G&K Services, Inc. ( GKSR)

F1Q2011 Earnings Call Transcript

November 2, 2010 11:00 am ET


Shayn Carlson – Director, IR

Doug Milroy – CEO

Jeff Wright – EVP and CFO


Andrew Steinerman – J.P. Morgan

Chris McGinnis – Sidoti & Company

Alek Gasiel – Barrington Research



Good morning. My name is Philip, and I will be your conference operator today. At this time, I would like to welcome everyone to the G&K Services fiscal 2011 first 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) Thank you. Mr. Carlson, you may begin the conference.

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 2011 first 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 first quarter results, we will open the call for 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 to not 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 for the fiscal year ended July 3rd, 2010. A replay of this call will be available starting today at approximately 1:00 p.m. Central Time, continuing through December 2nd. You may access the replay by visiting the Investor Relations section of our Web site.

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

Doug Milroy

Thanks, Shayn. Good morning, everyone. Thanks for calling in today. As always, we appreciate your interest in our company. As has become my practice, today, I'd like to touch on three things, recap our first quarter and talk a little bit about the trends we see on the business; briefly remind you of our game plan, I think everybody's got that clear in their heads by now; but I'd touch on it briefly, and then, provide a little update on our progress with our game plan.

So if you look at the first quarter, we reported revenue of $200 million versus $208 million in the prior year. Previously, we disclosed an accounting change that added about $4 million. So if you exclude that accounting change, revenue was more like $196 million versus $208 million.

On the earnings side, we reported $0.49 versus $0.18 in the prior year. Again, the accounting change added in this quarter, it added $0.14. You'll recall a prior year charge for some cost reduction activities last year subtracted $0.04. So if you're trying to get to more apples and apples, it's – comparable earnings would be $0.35 against $0.22, or a 59% increase year-over-year in earnings.

Jeff will, as always, take you through the details in a couple of minutes. What I'd like to do is just step back from those quarter numbers and talk about the trend a little bit. If you look at revenue, and we talk on a sequential basis, take out foreign exchange, take out divestitures, Q1 was down only slightly from Q4, $196 million versus $198 in the prior quarter. That's our fifth consecutive quarter of stabilizing rental revenue, or essentially flat. So in other words, we have largely stopped the multi-year decline that we've been seeing in our rental revenue.

At the same time, direct purchase was down just slightly sequentially. So I think when you look at those trends, it's very significant that, in short, we can see real growth right around the corner. If we talk then about it in terms of growth rate, and you look at rental organic growth rate for the quarter, was negative 3.5%. That's up from a negative14% same quarter prior year, or it's up from negative 6.25% sequentially, which again is our third quarter of consecutive improvement in our rental organic growth rate after eight quarters of decline. So we're continuing improving trends on the revenue side.

If you'll look at margins, again, you see an improving story for the quarter. We reported adjusted operating margins of 7.2%. That's almost 200 basis points of year-over-year improvement, 50 basis points of sequential improvement, our fifth quarter of establishing a new positive OI trend line since we introduced our game plan five quarters ago.

And then last, in our last conference call, we started talking about or 10/10 [ph] goals. So we'd like to add a brief discussion of returns in this call and in future ones. If you'll look at our Q1 return on invested capital, it was 4.9%. Now that's essentially flat with 5% last year Q1. But obviously, that's going to trend up a little slower because that includes trailing four quarters of income. So if however you did choose to annualize the first quarter just to get a sense of what it looks like, this quarter, annualized, would be 5.4%, same quarter prior year, annualized would be 4% return. So in whichever way you choose to look at it again, it's moving clearly in the right direction.

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