Aramark (ARMK) 2005 Q3 法說會逐字稿

Good morning and welcome, ladies and gentlemen to the ARAMARK (indiscernible) Corporation third-quarter 2005 earnings conference call. At this time, I'd like to inform you that this conference is being recorded for rebroadcast and that all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions-and-answers after the presentation. I would now like to turn the call over to Bobbi Chaville, Associate Vice President of Investor Relations. Please proceed, Bobbi.

Thank you and welcome to ARAMARK Corporation's conference call to review the results of our third quarter of fiscal 2005. Here with me today are Joe Neubauer, ARAMARK's Chairman and Chief Executive Officer and Fred Sutherland, our Executive Vice President and Chief Financial Officer. Joe and Fred will present an overview of our third-quarter results and business operations after which there will be an opportunity for phone-in participants to ask questions.

I would like to remind you that any recording or other use or transmission of this audio may not be done without the prior written consent of ARAMARK. When we discuss earnings per share, we're referring to diluted earnings per share. As we discuss the results of the quarter, you may want to refer to the financial statements attached to this morning's press release which can be found on our website at www.ARAMARK.com. In the earnings press release and in today's discussion of results, we mention certain non-GAAP financial measures. The Investor Relations section of the Company's website includes reconciliation of these non-GAAP financial measures to the most comparable GAAP measures as required by SEC rules. Various remarks that we may make in this call relating to matters that are not historical facts including remarks about future expectations, anticipation, beliefs, estimates, plans and prospects constitute forward-looking statements. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties and important factors including those discussed in the risk factors, MD&A, and other sections of our Form 10-K and Form 10-Q. We disclaim any duty to update or revise such forward-looking statements whether as a result of future events or otherwise. I will now turn the program over to Joe Neubauer.

Thank you. Good morning and thank you all for joining us to discuss our 2005 third-quarter results. I'm pleased to say that we reported record sales of $2.8 billion for the third quarter, up 8% from a year-ago quarter. Net income at 71.4 million was up 11% and earnings per share of $0.38 were up 15% compared to the '04 third quarter. If you look at the first nine months of '05, sales were up 8%, again, to a record of $8.2 billion. Net income increased 10% to $196.9 million and earnings per share at $1.04 were up 13% from the first nine months of 2004.

Sales growth for the quarter was solid across all of our U.S. food and support services businesses except for our anticipated slowdown in sports and entertainment. International organic growth was up from last quarter and our uniform rental growth was solid and comparable with the second quarter. I'm pleased with our operating margin improvement this quarter and especially in our U.S. food and support services segment where the second consecutive quarter the margin improved by 30 basis points over prior year's quarter. I'm mostly encouraged that our year-to-date new business volume was up a solid 14% over last year and included several significant new business wins in our corrections, sports and entertainment, education and international operations.

Our clients clearly appreciate our innovative approach to providing customized total solutions that help satisfy customers' needs and preferences. We will continue to look for ways to differentiate our service offerings and deliver value to our clients and to our customers. Our net new business was also up for the quarter and continues with a positive trend. We also continue to see good cross-selling results in many of our businesses from our Mission One initiatives. With that, let me now turn the call over to Fred. Fred.

Thanks, Joe. I'd like to first take you through our consolidated financial performance and then I'll discuss our business segments. As Joe mentioned, third-quarter sales were $2.8 billion which was up 8%. Organic sales growth, which excludes the effect of acquisitions, divestitures and currency translation, was 4%. Operating income increased 9% to $143.9 million. Net income for the third quarter was $71.4 million, up 11% and earnings per share were $0.38, up 15% from the prior year quarter.

Turning to our U.S. food and support services segment, third-quarter sales were $1.8 billion, up 4%. Organic growth was also 4%. The growth was primarily driven by our healthcare and education sectors and was affected by the loss of two baseball clients that we discussed late last year. Third-quarter operating income for the U.S. food and support services segment increased 9% from the year-ago quarter to $97.7 million. The operating margin improved by about 30 basis points to 5.4% and was driven primarily by improvement in our healthcare, education and sports and entertainment businesses.

Now I would like to give a little bit more color on the U.S. food and support services segment starting with business services which includes food and facilities services to business, conference center and corrections clients. The business services sector had mid single digit sales growth in the 2005 third quarter. Continued success of our customer focused marketing initiatives in business services and solid net new sales in our corrections business both grew growth in the quarter. We are pleased to have added the New York Times as a business services client and the Indiana Department of Corrections as our fifth statewide corrections system.

Moving to education. We experienced high single digit sales growth fueled by strong based business growth in both higher education and K through 12. As we continued to benefit from our marketing initiatives, we were also helped somewhat by the timing of the Easter holiday. During the quarter, we added the University of Houston and Lock Haven University as new clients. Sales growth for the healthcare sector was in the mid single digits driven by both solid base business growth and new business. Sports and entertainment sales declined by 7% versus low teens growth in last year's third quarter as continued solid performance at convention centers and our existing stadiums and arenas was more than offset by the anticipated loss of two major league baseball clients, a weaker amphitheater concert schedule and the lingering impact of the NHL lockout. We're very happy that the lockout is over and look forward to next season. However, the uncertainty of fan loyalty and season ticket sales could prevent our hockey business from fully returning to its historical levels of sales and profits for the upcoming season.

We are proud to have added Lincoln Financial Field, home of the NFC champion Philadelphia Eagles, as a new client during the quarter.

Turning now to the international food and support services segment. Third-quarter sales of $594 million were up 25% from the '04 third quarter including a currency translation benefit of about seven percentage points. Organic sales growth was 8% as robust growth in Germany, Chile, Canada, and Spain was offset by a modest decline in the U.K. due to challenging trading conditions and lost business. We added several new international clients in the quarter including GIL Hospital in Korea and Grant MacEwan College in Canada.

Third-quarter operating income in the international segment was up 11% to $21.3 million with currency translation accounting for about five percentage points of the increase. All major countries saw improved profitability in margins with the exception of the U.K. We are continuing to actively address the U.K. business and have confidence in the management team but realize it will take some time to achieve improved results.

Now turning to our uniform business. Third-quarter uniform rental sales of $283 million were up 8% from a year-ago quarter. Organic growth was 5% which is comprised of new business sold of about 13%, about half of those new sales coming from first-time users of rental programs, lost business of about 8% with about 0.25 of the losses coming from customers who simply went out of business, price increases of about 1% and a decline in base of business of about 1%. Operating income increased 8% from the year-ago quarter to $31.3 million due to increased sales, lower garment costs, a gain on the sale of a dormant property offset by higher fuel energy and labor related costs as well as costs incurred from the national rollout to our route reps of our new handheld computers. The resulting margin was comparable to the year-ago quarter.

In the direct marketing segment, third-quarter sales were $100 million, down about 4% from the '04 third quarter. WearGuard-Crest continued to see softness in the quick service restaurant channel and demand for safety products remains somewhat soft. Operating income for the segment was up slightly to $2.6 million. Corporate expenses were $8.9 million, up 9% from the year-ago quarter and this higher spend was primarily due to increased cost related to the issuance of restricted stock units and Sarbanes-Oxley 404 compliance costs. Total debt was $2 billion at quarter end, up slightly from $1.9 billion at the end of fiscal year '04. As you know during the quarter, we issued 250 million of seven-year 5% senior notes that were used primarily to repay maturing debt obligations.

Net capital expenditures for the first nine months of '05 were $214 million, up from $200 million in the year-ago period. Internal cash flow, which we define as net income excluding unusual gains plus non-cash charges such as depreciation and amortization and deferred taxes less net capital expenditures, was $209 million for the first nine months of '05 compared to $218 million in the prior year with the decline due to a lower deferred tax provision which was $25 million lower than last year relating to a change in the tax law that we mentioned last quarter. And otherwise, internal cash flow is essentially growing in line with our business.

ARAMARK repurchased 2 million shares in the third quarter for $52 million. The remaining authorization is $88 million. Our guidance for the year remains essentially unchanged from the outlook we provided last May. We expect to report full-year sales of between 10.9 and $11 billion and full-year diluted earnings per share between $1.52 and $1.55 which is, as we discussed in our last guidance in May, excludes the impact of the second-quarter's real estate gain and international write-off. Now let me turn it back over to Joe.

Let me wrap up by saying that I feel quite positive about our team's third-quarter and year-to-date performance as we continue to execute on our strategy. Our momentum continues to be positive. We are identifying profitable growth opportunities in our businesses around the globe and are focused on delivering value to our clients, customers as well as shareholders. At the same time, we will continue to take a disciplined approach to all of our businesses which balances top line growth, profitability, return on investment and cash flow. While these individual performance measures may vary from quarter to quarter, we're confident that over the longer-term, this approach will maximize shareholder value. We thank you for your continued interest and now we will be happy to take questions. Thank you.

(OPERATOR INSTRUCTIONS). Jonathan Shapiro from Goldman Sachs.

I had two questions. The first question is on labor costs. I know you haven't seen a dramatic spike up in labor costs. I wanted to get your thoughts though on the recent union split and I know the SEIU has targeted you and some of your competitors, not new news, but just wanted to know if you had been sort of seeing any more aggressive tactics from any of the unions.

Well, Jonathan, we are very well aware of the increased union activity in our industries and we have had discussion with the unions about issues here relating to the industry. You also are aware that our business is very localized and conditions vary from location to location and generally, on our employees, the choice is to join a union or not to join a unit. But overall, I would say we haven't seen any significant increases in any cost structure at the moment.

And then wanted to just get an update on the national parks business. I know that was an issue last year. Has that sort of come back to normal and sort of what did you see in the third quarter and how is it shaping up for the summer?

Jonathan, this is Fred. The national parks business had solid performance in the third quarter. It was up year-over-year and generally our parks did well. Lake Powell, as I think you have written actually, has higher water levels than it had a year ago. Although those water levels are still below historic levels.

Okay. I know you guys get a pretty good read into the summer. How is that shaping up so far?

I think we're cautiously optimistic that the parks business will have decent year-over-year performance.

Brandt Sakakeeny from Deutsche Bank.

A couple of questions. On the food margin side, Fred, maybe you can just comment, was the 30 basis points margin improvement, was that a function of just trying to see lower worker's comp and other sort of labor costs or was it a function of sort of greater volume going through and just sort of operating leverage in the business?

Brandt, it's really a function of increases in volume, effective cost control of food costs and labor costs. We have a number of initiatives in the worker's comp area as we have talked about in the past. I think we've also said that those take awhile to roll their way through the system and actually affect your insurance costs. So I would really say it's more the former than the latter.

Great. That's helpful color. And with respect to the uniform business obviously very good growth there. Margins were stable year-over-year. Why haven't we really yet seen the operating leverage kick in there as well as some of the productivity enhancements with the sales force and automation and stuff like that?

I think there we're really seeing both pickups and challenges. So on the pickup side we're seeing improvements in our overall garment costs as we self-manufacture more and we are continuing to get the benefit of that, but we continue to be buffeted by cost increases in other areas. For example, our overall energy costs which would be both natural gas and fuel as a percentage of sales were up about 50 basis points on a year-over-year basis. And obviously that is a negative. And we continue to see some disproportionate increases in our labor-related costs.

Just final question, it looks like operating cash flow is up about 17% in the nine months if I strip out the sale of the -- of the receivables. What type of growth should we expect in your year-end operating cash flow? Should that be around your EBIT growth or are there going to be some changes that are going to drive that higher than EBIT growth?

We see our overall cash flow pretty much being in line with the profit growth of the company.

Michael Schneider with Robert W. Baird.

I'm wondering if, Fred, you could spend a minute just on the healthcare segment in particular in domestic food and services where, say, the growth rate has now slowed, I guess, two consecutive quarters, and I think that even accounts for the stripping and the corrections business out of that segment. Any color you can give us on why the growth rates are decelerating there? Is it a change in the pricing strategy of the business or something else?

Mike, the growth a year ago, you might remember, was extraordinarily high. It was in the midteens and I think we commented at the time that that, while we were very pleased with the growth we really didn't see it as a long-term reasonable sustainable growth level in the business. And it was driven, as you know, by in particular by signing four or five large comprehensive multiservice accounts. So that is going to vary really quarter by quarter.

In addition we also will have over time mixed changes between accounts where we will take all the employees under our payroll and as a result our revenues will be higher because we have all the employees directly and accounts where we don't take the employees under our payroll, so think of them a little bit more as management fee accounts, which are profitable but don't generate the same revenue level relative to the total managed volume.

So this year we are actually seeing a little bit more of that mix shifting towards new business where the employees are not directly on our payroll and that has an impact on the reported growth rate as well but it doesn't really have much of an impact on the profitability.

And it's a fair point to bring up the year ago comparison as tough but the discussions around that time frame were that this was kind of the next leg of that healthcare business and this was going to be somewhat of a new phase of larger healthcare outsourcing contracts. And in the wake of the challenges that those contracts presented though, it looks like that isn't the case at least in the number of contracts. Has your opinion changed at all that in the wake of the problems last year that maybe this market isn't as ripe as you had assumed or as you kind of changed your pricing strategy maybe the opportunity isn't as large?

Mike, this is Joe. We are still very excited about our multiservice offerings. This business is lumpy. It takes a long time to sell. We are working on several opportunities at the moment. Sometimes it takes six months, sometimes it takes 16 months. It's hard to tell when they come in but our pricing -- and again remember, a lot of these things are not price driven; they are really value driven in terms of what kind of value can you offer because you're doing very complex service offerings to these healthcare institutions. We're very excited about the opportunities and are working with several of them. So I don't think we'll change our mind on that at all.

Just some granularity on the net new business wins. Fred, you mentioned new business was up 14% this quarter. What was the net new business number?

It was double digits. It was also very positive.

Final question. Joe, as you look now, I presume you're planning for fiscal '06. This is a tough business to really identify changes because there is so much momentum in such a steady nature. What should we look for that is new or different in your strategies heading into '06?

Well I think, Mike, the strategy is the strategy and if we had the right strategy last year and this year, hopefully it we will also carry us into next year. This is a lot of the service offerings we've talked about as we talked at Investor Day. We talked about the consumer focus, or what we call the customer focus, throughout all of our businesses. We are very excited about that. We are driving it down into all of our businesses, not only in this country but also overseas. We think there are tremendous opportunities for us for continuing growth in both existing customers as well as new customers. So we are very, very satisfied that this will continue.

Having said all that, we don't have the market to ourselves. There are significant competitors in the market. So we will be out there trying to create value. The key is value creation for our clients and their customers. And that is really what we go to market at all the time.

Do the elements of the Mission One program change now as that program matures and presumably the easy opportunities have been capped and it becomes a little more difficult on the margin?

Well, I think that quite the opposite. I think that that program really is ingrained now in our system and it becomes more and more difficult to differentiate what is Mission One and what is not Mission One. I would say it has also driven us to -- our teams to work together much more collaboratively that they have had before. As you know, we have these star team meetings in 22 markets and Fred and I and the group presidents have been out to all of them. I have to tell you the energy that is generated when you see 3, 4, 500 of our managers together in one marketplace is enormous and that is just very positive for us. It is, in the competitive marketplace, it is a balance between top line and margin. That's really what we're trying to work here.

Chris Gutek with Morgan Stanley.

A couple of questions. Fred, is it possible to quantify the beneficial impact of the Easter timing on the growth rates in both the U.S. and international food businesses?

It's fairly minor actually, Chris. We actually had a carryover impact from the NHL. We thought throughout the NHL has been principal Q1 and Q2 but the NHL did carryover. We had NHL revenues in the third quarter of last year as well. You can really think of those two as pretty much offsetting each other.

Specifically, on that side. If you look at the sports and entertainment with 7% decline, to help us better understand what the underlying growth is there, could you quantify the impact of those two baseball contracts and maybe the NHL specifically as well?

The lost contracts for the quarter, again baseball driven, this is a Q3, Q4 business, were probably on the range of approaching $40 million, 35 to $40 million for the quarter. So it's obviously material relative to sports and entertainment and it is not immaterial relative to the total domestic food business. We expect that to be a Q4 affect too. The NHL impact was meaningfully less than that.

On the U.K. business, Fred, can you give us a little bit more of an update there what the status is with the (indiscernible) U.K. business as well as where you are with the (indiscernible) oil services platform off the coast of Africa?

If we, I think, continue to make progress in the U.K., as we mentioned in our earlier remarks, the management team I think there is now very solid. We've got some key new people in place and I think they are very focused on moving forward in what I think we all know is a very competitive market. And so I think we are making progress. I think we've got our priorities straight and we are moving ahead.

On West Africa, there again, we continue to move ahead on our desire as we have stated to our plan to exit that operation by the -- hopefully by the end of the calendar year at the latest. And we are not -- certainly not done yet but that is actively be worked on and there again, that's an area where we are continuing to make progress as we expected.

Okay and then one more question on the uniform rental business. I guess the contribution from the sales force or the productivity there has been stuck at about 13% for the last three or four quarters. Could you us a little bit of an update on what the growth and the sales force headcount has been, Fred, and then maybe some discussion as to why the productivity has not necessarily improved there even though the economy seems fairly healthy?

Well, with respect to the headcount, I'd just make a general statement (technical difficulty) I think that's clear now. Just make a general statement that the sales force headcount continues to increase year-over-year. It's increasing somewhat faster than the growth of the business. The business nomily (ph) was up 8%. So we had organic growth of 5 but we had 3% increase from acquisitions. So the sales force growth rate is somewhat higher than that.

With respect to overall new sales at 13%, there are really two components driving the new sales. One is the sales force sales and the other is sales generated by route reps. We have been very happy with sales force productivity. Our route sales are flat to slightly down year-over-year. Part of that is just the focus on rolling out that new handheld that we have talked to you about. But overall, the sales force sales we are pretty comfortable with.

Gary Bisbee with Lehman Brothers.

Just following up on that last one. While you have been growing the sales force I guess you say faster than revenues, it's the third quarter in a row that the organic total revenue growth has been in the 5% range and hasn't accelerated much. Can you give us any color as to what may be going on there and more importantly what your outlook is over the next 6 to 12 months? Do you think you will see material organic growth acceleration in uniform rental from here?

As I mentioned, there are a couple of factors there. Overall, base business growth, retention rates, pricing changes have been pretty much constant over the last couple of months and we think those numbers are pretty solid. We're hoping that the base business growth will continue to -- will start to pick up over the next couple of quarters and on the new sales, the sales force productivity we -- I guess we are optimistic that we will keep that productivity in place. We expect that our route sales will start to improve over the next quarter as we have completed the rollout of this new handheld and that will be beneficial as well.

As I said earlier we have also picked up -- since our sales base is 8% higher than last year, obviously you have to bring in 8% in new sales just to stay at the same percentage of the overall base and that is where the acquisitions come in which tend to push that number down. So some of that growth comes from acquisitions.

And what exactly is the route sales? Is that your people who are driving the trucks, cross-selling additional stuff to existing clients or they also selling it to new clients?

They sell to both. Their focus is mostly on existing clients. But they will also sell smaller new clients.

Looking at the strong organic growth in the international food and support services business, can you quantify how much of that was winning the World Cup qualifier soccer event that you did in June and then secondly to that, do you have any sense at this point -- I know there was an option for you to get the World Cup event next summer. Any sense as to how that is looking at this point?

The World Cup -- the soccer event was certainly a factor for Germany. It was not a driving factor of the overall organic growth in international. We had very solid organic growth outside of the U.K. in all of our other countries.

Let me just add that the international business overall is quite positive. We're very satisfied with that. Our team did a terrific job on the Confederation Cup event and we do have an option for next year and if you do a good job for clients on preliminaries, one would hope that you would get another chance to do the real big event which is much bigger, much more complicated. So we are quite optimistic that we will get that.

Eric Sledgister from Credit Suisse First Boston.

I was hoping you could give us an update on the handheld initiative in the uniform business, where you stand on that and if you've made any progress on the RFID chips.

The handheld we have pretty much rolled out nationally to our route reps and we have been pretty pleased with the results. It certainly helps with their productivity and helps to further standardize the business. On the RFID side, we do not have a national effort on RFID chips. The cost of those chips relative to the cost of the garments is not insignificant. So our automated source systems by and large our barcode and we continue where it makes economic sense to put in computerized automated sortation systems. But we're keeping a close eye on the RFID technology, particularly the cost effectiveness of it.

Lastly, I was just hoping to get an update on the revenue split between uniform and your non-garment business in the rental side.

I think in general it's a little bit more than half of the overall sales are garments, a little bit less than half are allied.

Bruce Simpson with William Blair

Following up from that last question, update on the Gall's situation, is that impacting direct sale of uniforms or is that pretty much over and behind you know?

Well as you know it involved a small part of our overall Gall's sales. There were export sales. We are cooperating with the government. These things take awhile to work through. I think that as more time passes, the impact on it -- our overall business becomes less and less and I would say that at the moment, there is no significant impact of the investigation on our overall sales.

Shifting gears to focusing on the core business, particularly the business dining within the U.S. food and support services. Can you give us some color on what is going on there in terms of -- are headcounts improving? Is that a significant factor? Is pricing changing one way or another? Is competition shifting either in your favor or away from you? Thanks.

Let me try and tackle that. I think in terms of employment levels, I think they are stabilizing. Again, it is so dependent upon location by location and industry segment by industry segments. So it's tough to say. But I think that we're working very, very hard in terms of improving our sales in existing locations both in terms of employees and also in terms of per capita spent. So I think we're doing a very, very good job of that. Overall, we have some significant marketing initiatives that again we have shared with you at our last Investor's Day and they are getting more and more traction overall.

As I've said a couple of times even on this call, this is a very competitive business and a very competitive marketplace and every so often we see competition increase in certain parts of this. In the past several quarters, we've seen more competition in the business services sector on both on a rebid situation and on existing situations. We, frankly, have seen some of our competitors commit to business propositions, including capital commitments and P&L commitments, that don't appear to have provided adequate economic returns to us. As I have said several times also on this call, we're trying to balance growth and profitability and that has been our motto all along and we will fight very hard competitively but when things don't make economic sense to us, so be it.

How would you characterize pricing within that segment on a year-over-year basis?

Again, it's not just the pricing; it's the overall economic package. I would say probably in the business services area, it has become a little more competitive.

And that really, Bruce, relates to new business, right. On existing accounts where there is an existing arrangement or we have pricing flexibility, vis-à-vis the consumers, there aren't any particular issues there. It is really connected with new business.

That is all the time we have for questions. I will now turn the call back to Bobbi.

Thank you very much for your interest in ARAMARK and we hope you have a great day.

Thank you. A rebroadcast of this conference is available starting today at 12 PM Eastern time and will run until August 17, 2005 at midnight Eastern time. You may access the rebroadcast by calling 1-888-203-1112 or 719-457-0820. Please reference past code 4527807. This concludes our conference call for today. Thank you for participating and have a nice day. All parties may disconnect now.