Conference Call, 02/02/97: Guest Supply, Inc. Q1 '97

FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

Guest Supply, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GSY)") else Response.Write("(NYSE: GSY)") end if %>
720 US Highway One
North Brunswick, NJ 08902
(908) 246-3011

UNION CITY, CA. (February 2, 1997)/FOOLWIRE/ --- Guest Supply released results for the first fiscal quarter 1997 on January 22nd. Net sales for the first quarter reached a record $47.7 million, an increase of 14% from the $41.7 million posted for Q1 1996. Net income was $1.2 million or $0.17 per share compared to $944,000 or $0.13 per share in the same quarter last year. Their net income for the first quarter was up 29.4% over the prior year and exactly on plan.

SALES BREAKDOWN. First quarter sales were up 14.2% over last year. Sales to hotels, route sales where they call on new customers or sell additional products to existing accounts were up 11%. That was in line with their first quarter plan. Contracted hotel sales to Marriott, Hyatt, and Renaissance were down 6% for the quarter. That is not something that concerns them because they have all of the business by contract and did not lose any. They think it was a function of a light December for the hotels and their ordering pattern. For the first three weeks of January those sales are above plan, however that impacted the overall growth number. Contract manufacturing sales were up 45% over last year. That principally came from Intimate Brands.

GROSS PROFIT. Gross profit dollars were up 16.5% and the gross profit as a percentage of sales was 23.2% versus 22.8% last year. While that is not a major gain, it is the first gain in 5 quarters and they believe it is a trend that is going to continue. They are very pleased and that increase came principally from improved manufacturing efficiencies.

EXPENSE LINES AND RELATED EVENTS. SG&A was 17.8% of sales versus 18% last year. Some of the initiatives that were undertaken in the first quarter were to move their corporate offices. Their lease was up and another building had been sold, so they moved 11 miles south on Route 1. With that as the plan, they shut down on a Friday at 12:30, worked through the weekend, and Monday morning at 8:30 were up taking orders with all computer operations working fine, so that went very smoothly. They also began the move into their new 226,000 square foot warehouse. That is going very well. There were some costs associated with that. Most importantly, they hired more route sales people in the last 5 months than they have hired in the previous 18 months. A lot of that hiring was on the West Coast where they had a low penetration in terms of sales people and they piloted a new training program to try to make them more productive faster. All the indicators are that the training program was successful. Some of those people had reached a broad brek-even within 8 weeks versus the 9 months average previously. As they look at this program, they are going to modify it. If that works well, they will be able to expedite hiring and, therefore, growth. They also began setting up their Greensboro sales and distribution center. This is a new location that will bring them to 14. They set up the offices, racked the warehouse and hired some sales people there and that facility will open February 10th. Those last two items are obviously aimed at future growth and they are delighted with the way they are going.

DEBT AND RECEIVABLES. Total debt was just under $63 million. Bank debt was $30.2 million. Inventory levels were $34 million. Receivables were $28 million and that is a high receivable period because they just finished doing Christmas for Bath & Body Works and Victoria Secret.

SECOND QUARTER OUTLOOK. Looking to the second quarter, they are only 3 weeks into the quarter, but hotel sales in both direct and contract sales are ahead of plan. Again, they had a light December so that could be a shift, but the direct or route sales are particularly strong. Those were on plan in the first quarter, so they are encouraged about what they see. Contract is slightly below plan and that is principally a result of their Procter & Gamble requirement being lower than last year. They still have that business, it's a function of the sales on P&G's body wash starting to flatten out. Bath and Body Works and Victoria Secret in the contract segment are right on plan.

CATALOG. With regard to the catalog, they have also set up a pilot telemarketing program in California and mailed the catalog to 300 hotels who are not currently customers with price lists. They only started this two weeks ago, but they are making sales. They also think that the part of the reason the new sales people are getting up to speed so much faster is the catalog.

NEW WAREHOUSE. The warehouse move is going extremely well. Their plan was to be out of all warehouses and consolidated into the one warehouse by the end of March. If they continue on the present schedule, they will beat that by a month and will be consolidated in one warehouse by the end of February. They are rushing that because there are redundant costs with rent and staff.

HILTON CONTRACT. The business covered by the contract they signed with Hilton last August continues to grow at a good rate and they are on target to manufacture the Ritz Carlton amenity program beginning in March.

MARRIOTT. They have expanded direct distribution to Marriott. Guest Supply does Marriott's personal care amenities and when they expand direct distribution to properties they can sell them other products. Marriott approved that for the Southwest and Guest started that out of their Dallas branch. This arrangement will add to growth.

SALES GROWTH. They are going to continue to add sales people in the second quarter. Without the construction and logistics issues they have been wrestling with for the last 18-24 months, they are really focusing a lot of effort on sales growth. They are very optimistic about 1997 and are off to a good start. Not counting the branch managers who also sell every day and the regional managers who sell management companies, they have just over 100 sales people now.

NEW BUSINESS PROSPECTS. They are in discussions with two potential contract manufacturing customers. They are presently working on two national account pieces of business in hotel that would both be significant. Both are in very early stages, but they like the way the discussions are going.

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