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G&K Services, Inc. (GKSR)

F4Q2010 Earnings Call Transcript

August 17, 2010 11:00 am ET

Executives

Shayn Carlson – Director, IR

Doug Milroy – CEO

Jeff Wright – EVP and CFO

Analysts

John Healy – Northcoast Research

Andrew Steinerman – J.P. Morgan

Chris McGinnis – Sidoti & Company

Mike Hamilton – RBC Wealth Management

Presentation

Operator

Good morning. My name is May and I will be your conference operator today. At this time, I would like to welcome everyone to the G&K Services fiscal 2010 fourth quarter earnings 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. I would now turn the conference over to Mr. Shayn Carlson, Director of Investor Relations. Sir, you may begin.

Shayn Carlson

Good morning. Thank you for joining our call today to discuss fiscal 2010 fourth 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 fourth 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 for 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 September 17. 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, and thank you very much for calling in today. As I always like to note, we appreciate your interest in our company and your taking the time to call in.

Today I’d like to cover three things. First, I’d like to briefly recap the fourth quarter. Then I’d like to take a look back at FY ’10, in part obviously because this is the end of our fiscal year. So it’s appropriate to look back at a full year. But also it’s a full year since we introduced our new game plan. So there too I think it makes sense to step back a little bit. And then third, I’d like to look ahead a little, obviously, to FY ’11, but we would actually like to speak today to longer term goals for the company as well. So I’ll cover those three points in order.

If I turn to the fourth quarter first, for Q4, we reported revenue of $220 million versus $218 million in the prior year’s same period. We reported earnings of $0.61 versus $0.16 in the prior year same period. But I’ve got to tell you there is a lot of moving pieces, as you’ve no doubt picked up from the press release already. To get an accurate picture of the underlying trends in the business, which is what I’m to do formals, I think you need to make a number of adjustments to both revenue and earnings.

Without an accounting change, we need to detail for you a little more. We’ve had some truing up not any new divestiture activity, but some truing up of some of our previous divestiture activity. We obviously had a 53rd week in the year, which fell in this quarter. And then as always, foreign exchange and tax rates. So frankly, this quarter, in particular, I think it’s best to let Jeff detail all those changes for you at once in a few minutes. That way, we only go through it once.

So what I’m going to attempt to do is move past that for the moment and speak to what we see as the underlying trends in the business. First, if you look at the revenues side, when you net all that out, rental organic growth was 6.25% negative for the quarter versus 10.5% in the prior quarter sequentially and versus a negative 11.5% in the prior year’s same quarter. So that’s our second consecutive quarter of improvement in our organic growth rate after eight quarters of decline.

Or if you look at it on a sequential basis, it again is the least sequential decline we’ve seen since North America began shutting jobs sometime ago. We are down about 1% sequentially. So that’s the fourth consecutive quarter of what we describe as stabilizing revenue. So from our vantage point, the quarter clearly feels like progress.

If you look at the earnings side, as I said, we reported $0.61 a share. Jeff is going to take you through the adjustments in a few minutes. But if I jump to – on an adjusted basis, the earnings were $0.36 for the 14-week quarter, which I know because that’s the way we talked about it last quarter when we gave some directional guidance on what we expected. So again, that standard we’d be looking at a year-over-year increase of 33% in EPS.

If to try and get a little more apples-and-apples, you take out the extra week and you try to do a comparison on a 13-week quarter, you would back out $0.03 earnings, it would still be $0.33, which would be a year-over-year improvement of 22%. That’s reflected in an adjusted operating margin of 6.7% or 200 basis points up from prior year when we first initiated our new game plan. So in our mind, the fourth quarter clearly continues to establish a positive OI trend line.

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