G&K Services Inc. (GKSR)

F3Q10 Earnings Call

April 27, 2010 11:00 AM ET

Executives

Shayn Carlson – Director, IR

Doug Milroy – CEO

Jeff Wright – SVP and CFO

Analysts

John Healy – North Coast Research

Andrea Wirth – Robert Baird

Andrew Steinerman – JPMorgan

Nate Brochmann – William Blair & Company

Chris McGinnis – Sidoti & Company

Mike Hamilton – RBC

Presentation

Operator

Good morning. My name is Ashley and I will be your conference operator today. At this time, I would like to welcome everyone to the G&K Services fiscal 2010 third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions)

Mr. Carlson, you may begin.

Shayn Carlson

Good morning. I am Shayn Carlson, Director of Investor Relations for G&K Services.

Thank you for joining our call today to discuss fiscal 2010 third quarter results. With me today is Doug Milroy, our Chief Executive Officer, and Jeff Wright, our Executive Vice President and Chief Financial Officer. After a discussion of third quarter results, we will open the call for any questions.

Before we begin, all statements made on this call concerning our intentions, expectations, or predictions about future results or events are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements reflect our current expectations or beliefs and are subject to risks and uncertainties that could cause actual results or events to vary from stated expectations, which could be material and adverse. You are cautioned not to place undue reliance on these statements and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Information concerning potential factors that could affect G&K and its future financial results and operating performance are included in our Annual Report on Form 10-K after the fiscal year ended June 27, 2009. A replay of this call will be available starting today at approximately 1 pm Central Time, continuing through May 27. You may access the replay by visiting the Investor Relations section of our Website.

At this time, I will turn the call over to Doug.

Doug Milroy

Thanks Shayn. Good morning everyone. Thanks for calling in today. We appreciate your interest in our company. As this has become my practice, today I am going to cover three things. First, I’d like to briefly recap the quarter; second, remind you of the key elements of our game plan, which is driving our company’s progress and third provide you with an update on the game plan, walk you through some examples and update on progress in a couple of specific areas.

So first the third quarter, for Q3 total revenue was $199 million versus $231 million in the prior period or down about 14%. When you adjust that number for divestiture activity which we have shared with you and foreign exchange, you see the following observations. Rental organic growth was negative 10.5% in the quarter versus negative 14% in the prior quarter. That's our first improvement in rental organic growth rate in nine quarters.

On a sequential basis, it’s the least decline in rental revenue since our employment levels began their significant slide, down just over 1% sequentially. If you look at the earnings side, we reported $0.38 a share which you need to adjust to $0.28 a share to net out the gain on divestiture activity. $0.28 reflects an operating margin of 5.8%.

So when you look at those numbers, I would argue in short the business continues to strengthen. It’s our third consecutive quarter of stabilizing revenue, which is clearly positive progress. Equally clearly it’s not good enough and remains as you would expect an absolute focus for us.

OI margin continues to develop its positive trend line. We are seeing the impact of the overhead reductions that we have taken. We are seeing the impact of other cost reductions we are taking. We are seeing the improvements in our underperforming locations, which I will share in a little more detail in a minute.

So in other words, we are continuing to see improvements that are entirely consistent with our stated focus, earning our right to grow, focusing first and foremost on improved profitability, our profitable growth not just growth. As a result of all that, our cash flow remains strong. We have paid down nearly $80 million of debt in the last 12 months.

Jeff will take you through the financial details in a few minutes as he usually does.

Second I would like to recap our game plan. I am guessing most of the people who follow our company have our new game plan memorized. Frankly, we think that's good. I would ensure you know where we are taking the company and put you in a position to track our progress against that. Nonetheless I would like to recap it very briefly today, as a reminder for those who follow us regularly but also for new investors and new potential investors calling in today.

So let me recap actually two things. I want to recap what the game plan is but again, why does it make sense for us, how did we come to it? Late last summer, as most of you know, we launched a new game plan for our company, it’s got four key elements to it. One, redoubling our focus on customer satisfaction. Now clearly with a 170,000 customers, we already have a very high level of customer satisfaction, redoubling it is ensuring that every single employee’s actions in our activities are aligned with our customer’s needs.

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