So if you can tell me what the interest rates will be at LIBOR for the next year, then I'll tell you what that would be. But LIBOR today is around, I think, 1. -- a little over 1.5%, three-month LIBOR. So it's basically going to be $75 million at 5.3%, and the balance at 2.5 to 3%; and then there's some standby fees and letter of credit fees on top of that.

Okay. Appreciate that. I wonder if you could talk a little bit about your operating cost structure. Your operating margin surged to 10%. Congrats on that. Easily the highest of the year so far. Give me some sense if you think that's purely seasonal with the upturn in your business, or how much of that is driven by the efforts that you've applied internally versus what impact Textilease is having on that figure.

Well, I think traditionally as we've said, our fall and spring quarters have been strong, but we're hopeful that we can get into that range going forward. Now, we are a little cautious. We're going to do this consolidation with Richmond, and that's going to -- there's going to be some severance costs and some minor costs, we don't think it's going to be substantial and we think there'll be a clear benefit, but in the fourth quarter there's going to be some cost. But we're certainly hopeful in the longer term that we can get back to 10% plus on the operating line. That's certainly our goal.

Okay. John. And I think the last thing I have, I'll get off, has to do with your expectations of cash flow for the balance of the fiscal year, for the fiscal year in total.

Well, I think we don't anticipate any -- right now it would be unlikely we do an acquisition in the fourth quarter, so I think it will be very much more of the same. I mean the cash flow from the business, the profits and the depreciation offset by capital expenditures. I don't anticipate significant changes in the -- you know, the working capital, you know, payables, receivables, things of that nature, so I would hope that we could generate another 10 to $15 million in cash flow in the fourth quarter, reduce the debt further.

Thanks, guys.

Okay.

Our next question comes from the line of [Jeff Bort] with Robert Baird. Please proceed with your question.

Hi, guys.

Good afternoon.

Just digging a little bit further into the breakdown of organic growth that you gave, can you just clarify, those are for this quarter, correct? Or is that looking over the last 39 months? I mean I guess they add up to 5.7%, so it's for the quarter?

That's the run rate at UniFirst for 39 weeks.

So you're comparing it back to the beginning of the fiscal year?

That is correct.

So that attrition number of 7.6% --

That's correct.

-- can you kind of tell us how the Textilease accounts are doing relative to that number? Is it still, you know, 300 basis points higher than that, or has it gotten any better?

Textilease is running at 9.8.

Okay. So some improvement there.

Yes.

Okay. Can you talk a little bit about the sales force? I think last quarter Dennis had said that both the sales force size and productivity were each off about 4%. How are those trending now?

That is correct, maybe a little stronger than that. But what we're trying to do is we've taken steps, we've done some mailings, some telemarketing, trying to get that productivity back. Summer's a little slower period. But also our head count dropped off, and we've been trying to build sales for back up the last quarter, and we intend to build it further --

Okay.

-- to be ready into '05.

I think before you said your goal was to kind of get back to where you were in terms of sales force size by the end of the year. Are you still on track for that?

No, I think we want to go a little stronger than where we were.

A little stronger?

We want to go up at least 10% over what we were budgeted number of positions last year. Now, we are running under budget right now.

Okay.

And we're trying to get back to that level, you know -- We just don't want to hire for the sake of hiring. They go through a two -- three interview process, and take a caliper test and all of this. But we want to try to hire the right people, as you know, we've probably got the higher turnover of the four companies. We work very hard at that. Even though we've got the higher turnover.

Okay. New account pricing, I think, last quarter Dennis had said was up about 6 to 8% or so, as you've kind of avoided some of the lower margin accounts. How is that trending right now?

I've probably got to concur with what Dennis is saying. I think it's been basically flat this quarter.

Okay.

I haven't seen anything come across, you know within much higher or much lower.

Okay. John, the accelerated amortization of the Textilease garments, is that issue in the past? Or where do we stand there?

Well, at this point they're substantially amortized after nine months. For what we put into that I would say it's more than 75% amortized. If you look at the merchandise in service in the balance sheet, I think it's only -- I think it's $3 million more than it was a year ago.

Right.

I mean, it was $60.5 million at the beginning of the year. We actually -- I think the amount we put into that -- we added 12 million to that from Textilease, of course we're adding with UniFirst all the time, and we have brought that back down to $62 million, so it's really at a very good rate, which bodes well for the future.

Okay. My last question, shifting gears to UniTech, it started to slow this quarter which we -- you know, you kind of hinted at might happen. If you look out for the next -- for the back half of the calendar year and into next year, what is UniTech looking like? Is the Canadian market activity picking up at all, or is that something that's going to be a couple of years out?

The Canadian market, we've basically got the Ontario Hydro account, and that's been coming in. What we're seeing is there's less outages scheduled for, you know, the back half of this year, and going into the quarter. We're going to have less revenue coming out of the UniTech division the next six months. That's what the boys are telling us.

Okay. Thanks.

[Operator Instructions] Our next question comes from the line of Bruce Simpson with William Blair. Please proceed with your question.

Hey, I'm back.

Hi.

Follow up on pricing a little bit. Ron, I assume when you said pricing this quarter was basically flat, you meant flat since the February quarter.

That's correct. I haven't seen -- you know, the only thing that crosses my desk is the stories of the -- you know, the real low ones or somebody has done something a little on the crazy side, and I haven't seen anything this quarter. I think Dennis' comment last quarter, I think things are basically remaining pretty flat.

So if we are roughly up, kind of, high single-digits from a year-over-year level, wherein I think that early '03 was kind of the trough, where is a typical new account pricing going out relative to the peak, before pricing started to slide? Is it -- are we still lower than what you once commanded for a new uniform account?

Well, I guess we look at it a little differently. We look at it -- the way we measure it, Bruce, is the merchandise cost based on the number of weeks of return and, you know, a few years ago, we used to look at when you dressed an account with the emblems and all of that, if you were in that 28 to 1 range, you know, you were in pretty good shape. That number has gone up to as high maybe as a company average last year maybe 32, 33, and we've seen it pull back to maybe around 31. That's the way we measure it internally. I'm sure that whole thing confused you.

No, I think I get that, which would -- if it's consistent, it sort of suggests that unless there's been material change to the garment cost, it sounds like as a rule of thumb maybe new uniform account pricing is 10% less than what it was when you were in 28 to 1 land.

That's probably right.

I think that's about right.

Just as a clarification what he's saying is it's the ratio of the investment in the garments to the weekly revenue, where it was -- took us 28 weeks, you know, to get back the money we spent on the garments, it went up to 32 weeks, and now has pulled back to maybe 31. That's just a short cut way to look at our typical account. Obviously there are other things you want to consider, as far as turnover and what type of customer it is and so forth, but that's the benchmark we use.

Thanks. The last thing that I have is just when you look out over the business -- the overall business conditions, the macro conditions and the shrinkage rates and so forth, can you give us any kind of detail on whether it's varying on either regionally or by kinds of end markets? And then, just generally, are you anticipating that after a short lag period, you think that'll start to improve, since we're seeing good job growth data out of the Bureau of Labor Statistics the last three months?

I'm not sure what you're getting out of the bureau is not political. What we're seeing, Bruce, is the run rate is definitely slow, the four positive weeks give us some hope, and like I said earlier Florida, when the snow birds go home, is mainly a service area, and we took a pretty hard hit in that one area. We have areas that are closer to being positive. You know, the West Coast is a little closer to being positive, and the Florida area is the most negative, and what we call the -- what's Gary’s area? What do you want to call that?

Texas.

The Texas-Louisiana area, where there's no oil is negative for us. Where there's oil in Robert's area is positive for us. That's probably the best answer I can give you without showing you series of numbers.

And it doesn't seem to be too much regionally other than what Ron said. It's pretty much across the board that is similar. Not like when the west belt was doing well and the northeast was doing poorly. It’s across the board.

When you give us that number, Ron, when you see the number of weeks out of 13, is that -- are you comparing on a year-over-year basis either the total number of uniforms wearers --?

No, I'm giving you the adds versus reductions.

That's just a week to week --

A week to week measurement.

Plus or minus.

Plus or minus.

Okay. One week compared to the next, 13 times for the quarter?

That's correct.

Okay. And the last thing, not to put you in kind of a philosophical position, but how do we reconcile that we are seeing, kind of, better job numbers throughout the country, and yet it hasn't yet shown up? Do you think it's a lag, or is there something kind of structurally changing in the nature of the industrial laundry business?

I think a lot of the jobs that are being created are the lower service type jobs that, you know, we don't do a lot of restaurants and things like that. You know, I think if you look at UniFirst SIC codes we're a little different than our competitors. We're probably a little more on the manufacturing side, and we're not seeing that pick up.

Okay. I appreciate the detail. Thanks a lot, guys.

Our next question comes from the line of Jeff Bort from Robert Baird. Please proceed with your question.

Again, not to hammer you guys too much on the add stops, but maybe if we slice it a little different way, you kind of indicate that April in Florida had a big negative impact. If you look at it excluding that, can you give us any sense of what add stops would have been? Was it that big of an impact?

They still would have been negative.

Okay.

I guess that's probably the best term I can give you without giving the actual numbers.

Okay. I guess just looking at the four positive weeks versus the nine weeks, was there any trend if there? Did the four positive weeks come at the end?

They have come at the end. The last three weeks of May were positive.

Okay. Any insight into June so far?

I don't think we have it.

I don't have it with me in front of me. I got them, but I don't have them in front of me.

Okay. Thanks again, guys.

Our next question comes from the line of Mike Werner with Kennedy Capital. Please proceed with your question.

Good afternoon.

Good afternoon.

I wanted to address one item which is more of a -- little bit more higher level in terms of when you -- the acquisition of Textilease has certainly improved your revenues, but your -- but am I understanding the correct -- the strategy behind how the earnings are going to rebound, the initial impact -- the initial impact was to cause a disconnect between the growth in revenues versus operating or, I guess, net income; and then as the transition takes more of a hold, starting, you know, next year, and the year after, you should see a reversal in terms of you should see more -- higher earnings growth versus revenues? Is that -- could you elaborate a little bit more on that?

Well, yes, I mean, I think that's essentially how we see it. I mean, I think what we -- we have -- and it's getting harder to tell, quite frankly, because as we integrate Textilease, it's harder to carve out what's Textilease and what isn't Textilease. But I think it's our view that in the near term, the additional profits or contribution generated by Textilease has about offset the additional amortization and interest costs we've had. So it's been kind of a wash, but as we go forward, we hope that we will get more -- you know, it will increase the profits, and it won't be a wash, it'll be a positive.

Okay.

But I think it has been relatively neutral this year. I think the growth in our profits this year have really come from the core operations as opposed to the impact of Textilease.

Okay. And there was a commentary about your cash flow, I think you may have made for maybe the next quarter or two, or maybe for the final quarter, you thought that there may be -- what was it, 10 to 12 million of cash flow to pay down debt available? Is that what your commentary was?

I think -- yes, I mean, it's in that range. Basically our depreciation and amortization is exceeding our reinvestment in capital, and so for the most part, net income to the extent it's cash, and for the most part it does become cash, is available to reduce debt.

Okay. On a -- going forward, then, would you -- is that your main focus, is to use, you know, additional -- your, I guess, extra cash flow to pay down debt? Would that be one of your main focuses going forward here over the next --?

Well, yes, however, we do have a -- if attractive acquisitions come along, we'd certainly consider that. So, I mean, we effectively -- any additional cash we have we're using to pay down the debt, and if we need more, we're borrowing a little bit more, but that's -- absent other uses, that's where the cash goes, yes.

Are there other places out there that you think are --?

Acquisitions or?

Yes.

Pardon?

On the acquisition side, is there anything else that's interesting to you out there?

Well, we haven't been as aggressive this year as perhaps we've been in prior years, but we still have our ear to the ground, and if anything comes along, we certainly still would consider it.

Okay. Is there a target that you may have set to have your debt at, assuming nothing else crosses your plate -- to be at in terms of a percentage of total cap, or absolute dollar amount by the end of next fiscal year or beyond that?

I don't think we have any hard rules of thumb. I think that we feel the nature of this industry can support a relatively high debt level, so we're really not uncomfortable having debt equal to or greater than equity. But I think over the longer term, the company has been relatively conservative, and kept debt as maybe one-third of total capital, somewhere in that range, but we don't have a hard and fast rule.

How was your DSO and inventory turn this quarter? Were you comfortable with those, or do you need to get those to a --?

Well we'd like to do a let better and get our inventory down. We acquired a fair amount of inventory as part of the Textilease acquisition, and we had to shut down a manufacturing facility they had, but we're not -- we don't think that it's way off the mark. We're never happy.

Okay. As a whole, how are the -- how does the equipment look and the plants at the Textilease operations? Are those -- do they need improvement? You mentioned that you're going to be spending less capital this year versus last year, just kind of curious if that --?

Well, as a general rule, and Ron probably should speak to this more than myself, but one of the reasons Textilease was attractive to us is they had very nice facilities with modern equipment. Want to add to that, Ron?

No, I think what John is telling you is right on. As we decide which plants to push together and shove around, we may have to buy a little bit of plant equipment to handle some capacity, but overall, their plants were in very decent shape.

Part of our rational in selling the linen business is what they had done is they put these big flat ironers in several of their plants, and they really kind of screwed up the flow, and it's a little bit more expensive product to process, so part of our rationale is to pull those flat ironers out and to maybe streamline the operation so that we can put more throughput through their plant.

I see. Also, you mentioned -- I think, Ron, you mentioned that you're -- can you remind me who your target clientele are, if they're not restaurants or whatever? You do serve --

The industry is founded basically around the automotive industry -- the automotive service industry, you know, we're probably 17 or 20% in that range, I don't have the number in front of me. We're basically in the 20s -- low 20s in the manufacturing area and, as you well know, manufacturing's been moving off, so forth. And then it just trickles on down, transportation and service industries. You know, the plumber, the electrician, and so forth. But we have not -- you know, I think we have not seen anything in the manufacturing side, you know, steel is still a struggle. We do a lot of steel through the rust belt area.

Are you talking about actually -- are you talking about manufacturing the uniforms, or --?

No, no, no steel industry.

Okay.

As you well know. And I think we do some food industry, that's probably picked up a little bit but, you know, we're just pretty well all over the board. We just haven't seen the pick up, and I'm not sure that -- you know guys watch numbers better than I do -- where these jobs are being created. If they're all being created at McDonald's, we're not going to be able go get any wearers. We don't service that type of business. We are probably the more industrial laundry than some of our competitors. You know, our strategy has been the garment, and, you know, we invested a large amount money into a distribution center and manufacturing plants in Mexico, and we push and promote, you know, image and identity in garments and businesses. And that's our forte. We have not chased the restaurant industry at all.

I thought the steel industry was fairly robust right now. Maybe I'm wrong.

Talk to my Pittsburgh manager.

Okay.

It's not right now in that area. I can tell you that.

Maybe overseas, and not here.

Yes, overseas, exactly.

Okay. That's all I have for right now. Thank you.

Very good.

[Operator Instructions] There does not appear to be any further questions at this time.

Well, I want to thank everybody for listening in. We're certainly confident for the next quarter, and we're looking forward to 2005 to continue the integration of Textilease. We're working very hard to try to get our sales effort back on-track the way it should be. I'm sure we're going to be making more changes in that area, but I really appreciate you all coming to listen to us, and thank you very much.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.