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Executives

Shayn Carlson - Director of Investor Relations

Richard L. Marcantonio - Chairman of the Board, Chief Executive Officer

Jeffrey L. Wright - Chief Financial Officer, Senior Vice President

Analysts

[John Heely] - FTN Midwest Securities Corp.

Scott Schneeberger - Oppenheimer & Co.

Michael Hamilton - RBC Dain Rauscher

Michel Morin - Merrill Lynch

Theodor Kundtz – Needham

Ashwin Shirvaikar – Citigroup Global Markets

Andrea Wirth – Robert W. Baird & Co.

G&K Services, Inc. (GKSR) F4Q08 Earnings Call August 12, 2008 11:00 AM ET

Operator

Welcome to your G&K Services fourth quarter fiscal 2008 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Shayn Carlson, Director of Investor Relations.

Shayn Carlson

Thank you for joining us to discuss G&K’s fiscal 2008 fourth quarter and full-year results. Once we’ve completed our prepared remarks we’ll open the call for questions. Joining me today on the call is Rick Marcantonio, Chairman and Chief Executive Officer, and Jeff Wright, Senior Vice President and Chief Financial Officer.

Before I turn the call over to Rick, I’d like to remind everyone that this call may contain forward-looking statements within the meaning federal securities laws including statements concerning business strategies and their intended results and similar statements concerning anticipated future events and expectations that are not historical facts. These forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in the press release distributed this morning reflect management’s best judgment at this time and all such statements are subject to numerous risks and uncertainties which could cause actual results to differ materially from those expressed in or implied by the statements provided. Additional information concerning potential factors that could affect our future financial results are included in the company’s annual report and from time to time in the company’s filings with the SEC.

A replay of this call will be available starting today at approximately 2:00 PM Eastern Standard Time through September 11. You may access the replay by visiting the Investor Relations section of our website.

At this time I’d like to turn the call over to Rick Marcantonio.

Richard L. Marcantonio

Welcome to our fiscal 2008 fourth quarter and full-year results conference call. Before I provide highlights for the fiscal year, I’d like to mention that Jeff and I are joining you today from New York City. This morning G&K opened the NASDAQ stock market to celebrate achieving $1 billion in annual revenue, another significant milestone we’ve accomplished since introducing our new strategic vision four years ago. What is really exciting is that we brought a few members of the G&K team with us to help capture this very special day.

To start, we reported strong fiscal 2008 results this morning. For the fiscal year revenue totaled just over $1 billion up 7.8% over the prior year driven by rental organic growth, revenue contributions from acquisitions, and the benefit of foreign currency translation. Despite higher energy costs and a difficult economy, we also delivered a 50 basis point operating margin improvement in fiscal 2008 driven from leverage by overall revenue growth and the benefit from productivity initiatives. Earnings totaled $2.27 per diluted share a 12.4% increase over the prior year driven by 14.1% improvement in operating income partially offset by a higher effective tax rate. When adjusting for a comparable effective tax rate, earnings per diluted share increased 20.7%. In addition, we generated $103.1 million of operating cash flow a record level for the company and an increase of 28.2% from the prior year.

Now let me briefly outline our fourth quarter performance. First, total revenue for the fourth quarter was $25.2 million which met expectations and increased 4.9% over the prior year period. For the quarter, the increase in revenue was driven by positive rental organic growth driven by solid new account sales, route sales, and pricing. Revenue from acquisitions and the benefit of foreign currency translation also contributed to revenue growth. From an earnings perspective we drove earnings that exceeded expectations and our guidance and totaled $0.55 per diluted share. Fourth quarter earnings per share were driven by leverage from overall rental growth, savings from productivity initiatives, and the accretive benefit of continued share repurchase activity. Higher-than-expected earnings were pressured by increased energy costs, product input prices, soft economic conditions, and a higher tax rate. While compared on an equivalent effective tax basis, fourth quarter earnings per diluted share increased 5.7%. Overall we’re pleased to report another strong fiscal year and solid fourth quarter revenue results.

With this as a financial overview, I’ll now take a few minutes to provide some additional insight into a couple of areas. After that, Jeff will take you through a detailed review of our financial results.

To start, I’ll review the progress we’ve achieved in driving new business from our field sales organization. Let me remind you that this is an area we’ve been investing heavily in over the past four years. Let me get more specific for a moment. Since 2004 we’ve strengthened our sales leadership team, expanded our sales force by over 25%, provided our sales reps with new exclusive customer segmented solutions, and more recently have equipped our sellers with laptops and a leading sales automation system to enhance their overall success. As a result of our investment and focus in this area, weekly new account sales written in fiscal 2008 were up almost 20% over the prior year.

Let me provide some additional detail on the sales automation investment we’ve been making. As I reported last quarter we’ve been deploying the sales automation system throughout our sales force during the past year. In fact, as we speak the last group of field sales reps are being trained on the new system. Importantly, the successful implementation of this new sales tool is being completed ahead of schedule and we have captured the office savings that we planned of approximately 50 sales and administrative positions. As you may recall this new sales technology platform will help our sales reps better identify, track and manage their opportunities and activities driving even higher sales levels of productivity. The earlier results indicate that we’re seeing sales reps close larger deals and build a growing pipeline of potential new business. Obviously this will help us generate even greater sales productivity. Overall we’re pleased with the continued strong performance of our field sales organization.

Now let me take a minute to highlight some impressive results from national accounts. Our national account sales team delivered another outstanding year. For the year our national account business grew by nearly 20%. During the year we drove a significant increase in new national account business by signing over 40 new national accounts, more than double the accounts signed in the prior year. In addition, it’s important to know that we renewed close to 95% of our existing national account customers that were up for renewal during the year. Not only did we renew the business, we also expanded the relationship with many of these customers. As you might expect I’m especially pleased with our performance in this area. During the quarter we added a record amount of national account weekly revenue. This included signing a number of premier household name companies in multiple industries like consumer products, waste services, transportation, restaurants, specialty contractors, and oil services to name just a few. Again, outstanding results and terrific momentum from our growing national account business. As we said before we’ve increased our focus and investment in national accounts to drive higher levels of organic growth and leverage plant and route infrastructure to increase profitability.

Shifting for a moment to the service side of our business, we also continue to drive increasing route sales. Expanding of the customer relationship by cross selling more products and services remains a significant opportunity to drive higher levels of organic growth. I’m pleased to report that for the year route sales were at record levels and increased at a double-digit rate compared to fiscal 2007. In addition, on a per service rep basis route sales are up approximately 15% as compared to fiscal 2004. Great progress over the last four years.

With that said, we continue to develop and measure our customer service teams to further increase the revenue per stop, leverage our existing cost structure, and drive higher operating margins. Overall we continue to generate new business and as a result of the efforts of our sales and service organizations new business that continues to provide positive momentum in a challenging environment, an environment where the economy is impacting employment levels in many industries and creating financial difficulties for many businesses across North America. Jeff will provide more details on how the economy is impacting our customers in just a few minutes.

Now I’d like to highlight some of the results from our investments in marketing. As you’ve heard me describe before, we continue to make investments in innovative marketing programs and strategic alliances to provide innovative customer solutions that enhance image and safety in our customers’ work place. Importantly, being increasingly innovative as a company is a key component of the long-term vision we introduced four years ago. Since that time we’ve launched programs that are the first of their kind in the industry, like ProSura and BioSmart as two examples. Specific to ProSura we recently announced the issuance of two patents covering this program an exciting development for our company. Clearly the receipt of these two patents further demonstrates our commitment to innovative solutions that provide long-term competitive advantage. More importantly, our investments in programs like ProSura continue to drive new business.

For the fiscal year our revenue to customers in the food industry is up over 10% despite the fact that employment in the food manufacturing industry is down over 30,000 jobs in the last year, further evidence of the value of our programs for customers in the food industry. Our success with the food industry has been further enhanced as a result of BioSmart. As you may recall G&K is the exclusive provider of BioSmart garments and towels to the food industry. BioSmart continues to gain awareness in our industry generating an increased number of sales leads from customers of all sizes from grocery stores to national restaurant chains to large food manufacturing and distribution companies. Specific to the grocer and casual dining customers our revenue with the food retail market is up over 15% for the fiscal year. While we’re pleased with this strong result we’re not taking our foot off the pedal. As a result we’re adding to our BioSmart product offering to better meet the needs of the large and growing retail food market and we’ve recently introduced BioSmart in our market-leading Canadian business.

As I’ve said before, our investment in marketing serves as a cornerstone to differentiate G&K from the competition, expand our market, and provide our sellers with exclusive innovative offerings that solve our customers’ unique needs.

Also as you may recall last June we announced our strategic agreement with Dockers San Francisco. This new relationship marks another key strategic step towards achieving our vision and further demonstrates our commitment to innovative solutions. When we first announced this exciting new relationship we communicated that we would roll out Dockers brand in a phased approach starting by offering Dockers apparel to our Lion Uniform Group customers. As discussed last quarter, we have now begun the initial rollout of Dockers brand to pilot markets through our rental customer base. This rollout which will take place over the fiscal year involves investments in training, marketing collaterals, distribution and working capital. It’s important to note our direct purchase strategy as a significant enhancement in the way we serve our customers’ needs. With over 175,000 rental customers this represents a big market opportunity for us. We want to fulfill all the image needs of our customers not just the image needs offered through our rental program. While we’re in the early innings of this strategic initiative we’re making excellent progress. I will continue to report our success in this area as we move through fiscal 2009.

As I mentioned earlier it’s almost 10,000 people that make G&K an outstanding company. I’d like to express my sincere appreciation to each and every member of the G&K team for driving a strong fiscal year. It’s our people who make the difference and our people who are G&K to our customers. Thanks again for an outstanding year, a fiscal year when we achieved record results in a number of areas and surpassed the $1 billion revenue mark, a significant milestone that we identified along our strategic path and a milestone that’s now in our rearview mirror as we continue to move this company to even greater success.

Lastly, as Chairman of G&K’s Board of Directors, I’d like to welcome a new member to our Board of Directors, Lynn Crump-Caine. Lynn is the CEO of Outside In Consulting an organizational performance strategy development consulting firm she founded in 2004 that assists leaders in driving business results. Prior to founding Outside In Lynn worked for McDonalds Corporation for more than 30 years where she held several executive positions including Executive Vice President of Worldwide Operations and Restaurant Systems, Executive Vice President of US Rental Systems, and Senior Vice President of US Operations. Her extensive business background, executive leadership, and multi-location operating experience will add significant value to G&K.

I’d also like to take the opportunity to thank Michael Allen who is retiring from our Board for his years of devoted service. Michael has been a director since 2002 and has provided valuable contributions and insight to our company.

Before I turn the call over to Jeff, I’d like to repeat that I’m pleased with our strong fiscal year results. Despite an economic environment that continues to be challenging we drove a solid increase in revenue, improved operating margins, achieved record earnings and cash flow. By any measure it’s clear that G&K had a strong year.

With that I’d now like to turn the call over to Jeff.

Jeffrey L. Wright

As Rick highlighted earlier, we’re pleased to report strong fiscal 2008 and solid fourth quarter results. For the fiscal year total revenue was $1 billion 2.4 million a 7.8% increase from previous year revenue of $929.5 million. The increase in revenue was driven by rental organic growth, strong revenue contribution from acquisitions, and the benefit of foreign currency translation.

Fiscal 2008 earnings were a record $2.27 per diluted share a 12.4% increase from $2.02 per diluted share in the prior fiscal year. The increase in earnings per diluted share was driven by a 14.1% improvement in operating income as a result of leverage from revenue growth, improved productivity, and lower merchandise costs. The growth in operating income was achieved despite continued economic softness, higher energy costs, lower contribution from direct sales, and expenses related to systems implementation activities. Fiscal 2008 earnings per diluted share were also impacted by a higher effective tax rate of 38.5% as compared to the prior year tax rate of 34.0%. The lower effective tax rate resulted in a $0.14 per diluted share benefit in the prior year. When comparing earnings on a tax equivalent basis, earnings per diluted share were up 20.7% over fiscal 2007.

In summary, 2008 financial results reflect record revenue, record earnings, and record cash flow. We also posted a half point of operating margin improvement. A very solid year in a tough economic environment.

Shifting to the fourth quarter, total revenue was $252.2 million a 4.9% increase over prior year revenue of $240.4 million. The increase in fourth quarter revenue was driven by rental organic growth, revenue contribution from acquisitions, and the benefit of foreign currency translation. During the quarter organic rental growth was approximately 2.0% as a result of strong gains and new account sales, an increase in route sales, and pricing. While we’re pleased to generate solid new business, expanded relationships with existing customers and the benefits from pricing’s positive momentum was offset by an increase in economic-driven customer attrition and a reduction in employment levels in certain industries.

For example, rental organic growth continues to be impacted by customers experiencing financial difficulties. The economy is causing some customers to cut back on items, delay their uniform decision, or simply go out of business. We are also seeing deterioration in the Add Quick metric which tracks changes in the number of employees wearing uniforms at our customers. In just the last year we’ve seen significant job losses in the specialty trade, general building contractors, printing and publishing, transportation equipment, automotive, and wholesale trade of durable goods. These sectors as reported by the Department of Labor are down almost 900,000 jobs on a year-over-year basis. For G&K we’re down about 8,500 wearers in these segments compared to last year. Clearly slowness in overall economic conditions is offsetting some of our sales gains.

Earnings for the fourth quarter were $0.55 per diluted share which exceeded expectations by $0.03 per share. Fourth quarter earnings per diluted share were driven by leverage from overall revenue growth, savings from productivity initiatives, and the accretive benefit of continued share repurchase activity. These benefits were offset by higher energy costs, increased product input prices, increased interest expense associated with the higher debt levels from acquisitions and share repurchases, and a higher effective tax rate. Prior year fourth quarter earnings of $0.57 per diluted share reflected a lower effective tax rate of 34.6%. The lower effective tax rate resulted in a $0.05 per diluted share benefit in the prior year period. Again, when comparing earnings on a tax adjusted basis earnings per diluted share increased 5.7% as compared to the prior year period.

With these comments as an overview, let me walk you through a more detailed financial review. Rental revenue in the fourth quarter was $234.5 million a 7% increase over the prior year of $219.1 million. This increase was driven by rental organic growth, strong revenue contribution from acquisitions, and the benefit of foreign currency translation. Direct sale revenue was $17.7 million compared to $21.3 million last year. Direct sale volume compared to the year ago period was impacted by weakness in certain customer end markets and soft overall economic conditions. Also as we mentioned last quarter we did not renew the contract of one large customer.

Rental gross margin for the quarter were 32.0% compared to 33.0% in the prior year period. The change in gross margin was a result of increased production and delivery costs associated with higher energy prices and costs associated with environmental compliance activities. Direct sale gross margin was 27.3% compared to 30.0% in the prior year period as a result of expenses associated with systems implementation issues and the impact of fixed cost absorption from lower direct sales volume.

Selling and administrative expenses in the quarter were 23.2% of consolidated revenue down from 23.6% in the prior year period. During the quarter we continued to gain positive leverage from overall revenue growth and productivity initiatives which were partially offset by ongoing systems implementation activities.

Let me give you a quick update on our investment in a new information system at Lion Uniform Group. As you may recall this new system handles all aspects of this business including e-commerce, order entry, customer service, and distribution. Last quarter we reported that we were beginning to stabilize the system that went live in December. We continued the process of stabilizing the system in the fourth quarter. Employees are progressing up the learning curve on this new system. While we still incurred additional expense in the fourth quarter as we stabilized the system, the expense level was substantially reduced from third quarter levels.

Now moving back to the detailed financial review, as stated in our press release depreciation and amortization was previously disclosed separately on the income statement. Depreciation expense has now been reclassified to the cost of rental operations, cost of direct sales, and selling and administrative expense. Amortization expense has been reclassified to selling and administrative expense. All prior year amounts have also been adjusted to reflect this new presentation. We made this change to reflect a more complete picture of our cost of rental, cost of direct sales, and selling and administrative line items. There is no impact on current period or previously reported income from operations or net income. Of course depreciation and amortization remains on the cash flow statement. Depreciation in the fourth quarter was $8.75 million and amortization was $2.7 million.

For the fourth quarter operating margins were 8.5% as compared to 9.2% in the prior year period. The change in operating margin was a result of lower gross margins due to record energy costs, costs associated with environmental compliance, lower direct sale contribution, and expenses related to systems implementation activities. Gross energy costs alone accounted for a 75 basis point impact to operating margins. It’s important to know that the benefit of our gasoline hedging program helped offset the pressure of higher energy costs by approximately 35 basis points, so energy costs went up 40 basis points after the benefit of hedging. Our hedging program helped us partially control this extremely volatile cost.

We’ve mentioned improved employee productivity on a number of occasions. One metric we track internally is revenue generated per employee. Because of continued productivity gains this metric has improved by over 12% from two years ago and increased by approximately 5% from a year ago.

Continuing down the income statement, interest expense for the quarter was $3.8 million up $0.4 million over the same period last year. The increase was driven by higher average outstanding borrowings as compared to the prior year period. Our higher debt balance is a result of the acquisitions we’ve completed over the last year and our investment to date and buying back stock under our share repurchase program.

For the fourth quarter our effective tax rate was 39.7% compared to an unusually low rate of 34.6% last year. The prior year fourth quarter rate was lower than normal due to reductions in tax reserves that were no longer needed.

Now let me turn to our capital structure and cash flow which remain extremely strong. Total debt of $288.8 million was up approximately $73.5 million compared to the prior year period. Total shareholder equity stands at $557.5 million and debt as a percent of total capitalization was 34.1%. Cash flow from operations for the year ended June 28, 2008 increased significantly to $103.1 million up 28.2% compared to the prior year period. This strong cash flow production was driven by a 14.1% increase in operating income and our continued focus on controlling working capital investments needed to support the growth in the business.

Capital expenditures were $27.1 million for the year compared to $31.5 million in the prior year. We expect capital expenditures to remain in the $30 million to $35 million range for fiscal 2009. It is important to note that we are considering building plants in two markets. We have no made final decisions on these projects however. If we decide to move forward, our capital spending run rate would increase in the second half of the fiscal year.

For fiscal 2008 free cash flow defined as cash flow from operations less capital expenditures increased significantly to $76.0 million up 55.5% from the prior year period. Free cash flow per diluted share increased to $3.75 per diluted share up from $2.28 per diluted share in the prior year period. This significant level of free cash flow also outpaced our book earnings per share of $2.27. We expect to continue to generate strong free cash flow in fiscal 2009.

As previously disclosed, the company initiated a share repurchase program to purchase up to $100 million of the company’s outstanding common stock. During the fourth quarter the company announced a $75 million expansion of the share repurchase program. For fiscal 2008 the company purchased approximately 2.5 million shares of common stock including 0.7 million shares during the fourth quarter. Since inception of the share repurchase program through the end of the fiscal year, the company has repurchased approximately 2.7 million shares or approximately 12.6% of the total shares outstanding at the beginning of the program at a cost of approximately $101 million.

Clearly our strong balance sheet and excellent cash flow generation provides the capacity to pursue further strategic acquisitions, fund organic growth opportunities, and repurchase our shares.

Looking forward we expect revenue in the first quarter of fiscal 2009 to be in the range of $249 million to $252 million. This revenue guidance includes solid new account sales, route sales and increased pricing offset by the impact of economic conditions on customer retention, employment levels, and a weaker Canadian dollar exchange rate. The Canadian dollar has weakened up fairly significantly just in the last few weeks.

As for earnings we’re expecting diluted earnings per share to be in the range of $0.53 to $0.57 for the first quarter. Our first quarter earnings reflect continued efficiencies gained from revenue growth, productivity savings from ongoing operational initiatives, and the impact of our share repurchase program. In addition, the earnings guidance includes ongoing investments, higher energy costs, expenses associated with systems implementation activities, and ongoing acquisition and integration costs.

Our guidance also reflects an effective tax rate for the first quarter of 39% to 40%.

As you think about fiscal 2009 quarterly performance, it’s important to note that the revenue and earnings progression can move up and down during the year. As examples you may recall that the second quarter is historically a strong quarter due to our annual outerwear promotion and the increase in mag volumes that we normally see given the change in seasons. During the third quarter we typically experience slight margin pressure as a result of the reset of payroll taxes and the impact of annual merit increases for our operating teams that become effective in January.

Again, I’ll repeat that we’re pleased with our strong fiscal year increase in revenue, operating margins, earnings and cash flow.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from John Heely - FTN Midwest Securities Corp.

John Heely - FTN Midwest Securities

I know you don’t give annual guidance but I was hoping you could kind of give some color on organic growth for the rental business, how we should think about it for 2009. Looking at the guidance you give, it kind of implies that organic growth stays close to the 2% range in the first quarter. Do you think that’s a sustainable level that we could see throughout 2009? I know everyone’s crystal ball’s cloudy but I’m trying to understand what’s in your crystal ball.

Richard L. Marcantonio

I’ll take part of that question and I’m going to ask Jeff to give some additional information. First of all, you’re right. Our guidance or our numbers for the first quarter suggest guidance about at the levels we’re at right now in this quarter. What we’ve done frankly within the company is focus on the controllables. We feel that real controllables in our business are our ability to drive new sales to professional sales, our ability to drive route sales increases, and our ability to increase pricing where it’s appropriate. And all those metrics we feel actually very good about where we’re at as a company. As you would probably expect, there are some quit metrics that affect us and I’m going to ask Jeff to give you some guidance on that. Those are the parts that make it somewhat uncontrollable. We’re going to continue to invest the revenue growth. It’s a couple of the quit components that we probably want to give you more visibility to.

Jeffrey L. Wright

Sure. Maybe as just a little bit of color but we mentioned in the prepared comments that we continue to be effected by customers that are having financial difficulty, that are going into bankruptcy or having other financial problems, and our customer losses in the second half of fiscal 2008 compared to the second half of fiscal 2007 are up about 30%. So the number of losses that we’re experiencing with customers due to financial reasons up about 30% second half this year compared to second half last year. And a similar metric, the other one that’s affecting us is the change in employment levels. We know that the employment situation in the US and in Canada has been difficult and again second half this year versus second half last year the net loss of wearers in our customer accounts there is up 44%. So those continue to be pushes against our organic growth metrics and as Rick mentioned earlier we’re going to focus on the controllables. We’re going to continue to drive new account sales through our innovative marketing programs, continue to drive route sales and pricing where appropriate, but we do have some headwinds that we’re fighting.

John Heely - FTN Midwest Securities

A question on the pipeline for new products. It seems like you guys are having great success with some of your ProSura and your BioSmart offerings. Can you kind of talk to maybe what the pipeline looks like for new product introductions in 09 and if that’s something you’re going to continue to push through even despite the economic headwinds?

Richard L. Marcantonio

The pipeline is full. We are conscious about the current economic conditions so we’re watching the investments we make but I think the biggest noticeable increase from new effort this year will be focused on rolling out Dockers. We plan to roll out Dockers to all our existing customers and have it sold by our route sales teams and as I mentioned we’re just in the early phases, the early pilot markets right now but that will be a major effort going forward. And the early results are quite encouraging. And then you’ll see more segmented marketing programs roll out as the year goes, maybe the later part of this year and early into next year. But the first half of the year we’re really going to focus heavily on the Dockers introduction. It’s a major introduction for our company. It’s a major undertaking. We have to train our entire organization to sell this new product offering and as I said, the early results are very positive.

John Heely - FTN Midwest Securities

I know you guys mentioned that fx and acquisitions added about 5% of rental growth this quarter. Could you break out kind of the split between fx and acquisitions?

Jeffrey L. Wright

I was just noodling these numbers a couple days ago, but our total revenue growth in the fourth quarter was about $1.8 million and so was up about 4.9% and rental organic growth drove again about 2% or about $4.4 million of that. Fx drove revenue up about 1.5% at about $3.6 million. Acquisitions drove growth up about 3% at about $7.5 million. And our direct sale business unfortunately down year-over-year so that’s a negative to the growth rate of about 1.5% or about $3.6 million negative. So those would be the components I think that should add up to the percentage growth rate as well as the dollars.

Operator

Our next question comes from Scott Schneeberger - Oppenheimer & Co.

Scott Schneeberger - Oppenheimer & Co.

Could you give us an update? Rick you mentioned sales automation. It sounds like you wrapped that up. Will there be any incremental cost slide into the fiscal first quarter? You mentioned that you’re still training some folks. Or is the cost impact now behind us with the close of the fiscal year?

Richard L. Marcantonio

Great question. Frankly the cost impact’s behind us. We’re not going to reap the benefit of basically reducing our work force by about approximately 50 people and putting a better tool in their hands. So I look to lower costs as well as higher sales productivity.

Jeffrey L. Wright

And maybe just one thing I could add to that. All the one-time costs, the training costs and travel costs and getting people up to speed, are behind us. Of course we deployed laptops and so forth, so there is some ongoing costs of the hardware and software associated with us, but the one-timers are behind us and now we will enjoy the benefits of both administrative reductions that we’ve made as well as sales productivity which is the real gravy.

Scott Schneeberger - Oppenheimer & Co.

And Rick you in the past have ebbed and flowed your addition of new sales folks as you’ve watched the business move. Could you give us an update on what you’re seeing, what you’re thinking about over the coming year for that?

Richard L. Marcantonio

That’s also a great question. Frankly we probably ended the year a little lower in headcount. We were adding people and we probably ended a little lower than I wanted us to be. You can fully expect us to be adding to our headcount throughout 2009 specifically in the first quarter our forecasts have adding additional personnel. Again we’re focused on the controllable side of the revenue equation whether it be professional sales by introducing innovative programs, adding headcount, the route sales business, or pricing as well as acquisitions. And those are the areas that we need to continue to drive to leverage the cost structure we have in place. I don’t see any reason to hold back there.

Scott Schneeberger - Oppenheimer & Co.

Jeff, you mentioned that much better sequentially on the systems implementation at Lion fourth quarter versus third quarter. Can you talk a little bit about going forward when you see that wrapping? Are we pretty much there? How do you see it over the next coming quarters?

Jeffrey L. Wright

In terms of the Lion systems implementation we do see the employees progressing up the learning curve nicely and the costs have ramped down nicely. The area that we’re really focused on now is continuing to bolster our customer relationships and working on getting the right kinds of information in front of our customers at all times. So it’s gone nicely in terms of the progression up the learning curve; it’s not been easy as we’ve kind of moved through the winter and spring time here. But it’s pretty well stable and I don’t anticipate a lot of costs moving forward.

Operator

Our next question comes from Michael Hamilton - RBC Dain Rauscher.

Michael Hamilton - RBC Dain Rauscher

I was wondering if you could isolate any one-timers in here. Did we see anything unusual in receivable write-offs in the quarter similar to 3Q? And then also anything that you’re able to isolate in terms of expenses related to systems changeovers here?

Jeffrey L. Wright

Mike, in terms of AR I would tell you that we did actually move our accounts receivable reserves up just a little bit but we did not have the kind of write-offs that we experienced in Q3 where I think we had four large customers that went bankrupt or had financial difficulties. So that was significantly pulled back from Q3. We did have expenses; we had the ongoing systems costs at our Lion Uniform Group that was probably on the order of $0.02 to $0.03 a share. Again those I see really abating going forward. And then we had some costs associated with environmental compliance at one of our locations that was higher than normal. That was probably $0.02 per share as well. And then maybe on the positive side we had settlement related to - we had a fire at one of our facilities a couple quarters back and we had a small gain to the tune of $0.02 there. So there’s a few little moving parts but nothing that’s kind of moving the results wildly.

Michael Hamilton - RBC Dain Rauscher

Rick, if you could kind of speak to the big picture as to where you see yourself putting focus with the sales force this coming year and where you see ability to take some of this momentum and continue to build on it?

Richard L. Marcantonio

Well a couple of things. First, we’re going to take advantage of the sales automation tool. As I indicated earlier results look really promising. Obviously we got a terrific payback on it or we would have not made the investment in the first place. But with that said, I really want to continue to add to the sales force. I like the growth we’re getting out of our professional sales whether it be from our field organization or our national accounting. Both of those groups are having terrific years and I want to continue that momentum. So we will forge ahead with that.

Our route sales team, they’re going to be challenged quite a bit this year. We’re going to ask them to grow route sales going forward but we’re also going to ask them to start selling Dockers. The good news is they’re extremely excited about the opportunity to sell Dockers. They now have a complete package to bring in to our customer base. You have to recognize that before they were only allowed to bring in rental solutions. Now they can bring in rental and direct purchase solutions. And as he or she analyzes the customer’s needs, they now have products and services that meet that.

So those will be our primary area focuses for the year. As I mentioned we will introduce some new segments of marketing towards probably the second half of the year. I think our first half is much more focused on the Dockers side. And what we’ll do is we’ll continue to watch closely the, and frankly it’s just watch closely, the Add Quick metrics. Those are things that are much more difficult obviously, almost impossible to control and those are the things that are impacting us on the down side.

I think the only other thing that I would tell you is that we’re still very active in the acquisition part of the business. As a matter of fact we’ve added to that personnel in that department and we’ve brought some new people in and that’s terrific and that will help us continue that activity and we continue to be very active. I can’t tell you exactly when we would add it but acquisition will be in our sights for growth going forward in 2009 as it has been for the last four or five years.

And I think probably to summarize this, we feel that the things that we have put in place are working. We’ve got three or four years now under our belt under the new strategy and the drivers are driving growth and they’re improving the profitability of the business. We’ve got little economic hiccups here and there and we’re just going to have to manage through them but we’re not going to deter from the overall game plan.

Operator

Our next question comes from Michel Morin - Merrill Lynch.

Michel Morin - Merrill Lynch

I’m wondering first on the results amortization was down sharply relative to the last quarter. I assume you’ve anniversaried some items there. Is this a new level that we should expect going forward?

Jeffrey L. Wright

Actually we mentioned that we reclassed depreciation and amortization up into the other line items, number one. And then there was also a small reclass kind of between depreciation and the other line items that affected the quarters. So it looks like Q4 is lower but there’s actually an offsetting entry in cost of rental and I think when we get to release our 10K here in a couple of weeks but we’ll show the restated depreciation numbers for Q1, Q2, Q3, Q4. But as I recall the numbers from Q1, Q2, and Q3 all have been reduced about $300,000 to $400,000. So again there’s been a minor change between depreciation and the cost of rental line item. So the lower run rate that you’re seeing in Q4 I don’t think you should bake that lower run rate in.

Michel Morin - Merrill Lynch

It looks also on your interest expense that you’re also benefiting from decline in interest rate. Can you remind us what percent of debt is at floating rates?

Jeffrey L. Wright

We try to target 50% floating and 50% fixed. When interest rates moved down pretty aggressively, I want to say it was in the February-March timeframe, we put a few more floating to fix swaps in place. So today we may have closer to 60% fixed but it’s kind of that 50/50 target.

Michel Morin - Merrill Lynch

In terms of the guidance, what share count are you assuming?

Jeffrey L. Wright

The share count in the fourth quarter I think should be pretty reflective going forward. Obviously it doesn’t have a full quarter’s worth of the fourth quarter repurchases but the fourth quarter repurchases weren’t super significant, so I’d use the fourth quarter share count maybe down a little bit from there for Q1.

Michel Morin - Merrill Lynch

On the direct sales side you mentioned that there’s one large client that you did not renew. Is that really the primary factor here? Are you still – I think that last quarter you had talked about losing a little bit of sales also from the disruption from the new system and I’m wondering if that’s kind of behind you from that perspective?

Richard L. Marcantonio

Yes, the primary reason why our direct sales business is down for the year is we loss one customer last year which was in our history and obviously that will anniversary. Moving forward we’re still gaining new business and most of the issues related to the implementation of the new IP system are behind us now. Actually, what’s really exciting is we’ve really got everyone much focused on the revenue side of the equation which is really where we want them focused going forward. So, I think it’s best to say most of that’s behind us now.

Operator

Our next question comes from Theodor Kundtz – Needham.

Theodor Kundtz – Needham

A couple of questions, just could you go over the pricing environment that you’re seeing Rick. Then, maybe give us a little more color on what you’re seeing in pricing. And also, you talked about the deteriorating conditions in the [inaudible] side and maybe if you’re seeing any current change from what you saw in the fourth quarter, what are you sort of seeing currently in that area?

Richard L. Marcantonio

Well, first pricing, it depends on which way you want to talk pricing? We’re getting price pressure from a cost standpoint from a number of our suppliers whether it be as it relates to garments or hangers, chemicals, there isn’t anybody that is not knocking at our door asking for some kind of price increase. So, from that standpoint we’re under a lot of pressure there and we’re doing a good job of trying to control that cost in that regard. As it relates to the pricing environment for our products and services, it’s competitive, it continues to be competitive. I don’t think it’s dramatically different from what I’ve seen in the prior quarter. We’ve been able to take some pricing, we’ve been able to pass it on and obviously the energy increases that we’ve all faced has probably I don’t want to say made it easier but at least let people see or they understood some of the pricing that we were all going through so I’d say it allowed us to be able to price not with ease but a slight easier than it has been. With that said, we’re still under the price pressure from the other side from a cost standpoint.

Theodor Kundtz – Needham

I guess the question really is, are you able then to offset the cost increases you’re seeing from your suppliers and also from the fuel side with these price increases? Is it kind of a neutral impact that you’re seeing or is there pressure in your margins?

Richard L. Marcantonio

Well, it is putting pressure on our margins. Even if you’re able to recover, you never recover at the same time you’re incurring the cost so you’re always playing catch up. That’s always one of the issues that we’re faced with. So, that’s way it’s important for us to find things like [inaudible] that we put in a year ago and the sales automation tool this year where we were able to reduce our cost structure by, I think those two initiatives alone took almost 150 people out of our organization. That’s a significant cost reduction for a company like ourselves. We need to kind of keep a lot of pressure on our business to keep looking for opportunities and it’s one of the reasons why I think technology will continue to come in to our business. It’s in our plants, I think it will be in all aspects of our business as a way to control the cost structure going forward. But, it never feels neutral is I guess probably the best way of saying that.

Theodor Kundtz – Needham

Then just a current economic outlook? The economic conditions that you’re seeing, is there any kind of change out there currently? Do you think things have stabilized here or do you think we see a lot of softness coming up?

Jeffrey L. Wright

I think you had specifically had asked around the employment levels and I don’t know that we’ve seen any discernable difference currently in July and early August here compared to the fourth quarter but still a net loss of wears. It’s funny, I was just speaking with the head of our Canadian business the other day and he said there was an article in the Toronto paper there about that in July Ontario loss 41,000 manufacturing jobs in July. So, it’s clearly still there, there’s weakness in the economy and as Rick pointed out, we’re focused on the controllables here and driving our new account sales and [Ralph] sales to help offset that weakness.

Richard L. Marcantonio

I think the only other thing I would add is as the oil prices drop, we’ll have to wait and see what impact it will have on the economy. I mean, one area to no one’s surprise is the automotive industry. That’s obviously a customer base of ours and one that’s affected our employment levels. We’ll have to kind of watch that going forward.

Operator

Our next question comes from Ashwin Shirvaikar – Citigroup Global Markets.

Ashwin Shirvaikar – Citigroup Global Markets

My question is can you build on and grow the cash flow performance in 2009? Are there any one-timer type headwinds that you’re going to face for cash?

Jeffrey L. Wright

I really believe we’ve had some good cash flow years here for a number of years. We had an outstanding year this year but I really believe that we can build on it and I’ll make one caveat to that as I talk about this. I think the company has done a nice job, I’ll give you a couple of examples but our capital spending this year at $27 million and our depreciation I think is like $37 million so there’s a $10 million difference there that’s cash flow that’s being driven above and beyond our kind of operating income level. Then, inventory as well, and by the way I see some more opportunities in inventory but, our inventory balance year-over-year is up like $1 million or $1.5 million but when our business grew at 8%, inventory should have been up about $12 or $13 million but it was only up $1 million so again, there’s another significant increase where we’re not having to add working capital as fast as the business is growing. There’s a lot of attention to it internally, across receivables, across inventory, across capital spending and of course, earnings performance and that’s showing itself I think consistently in our results which we feel good about.

The only caveat again I would make, we mention it in the call, but we are considering some plant building opportunities in a couple of different markets that won’t start until the second half of the year at the earliest and we have not made those decisions yet but, there’s a chance that we could see some heavier capital spending as we kind of get later in the year.

Ashwin Shirvaikar – Citigroup Global Markets

From a sort of product standpoint, is there any way you could take the pressure Bio Smart and sort of apply it to other verticals or do what you’ve done in food services and other verticals?

Jeffrey L. Wright

Actually, we’ve already started doing that. ProSura when we originally introduced it, was primarily for the food processing industry and we recognized that there was an unmet need in the food retail industry whether it be grocery stores or restaurants or the like and that’s how we expanded in to that marketplace. We’re starting to see the exact same thing with Bio Smart right now and while Bio Smart and ProSura aren’t necessarily product offerings that we would bring in to say the automotive industry, I can assure that behind the scenes the investments we’ve been making in marketing and market research have helped us identify segments and product opportunities. What we’re doing is being thoughtful about how we introduce these new segments because it takes money to introduce them. Not only to develop them, whether it be market research or other development costs but, we don’t just roll out the product, we actually train our people to sell these new products and services. I think you’ll see something towards the second half of the year that will be some additional product offerings.

Right now, the biggest thing that we have going, we have a lot of resources tied up, is on the Dockers front and frankly, there’s another example of how we’ve levered Dockers. We started by introducing Dockers in to our line uniform group, we are now introducing it in to our rental organization and from there we’ll level that investment in to our national account team. We really don’t look for solutions that really have one opportunity only, if at all possible.

Sorry to jump in on here but on the D&A, I guess, the new presentation and putting it in on the line, is there any particular reason you’re choosing to do it now or what’s driving that?

Jeffrey L. Wright

I think the, probably, to be honest with, there’s no particular reason. We wanted to do it, I guess at a year end. Makes for a clean cut off at year end and then starting the new year but we actually looked at a lot of different organizations that, while the practices can vary, it appeared to us that most companies tend to reflect it up into the, in our case, the cost of rental, cost of drug sale on SG&A and have it more be a more full presentation, if you will, of the cost of each of those line items, rather than breaking out depreciation separately.

So, obviously, they’ll still continue to be a separate break out on the cash flow statement and we will continue to provide color around the two numbers. Don’t have any issues with that but we decided it was a cleaner presentation on the income statement. Wanted to do it at year end. It’s a clean cut off and provides a more full presentation of the cost of rental, cost of drug sale on SG&A categories.

Ashwin Shirvaikar – Citigroup Global Markets

A couple of housekeeping type stuff, tax rate 39% to 40% for the quarter; is that also good for the full year?

Jeffrey L. Wright

I think it probably is, yes. I would hope that it ended up leaning a little bit more towards the 39% but I think 39% to 40% is probably a good estimate for the year.

Ashwin Shirvaikar – Citigroup Global Markets

And the share count, you said, only a slight down tick from the level we’re at. Is that in spite of the fact that stock’s quite attractive here? Are you not buying back stock aggressively?

Jeffrey L. Wright

I guess we’re only providing guidance for Q1 so I was trying to provide some feedback on Q1 and so with the share repurchases that we made in the fourth quarter and we haven’t disclosed, what the share repurchases were that we made in Q1. But we have, I would anticipate, that the share count will come down somewhat for Q1 and then again, what happens in Q2, Q3, Q4 will be dependent upon our actions moving forward.

Operator

Our next question comes from Andrea Wirth with Robert Baird.

Andrea Wirth – Robert W. Baird & Co.

Just a couple quick questions on the rental gross margin. You had mentioned there was a little environmental increase in this quarter. Just wondered if you could elaborate a little on that charge and then maybe roughly what the impact was from that and if it’s going to continue over the next few quarters or not.

Jeffrey L. Wright

The impact was about, I would quantify it as $0.02 to $0.03 of earnings per share. It actually did relate specifically to one of our locations out on the East Coast. The EPA in that state had some issues with our environmental permitting at one of our facilities and we voluntarily decided to change our operations there and respond to those issues and we’re cooperating fully with the state EPA to get those issues resolved. But it did cost us because these operational changes, it did cost us $0.02 to $0.03 of earnings per share and it’ll have a little bit of impact moving forward but not at that level for Q1 and moving forward.

Andrea Wirth – Robert W. Baird & Co.

And now I guess just since you were only down about 100 basis points in the quarter this year. So are you still getting a pretty decent benefit from improved merchandise cost or is that improvement been lapped now at this point?

Jeffrey L. Wright

No, merchandise costs continue to look good. Obviously, the big downward movement was energy costs that are up so significantly on a year-over-year basis but merchandise costs continue to show a nice improvement and energy costs and the environmental costs were the items that moved downward.

Andrea Wirth – Robert W. Baird & Co.

Now just one last question, on the last call you had mentioned that you were bringing in a few consultants to just go through and evaluate G&K service offering. Just looking for the update on that; I have they completed that process and what are some of the initial thoughts on that overview?

Richard L. Marcantonio

I mentioned it in the last call. We have not completed that process. As a matter of fact, we’ve actually put it on delay given the economic environment. We’re trying to watch the investment areas and while we see it as a big opportunity, long term, we decided to put most of our investments in revenue related growth opportunities and that’s where we’re focusing through the first half of the year, whether it be on the Dockers side for direct purchase or on the growth side for professional sales or route sales.

If there are no more questions, I think we’re going to proceed with my closing comments. This is again, Rick. Thank you for joining us this morning. As I indicated, we’re very pleased with reporting a strong fiscal year. We’re committed to continuing to execute against growth and productivity initiatives while managing the economic environment to generate higher organic growth and drive higher operating margins, earnings and cash flow. We look forward to first quarter results and reporting it to you in late October so with that, have a great day. Thank you.

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