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Executives

Douglas Milroy - Chief Executive Officer

Jeff Wright - Senior Vice President and Chief Financial Officer

Shayn Carlson - Director of Investor Relations

Analysts

John Healy - North Coast Research

Andrea Wirth - Robert W. Baird

Scott Schneeberger - Oppenheimer

Andrew Steinerman - JPMorgan

Mike Hamilton - RBC Dain Rauscher

G&K Services Inc. (GKSR) F1Q10 Earnings Call October 27, 2009 11:00 AM ET

Operator

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

Thank you Mr. Carlson, you may begin your 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 2010 first quarter results. With me today is Doug Milroy, our Chief Executive Officer and Jeff Right, our Executive Vice President and Chief Financial Officer.

After discussion of first quarter results, we will open the call for any questions. Before we begin, all statements made on the call concerning our intentions, expectations or predictions about future results or events are forward-looking statements within the meaning of the private securities reform Act of 1995.

These statements reflect our current expectations or beliefs and are subject to risks and uncertainties that 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. 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 in the future finance 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 standard time, continuing through November 27th. You may access the replay by visiting the investor relations section of our website. At this time, I’ll turn the call over to Doug.

Douglas Milroy

Thanks Shayn and thanks to all of you for calling in today, we sincerely appreciate your interest in our companies. Today, I am going to focus on three main things; I would like to briefly recap the first quarter. I would like to remind you of the key elements of our game plan that we laid out last quarter, and then we want to give you a few details of our progress against that plan.

But before I jump into that, I would like to step back a little bit and describe two elements of how I want to handle these calls, so I set a clear expectation. The first expectation I would like to clarify is about the repetitiveness of the format. As I just alluded to, we’ve developed a simple clear game plan for our company or at least simple to describe, and what you’ll see in our calls on a go forward basis is a very steady rhythm of, here’s our game plan, here’s our progress against it and ultimately of course what matters is here’s the results we are achieving and so the expectation I want to set is don’t expect to hear about new and different every quarter.

Don’t expect anything that resembles flavor of the month, or in this case flavor of the quarter. I in fact think that that’s a significant management challenge to have a clear game plan and to consistently stick with it or what Deming called a constancy of purpose. I think is a real key to making money, you’ll see it reflected in how we run the business and you’ll see it reflected in how we walk through these conference calls.

The second clear expectation I would like to set is around sharing the details about running our business. I know that you want detail, especially speaking to our analyst community and in the last call, I expressed concerns about the competitive nature of that detail and so in short, I am not going to be able to give you as much detail as you want but I’ll give you as much as possible. So, I wanted to lay out a particular guideline that I think will help us both.

The closer the activity, the closer the initiative, the closer the changes we are making are to the customer, the more competitive I feel that information is, and as a result the more tightly we’ll hold those details. So, in the end, we will walk that balance with you as best as I can which I trust you understand. So having said that, let’s get into it. For the first quarter, our revenues were $208 million, down from $245 million in the same quarter for the prior year.

Within these results, there is some positive news; we’ve seen some employment stabilization. Jeff will describe some of the details around that a little bit later and if you look at the numbers, you’ll see that it’s the least sequential decline we’ve had since these employment levels began their steep decline or in another words, a sequential decline of just a little north of 2%.

On the earnings side, we reported as you saw $0.18 a share, $0.22 a share, a few add back, $0.04 for severance expenses. Here too we see some positive news, it’s the first uptick in our OI margins since again the shedding of jobs in this economy began, the 70 basis point uptick and as we said in the press release, and Jeff will describe a little more later, we expect slight further improvement in the second quarter and importantly, that’s entirely consistent with what we’ve laid out as our focus. Earning our right to grow, the focus seemed foremost on profitability.

So, well a quarter or two is clearly not a trend, it is also clearly a start and we’ll take it, and also our cash flow remains strong. So Jeff will take you through those details in just a minute.

The next thing I would like to do is reiterate our game plan, I’ve continued to spend a lot of time in the field, time with our customers and time with frontline employees and every visit to the field reinforces the same thing, which is our game plan is dead on the mark for where we need to take the company. I shared with you last time the four key elements; I think they are worth recapping in a little bit of detail today.

The first is redoubling our focus on customer satisfaction. Our customer requirements are pretty clear, pretty straightforward and we already have a very high level of customer service, as we’ve said we have a 175,000 customers, I don’t know what better testimonial there is, to the high level of customer satisfaction we provide. Nonetheless, what we are talking about is taking that to a whole new level.

In any company I’ve been, and this is not just a G&K comment, in any company I’ve been in, it’s amazingly easy to get distracted by your internal challenges and when I talk about taking it to a whole new level, it’s about reminding ourselves every day, what does the customer need and how do we best satisfy those needs, and then ensuring that we line up every element of our company with those needs, because ultimately high customer satisfaction will drive high topline revenue.

The second key element of our game plan is driving a relentless focus on day-to-day execution or the basic blocking and tackling of the business. If you think about what we do on a daily basis, we have more than a million wears, it’s a lot of uniforms, it’s a lot of transactions, it’s a lot of details and it introduces a lot of complexity into a business like ours and some of that complexity is absolutely inherent in our business model, but some I am convinced we’ve introduced over time and better execution is about stripping out that complexity.

The third element is increasing our focus on cost management. This is a truism of running a business well, but particularly in the economic times, we find ourselves in, it’s about having a very, very sharp focus on the must halves versus the nice to halves for a business and be very clear about what’s the value added activity for our customer and what’s not and where it’s not value added, working hard to strip it all because when you strip out the activity the associated cost come with it.

The last element we have described in our game plan is addressing our under performing locations. We have as you know just north of a 170 locations and by definition you are going to have a spectrum of profitability across them, and we are working hard to address the bottom hand of that spectrum and therein particular ensuring in those businesses we earn our right to growth.

So as we said, we thought it was worth stepping back those are the four key elements of our game plan. I believe it provides a simple clear foundation for improving the financial performance of our company. The last thing I would like to do before I turn this over to Jeff is, we thought that providing you some specific examples of how we are executing that game plan would add some meat to the discussion. So let me take you through some.

First let me take you through a couple of examples on cost management. The first one I want to describe is and we alluded to this in our press release. We fundamentally realigned our field structure and reduced our corporate overhead and I want to be very clear, this is not just about cost management, it’s about moving resources and decisions closer to the customer, which is entirely consistent with our number one objective on customer focus.

Specifically, we reduced our regional infrastructure both offices and personnel. We reduced our corporate staff and importantly, our corporate staff at the executive officer team of basically right sizing our leadership team for the realities of today’s business size. I also think it’s important to point out from this particular restructuring effort; we exempted the front line employees. Now there we continue as we’ve described in the past to scale on a day-to-day basis to the needs of the market place but specifically it lies outside the scope of these recent actions we talked. So that's one example.

Another example is that we eliminated or reduced certain annual or long-term incentive programs and we modified some non-core benefit programs as well. Again this was a stepping back and evaluating local market pay where we compete for labor evaluating competitive pay for the business services sector. We consider the economic environment we find ourselves in and our view of it going forward and we considered our own financial performance and the gap we are working to close and we determine that some reductions were necessary.

At the same time, we made some reductions however, we made some changes to exactly how our bonus system is structured, which will ensure that they remain motivational and tightens the link to business performance. So, those are a couple of examples in cost management and well, we are not going to disclose an exact number, and the net of all of what I just described is clearly material. It will begin to show up in Q2. On a long run basis depending on exactly how those changes play out, we would be talking about a 100, 150 maybe even 200 basis points of operating margin improvement.

Now having said that, I would not be in a hurry to run out and adjust any models until we see more top line stability. Let me give you a couple of examples of the fourth element of our game plan as well. The fourth element as you recall is addressing under performance in some locations. It is not a one size fits all.

So I want to give you a couple of examples. We have a small unprofitable business that we divested in the quarter. We looked at it, its low market share, it would require an enormous amount of effort and intention and investment to fix it, and I don’t think it would balance out with the result, so we made the difficult decision to divest it.

If I give you another example, we have taken divestitures around two of our Linen operations, as you know flat linen tends towards lower operating margins in those divestments not just shutting low margin business, but they allow us to focus more of our capacity on our core industrial market.

A third example I think is an important one because there is nothing to do with divestment, that can’t always be the answer. We looked at operations in a large metro area where we felt there was a significant opportunity for improvement and in fact enacted a broad series of changes to the management structure, to the route management structure, to how we run the routes and other changes. The net of all we believe will have a material effect on that particular operation.

So I thought it was useful to just walk you through a couple of examples. Clearly in each case we would look for strong year-to-year numbers, and also I hope the examples illustrate that as we work to address the bottom end of our spectrum, it’s not a one size fits all.

The last example I want to give you is maybe the most important. It has nothing to do with addressing the bottom end of the spectrum, but I want to make sure you don’t walk away with a sense that this is all about hunkering down or all about cost cutting because clearly growth is the lifeblood of any company.

In the quarter we took in a $2 million expansion decision in one of our plans, that in fact was a pretty straightforward decision to make, it’s a growth market, the team there is out of capacity, that team has had a strong history of top line growth and good profitability and it was a pretty quick decision to say, yup, we have got to ensure we have got adequate capacity to meet the needs of our customers in that local market.

As far as we put it that was the team that had clearly earned its right to grow, and I think it’s an important example to share with you of our willingness to very quickly make the necessary investments to continue to drive the top line of our business. So, let me recap the comments we have made so far. Game plan remains unchanged. We just thought it would be useful to give you some very specific examples, it would add some color commentary to the discussion, and most importantly, help us share and convey our confidence to you for the path that we are on.

Now I am going to ask Jeff to take you through the financial details, and then Jeff and I will be happy to answer any questions you may have.

Jeff Wright

Thanks Doug and good morning everyone. This morning I will cover three areas in more detail. First, I will review our first quarter financial performance. Then I will provide some perspective on a few areas to give you some more detail on that financial performance and finally, I will provide some directional insight for the fiscal 2010 second quarter.

To start, I will provide an overview of our first quarter financial performance. For the quarter revenue totaled $208.1 million that compares to revenue of $245.2 million in the prior year period. Revenue continues to be impacted by difficult economic and employment conditions, lower direct sale volume and the impact of a weak Canadian dollar.

For the first quarter, the rental organic revenue growth rate was approximately negative 14%. This reflects the continued deterioration in customer employment levels, increased customer financial difficulties, lower pricing and a decrease in new account sales.

First quarter direct sale revenue was $12.5 million compared to $16.1 million in the prior year period. Direct sale volume was impacted by weak overall economic conditions and a non-renewal as we previously disclosed of one larger customer.

As Doug mentioned, customer employment levels have begun to improve slightly and our rental revenue decline has moderated in the past few months. On a sequential basis, after adjusting for foreign currency translation and divestitures, rental revenue is down approximately $5 million in the first quarter compared to the fourth quarter of fiscal 2009.

This compares to a sequential decline in rental revenue of over $12 million last quarter, and over $15 million in our fiscal 2009 third quarter. So, the decline in rental revenue to clearly moderating, which is encouraging, a key driver of the moderating revenue decline is customer employment levels. For example, our add quick metrics, which measures the change in our existing customers employment levels improved for the second consecutive quarter.

While we are still experiencing a net reduction of wears in our customer base this is an early positive sign that the revenue decline is moderating. On another front our pricing metric measures the cumulative effect of pricing activity over the last four quarters.

As we stated last quarter, we are not going to provide specifics around pricing. However, as you would expect during an economic downturn pricing is more competitive than normal. Pricing was more competitive than normal in the third and fourth quarter of fiscal 2009, but improved sequentially in the first quarter. This is another early sign of stabilizing revenue.

And finally, as our new business continues to be driven by a solid number of no program wins. This is a good sign that our market is resilient and continues to grow as businesses value the benefits of uniform and facility services programs.

First quarter earnings adjusted as Doug described were $0.22 per diluted share and compared to adjusted earnings of $0.50 per diluted share in the prior year period. Adjusted earnings per diluted share benefited from a reduction in production, selling and administrative expenses as a result of lower staffing levels, efficient utilization of merchandise and lower energy cost.

While one quarter doesn’t make a trend, our adjusted operating margin improved by 70 basis points sequentially. Operating margin continues to be impacted by a reduction in fixed cost absorption due to lower rental and direct sale revenue. Current year earnings also benefited slightly from a lower effective tax rate and a small reduction in share count, which were offset by a slight increase in interest expense.

As part of our new game plan, we have taken swift and decisive actions to fundamentally lower our cost structure. As Doug highlighted, we have restructured and reduced staffing at our corporate headquarters, realigned our regional structure and reduced to eliminate a certain management incentive and benefit programs. These actions included a significant reduction officer level personnel.

Our staffing at corporate had just gotten too heavy. The changes also included a complete elimination of our regional officers to move resources closer to the customer. These actions protect frontline employees who service our customers, move decisions closer to the customer and lower our cost structure. They support our redoubled focus on customers concentrate efforts to improve our blocking and tackling and demonstrate our commitments to run lean.

We also reduced to eliminate at certain management employee benefit plans. One of the plans impacted was the long term equity incentive program where we reduced the number of employees participating in the program and also reduced the annual grant amounts. These changes will eventually have a fairly sizeable impact on the income statement, however, because these amounts or expense to the P&L over at 3 to 5 year vesting time frame the income statement impact is not immediate.

As Doug mentioned earlier, these changes could drive a 100 to 200 basis point improvement in operating margin; however, we are advising caution in building these improvements into projections until we see further revenue stabilization. In addition, we are addressing under performing businesses. To reiterate what Doug said earlier we have divested one small on profitable operation, divested a non-core piece of linen business in another market, and made several operational changes to a major metro market location.

These operating changes are consistent with our game plan and focused on earning our right to grow. Despite the economic pressure to revenue on earnings, we continued to generate solid cash flow. For the quarter cash flow from operations was $10.2 million, and free cash flow was $6.7 million. It’s worth noting that cash flow tends to be the lowest during our fiscal first quarter due to primary to the pay out of our annual incentive compensation programs.

We expect to continue to generate strong cash flow for the balance of the fiscal year. We continue to utilize our strong cash flow to pay down debt and fund our quarterly dividend, which we recently increased for the fourth consecutive year. Debt net of cash was down $61.9 million as compared to the first quarter of last year. As such, our financial stability and flexibility remains strong.

Now moving to the future, as we disclosed last quarter we will not be providing specific revenue and earnings guidance for the foreseeable future and also consistent with the last quarter, we will provide directional input to help the investment community assess our near term performance. As stated in our press release this morning, we expect second quarter revenue to be consistent with first quarter revenue. While economic and employment conditions remain difficult we are encouraged to see some signs of stabilization. In addition, our direct sale business will benefit from our annual outer wear promotion.

From a profitability standpoint, we expect second quarter operating income margin and earnings per diluted share to improve slightly from first quarter results due to the recent restructuring of our corporate and regional organizations and the location profitability actions we have implemented. In addition, we expect the more normalized effective tax rate in the second quarter.

As Doug described, our new game plan has been communicated and embraced by the team. Importantly, we are beginning to see early positive results and look forward to reporting our progress in the quarters ahead.

So that concludes our prepared remarks and we would be glad to take your questions at this time.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from John Healy - North Coast Research.

John Healy - North Coast Research

Kind of the game plan as you look at locations and all of the more detail, any color you could provide us on as you look at the spectrum of locations, how many that you feel are okay today, how many of you have got a game plan and then trying to fix those locations, and how many markets that you think are more challenged and just maybe give a little bit of color behind that?

Douglas Milroy

John we missed the first part of your question it got cut off, but I think I got the substance of it you are asking about the numbers around the under performing locations, is that the substance of the question?

John Healy - North Coast Research

Exactly

Douglas Milroy

Okay. No I would say at this point, we don’t want to disclose that, we have described it as a spectrum of profitability and we are working at the lower end of that, and I don’t think we should talk about the details of exactly what that means or where it is. I guess, the only other color commentary here I would add is, you probably always have a spectrum of profitability and we will probably always be focused on the lower end as well as, looking at things we can do in other businesses as well, but even as we move that lower end up, we will remain focused on it.

John Healy - North Coast Research

Jeff I was wondering if you could give us just run through the numbers real quick for us on, maybe work days per quarter or maybe how those might compare to last year’s so we could try to think about just maybe modeling your business from a per day revenue generating standpoint?

Jeff Wright

John, I would have to be honest with you, I don’t have a work days per quarter in front of me, but I would just remind you that we are on a 52 week convention, where there is 13 weeks in every quarter, and less by chance the holiday, we would end up on one side or the other, the number of work days is usually the same but so, I just remind you on, when we are on that 52 week convention with 13 weeks in every quarter, the number of work days is usually consistent, but again, I haven’t looked at it exactly, but I think it’s consistent.

John Healy - North Coast Research

I guess the reason I was asking was I wasn’t sure of the way the holidays were falling this, this upcoming quarter if that would impact kind of a comparison standpoint, and I guess we should take a further look at that then.

Jeff Wright

Yes, and again I don’t have it right in front of me, so I can't speak to it right now.

John Healy - North Coast Research

Jeff you mentioned the tax rate would be more normalized as we go through the year, I mean, are we still talking in kind of that 39%, 40% type level, is that how we should interpret those remarks?

Jeff Wright

Yes, I think that’s a fair assessment, I know that our tax rate has been jumping around a bit due to some unusual charges these last number of quarters, this quarter that in which we have the same last quarter, we’ve got some stock options actually that expired without value, and so there is a deferred tax asset that needs to be written off, and that’s effecting our rate, making it higher for the quarter, because that’s a specific event this quarter. I think that rate’s going to come back down closer to that 39% to 40% it might be in the low 40’s, but it should be closer to a normalized rate for the second quarter.

Operator

Your next question comes from Andrea Wirth - Robert W. Baird.

Andrea Wirth - Robert W. Baird

Wondering if you guys could first talk a little bit about your margins, I believe you had been generally actually expecting margin fixed line a bit sequentially, now actually to see a nice improvement, just wondering if you could talk a little bit about is this, since your cost initiative is coming in little bit faster than you had originally expected or is it the environment just wanted to get a better gauge of kind of what was the main driver there?

Douglas Milroy

I think Andrea, it’s sum of all the above, it's sum of the we took the bulk of that cost actions, we described we took early in the quarter. So, we probably got a little bit of benefit from them in the quarter, but it is also, and as we said, we want to be very clear, one quarter does not make a trend, but it is also beginning to see results from the new game plan, and by that I mean, the game plan is about earning our right to grow, are focused foremost on profitability.

So, we anticipated we would see all eye to begin to return first. So, it’s some of the cost reduction items we took, it’s some of the addressing, some of the lower profit locations, and making some fairly rapid changes there, but it is also inherent in kind of every element of how we are running the business, which is just ensuring we’ve got to focus on profitability.

So you are going to see it show up in the second element of the game plan better day to day execution, and you are going to see it showing up in the first element of the game plan, customer satisfaction, through a little higher sequential retention of customers. So, it’s really all of the above, there is not a single driver I would point to.

Andrea Wirth - Robert W. Baird

Then similarly along those lines pricing you mentioned that it was actually a little bit better sequentially, again is that due to the environment or is that more you essentially getting your own sales force I guess a little bit more cleaned up and how you are actually going on pricing, pricing new business or renewals essentially just trying to get a sense of, what’s driving that as well?

Douglas Milroy

Well, as we said last quarter, and I think it’s important we stick to it, the details of pricing are the most closely guarded element of competitive information that gets discussed in these calls, so I’m going to let it suffice to say that it is sum of both the elements that you described.

Andrea Wirth - Robert W. Baird

Then on the direct sales side, it sounds like there was a major non renewals, did that impact the entire quarter, meaning what we is that the full impact in this quarter or well we actually see a little bit more of an impact because it happened partially through the quarter, when we get into 2Q?

Jeff Wright

No, Andrea this is Jeff, it effected the entire quarter, I don’t think there is more to come on that issue it effected of the entire quarter and just I want to reiterate, we did previously disclose that we were losing that customer in a previous call, but we had a full quarter’s impact this quarter.

Andrea Wirth - Robert W. Baird

Have you disclosed the amount of that impact?

Jeff Wright

We have not and wouldn’t plan on doing that to get down to a customer specific level of revenue, so no we haven’t.

Andrea Wirth - Robert W. Baird

Just a final question on merchandised cost, sounds like you had a little bit better utilization there, is that more function of better inventory management, or you actually being able to maybe reuse governance a little bit more, because existing accounts have improved?

Douglas Milroy

It’s clearly both and when we look at the second element of our game plan and describe better day to day execution, better utilization of garments and circulation would be a good example of what we are focused on, when we talk about better day to day execution and as you just noted, you are starting to see a show up in the margins.

Operator

Your next question comes from Scott Schneeberger - Oppenheimer.

Scott Schneeberger - Oppenheimer

With regard to divestures of some of the non-core businesses and some of the changes at other existing locations, How are you shaking it with regard to capacity utilization right now, and let’s say you have a flat revenue line from here going forward, just as a hypothetical, how much improvement will we see with regard to capacity utilization on a go forward basis, with the changes you’ve just made and how many more are there to come, thanks?

Jeff Wright

I would say that the short answer is it’s not going to be a material change to capacity utilization. The divestitures we’ve described are very small, not enough to move the needle, capacity utilization has the name to know, it’s just partly about the physical capacity of the facility, but it’s also about how we are choosing to operate that facility in terms of shifts and hours and manning levels and so forth, and that will continue to moderate based on what our top line is doing, but the remediation actions we are taking on lower performing businesses will not have a material change on capacity utilization.

Scott Schneeberger - Oppenheimer

Is there any plans to further restructure plans or locations to work toward improve that or do you have the platform you want, you just need to see the topline growth now?

Jeff Wright

In our game plan, we’ve been clear that addressing low profit locations is an ongoing element of the game plan. We purposefully chose today to give you examples that spoke to divestiture as well as the examples that didn't illustrate divestiture won’t always be the answer. Now having said that, divestitures, acquisitions aren’t things we comment on, on our prospective basis.

We’ll report them as they occur. I think it’s the last part of our question that the most important one to come around you, which is clearly that, those activities will continue, but the focus as you just described is about foremost being focused on the top line and as I described.

Anything close to the customer is what we are going to hold the details up most closely, but if you think about activities and focused around the customer that are aimed at driving topline revenue, it’s almost an inverse correlation to how much we plan to talk about it, but sufficed to say it is unequivocally our number one focus is that first element of the game plan driving customer satisfaction because customer satisfaction directly drives profitable revenue growth. So, it’s the last part of your question that will be the source of the most significant improvement going forward.

Scott Schneeberger - Oppenheimer

Then with regard to this, and I am not calling it guidance, but indication of what might be expected for the December quarter with regard to the top line, was that just for rental or is that overall and could you remind us of the seasonality that directs sales line, thanks.

Douglas Milroy

Sure, the directional input was meant to be overall so that on a total of consolidated revenue basis, we are expecting revenue to be roughly consistent from Q1 to Q2 and within that, because of the annual outer wear promotion and so forth, we would expect, you know direct sale to be up a little bit, a few million and rental may be down just a little bit as that continues to moderate.

Operator

Your next question comes from Andrew Steinerman - JPMorgan.

Andrew Steinerman - JPMorgan

Could you talk about the restructuring charge and just kind of break it down for us where we find it in terms of on the gross margin line versus the selling admissions in line, administration line just so that we can pull it out.

Jeff Wright

This is Jeff, I don’t know that I am ready to pull it out of each of the individual line items, suffice to say that there is a meaningful impact on both sides of that equation, you know significant both personnel reductions and benefit plan changes that affected both the gross margin line and the SG&A line.

Andrew Steinerman - JPMorgan

Jeff, could you give us what energy as a percentage of revenues were in the first quarter? I think it was 4.1 in the fourth quarter.

Jeff Wright

Did you say percentage of total revenue or percentage of rental revenue?

Andrew Steinerman - JPMorgan

Total revenue.

Jeff Wright

Yes, let me just capture it here just for a second, hold on. It’s about 45 right on the button.

Andrew Steinerman - JPMorgan

Right, so that’s barely changed from last quarter sequentially right?

Jeff Wright

Yes, it hasn’t changed sequentially a lot, but it has improved, you know upwards of a point if you compare year over year, so it’s been a nice improvement on the year over year and a not a lot of change sequentially.

Andrew Steinerman - JPMorgan

Got it. Could you just give a little more comment on add quit, you said that just kind of repeat your comments, you said improve but still, just repeat your comments on the add quit ratio, what has improved in add quit and over what timeframe?

Jeff Wright

Sure, I think I made a comment on add quit that now the last two quarters sequentially the add quit metric has gotten better, and again that’s the measurement of the number of additional employees that are being added to our customers wearing uniforms and the number that have been reduced from the customer employment levels, it’s still a net negative number meaning the quits are greater than the adds.

But if you compare where we are at today and what the first quarter results were compared to last winter in our, for instance our second and third quarters. We are about half of the level of losses. So, the level of net loss of wears has been about cut in half from that time.

Andrew Steinerman - JPMorgan

Great and do you mean that sequentially or year-over-year? When you say add quit are you talking about year-over-year add quit have gotten less worse than year-over-year in the fourth quarter or do you mean the actual level of add quits in the first quarter compared sequentially to the fourth quarter?

Jeff Wright

Yes, my specific comment was the add quits got better sequentially, the last two quarters now consecutively. So the fourth quarter of fiscal ’09 was better than the third quarter and the first of fiscal ’10 was better than the fourth quarter of ’09.

Operator

Your final question comes from Mike Hamilton - RBC.

Mike Hamilton - RBC Dain Rauscher

Thanks for all the examples. Historically, one of the reasons for build out of locations was national account side. How are you thinking about national accounts, what are you seeing and how are you trying to balance things on where you go on the decisions on your planned activity?

Jeff Wright

It's kind of a three-part question, the national accounts is absolutely an important element of our business. It continues to be in the neighborhood of 15% of our total revenue. It continues to be a team of focus and effort that we want to invest in and grow and develop. So that would be the first thing.

Second, it is a key element of any divestiture decision or evaluation. It’s a key element of it and with the small changes we have made so far, we have not impacted our ability materially to serve national account customers, but it’s absolutely on the radar screen when we look at what are the levers for improving poor profit locations.

Mike Hamilton - RBC Dain Rauscher

Thanks. Jeff you are obviously getting fair swing to a tailwind on currency as we go into second quarter. What’s your thinking on Canadian currency in the level of picture you have given us?

Jeff Wright

I was going to flip to the page that kind of details out the currency impacts for me, but on a year-over-year basis, still in Q1 this year to Q1 last year it was still negative and revenue was hurt to the tune of about $2 million.

On a sequential basis, Q4 to Q1 it actually turned a bit positive, so it’s kind of going the different direction and by the way when I offered the $5 million reduction of rental revenue sequentially from Q4 to Q1, I was already adjusting for foreign currency, but it did provide a little positive lift, and I expect that that should be further positive at least based on where the currency rate is today, I think last I looked it was mid 90 something like that.

So, I think it will be a continued slight lift in Q2 and then on a year-over-year basis that should also be providing some lift on a year-over-year basis as well in Q2.

Mike Hamilton - RBC Dain Rauscher

Thanks. Then final question, again coming back to direct and the lost customer, did that customer query any material seasonality?

Jeff Wright

No.

Operator

(Operator instructions) At this time there are no further questions.

Douglas Milroy

Then we will wrap up the call. I would end today where I started, which is first of all thank you all for calling in today. We appreciate your interest in our company. What I hope you have heard today is we are clearly well on our way with our new game plan. Redoubling our focus on customer satisfaction, driving a relentless focus on day-to-day execution, increasing our focus on cost management and addressing our under performing locations.

Those are the four key elements of our game plan. We laid them out last quarter, we talked about them this quarter. I can assure you we will talk about them next quarter and I believe the progress we are making with that game plan boards well for better results ahead and we look forward to updating you on those results in January. Thank you very much.

Operator

This concludes today’s conference call. You may now disconnect.

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