Aramark (ARMK) 2007 Q1 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the ARAMARK Corporation first quarter 2007 earnings conference call. At this time, I would 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 will now turn the call over to Chris Holland, Senior Vice President and Treasurer. Please proceed, Chris.

Thank you and welcome to ARAMARK Corporation's conference call to review the results of our first quarter of fiscal 2007. Here with me today are Joe Neubauer, ARAMARK's Chairman and CEO, and Fred Sutherland, our Executive Vice President and Chief Financial Officer. Joe and Fred will present an overview of our first 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. As we discuss the results for the quarter, you may want to refer to our first quarter 10-Q, dated February 7, 2007, which can be found on our website at www.ARAMARK.com. In today's discussion of results, we mention certain non-GAAP financial measures. The 10-Q includes reconciliations 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 our 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 would now like to turn the program over to Joe Neubauer.

Thank you, Chris, and good morning and thank you for joining us for our first quarter 2007 results. I would like to share some comments with you and then turn it over to Fred, who will go over the details of the business with you. Before I get started, let me take a moment and thank those of you who participated in our recent debt offering and welcome you as financial partners of ARAMARK. We really appreciate your vote of confidence in our Company and especially our management team.

As you know, ARAMARK became officially a private company again on January 26 and we are excited about future opportunities for our business. As we enter this new chapter in the history of ARAMARK, I believe that we're well-positioned to succeed across our various businesses as well as around the globe. We're moving forward with strong and stable financial foundation and a great team of people who are motivated more than ever before to achieve results.

Our focus will continue to be squarely on our clients and our customers and our ambition is to provide outstanding experiences, environments, and outcomes each and every day for our clients and customers around the world. And this focus and ambition have never been stronger. I would like to offer a word of thanks to all of our 240,000 people around the world who have worked so hard to deliver outstanding performances over the years. And a special thank you to the nearly 250 senior managers who have recently chosen to become investors in the new ARAMARK. It's a great testament to their commitment and their confidence in our Company. We are very proud of the fact that almost all of the eligible managers from around the world elected to invest $150 million in the new ARAMARK, alongside of my own investment. As a result, this broad-based management group has a 17.3% equity stake in the Company and we have re-established the legacy of management ownership that made the Company so successful for a long time before this.

Now moving onto our results for the first quarter of 2007, as you saw, this was a very solid quarter for ARAMARK. We achieved record sales of $3.1 billion, up 6% from prior year, while our operating income was up 9% to $172.3 million. This solid growth results from excellent client retention for the full-year 2006, which we are maintaining through this year's first quarter. We're also pleased with our overall base business growth and our new sales efforts. And let me now turn the call over to Fred.

Thanks, Joe. Let me start with the consolidated financial performance and then I will discuss our individual business segments. As Joe just mentioned, our first quarter sales were up about 6% to 3.1 billion. And our organic sales growth rate was in the mid-single digit range. Our operating income was $172.3 million and net income was $87.7 million. During the quarter, we expensed approximately $3 million of costs associated with the going private transaction.

Now turning to our U.S. Food and Support Services segment, first quarter sales were up 5% to $2 billion dollars, driven principally by our healthcare, education, and corrections businesses. The business services sector had mid-single digit sales growth led primarily by refreshment services and corrections. The education sector had high-single digit sales growth, with strong base business growth in both higher education and K through 12. In our healthcare sector, we realized high-single digit sales growth, with strong base business growth in both food and facility services. Our sports and entertainment sector saw a slight sales decline, as lower sales from stadiums and arenas and a lower number of Major League Baseball playoff games year-over-year was only partially offset by solid growth in our convention center business.

Operating income in U.S. Food and Support Services segment rose 3% to $113.6 million, though the prior-year quarter included a $4 million dollar credit benefit from insurance proceeds from the Hurricane Katrina claim, which obviously was not comparable to this year. The business services, education, and healthcare sectors all delivered solid operating income growth this quarter, which was partially offset by decline in sports and entertainment.

Turning to the International Food and Support Services segment, first quarter sales of $706.4 million were up 13% on strong growth in Canada, Germany, Ireland, and Chile. First quarter operating income of $32.8 million was up from $24.6 million in the year-ago quarter. Most operations reported improved results, with Canada delivering particularly strong performance driven by the remote camps business.

In our Uniform Rental segment, first quarter sales of $318.9 million were up 8% from the year-ago quarter. Organic growth was in the mid-single digits. Operating income grew 13% to $37.5 million, driven by the higher sales, favorable merchandise costs, and lower fuel costs compared to the prior year. The Uniform Direct Marketing segment reported first quarter sales of $112.4 million, down 10% from the year-ago quarter, primarily reflecting the exit from the healthcare uniform line, and continued softness in other WearGuard-Crest channels. The segment reported operating income of $5.8 million, reflecting the lower sales and margin pressure at Galls, partially offset by substantially improved margins at WearGuard.

Corporate expenses for the quarter increased 6% to $17.4 million, though the increase was essentially due to about $3 million of transaction costs recorded in the quarter related to the merger, as I mentioned earlier. Interest and other financing expense was $35.9 million, obviously not a number that we will be seeing going forward. And that reflects somewhat higher average rates. Clearly we will have a new interest expense number as we move forward, given our new capital structure. Importantly, in talking about the capital structure, we have entered into floating to fixed swaps, which in conjunction with the portion of our debt that is naturally fixed rate, means that approximately 70% our total debt is now at fixed interest rates.

Capital expenditures in the quarter of $64 million were essentially flat with prior year and for the full year, we expect growth in capital expenditures to be roughly in line with the level of growth in the business overall. As you are all aware, the seasonality of the businesses is such that working capital is a use of cash for us during the quarter. Net cash used in operating activities of $63 million was slightly higher than prior year and consistent with our expectations.

For the full year, we expect working capital to perform consistently with historical levels. Finally, let me add my own thanks and welcome to our new debt investors. We appreciate your support in ARAMARK as we embark on this exciting new chapter in our history. Joe?

So you can tell, we are very pleased with the start of the fiscal 2007 and most of the businesses delivered strong operating income with solid margin improvement. Overall, ARAMARK remains a performance-driven culture with a legacy for caring for our people, creating client partnership based on trust, and delivering outstanding service. We see many new exciting opportunities ahead and we believe that we are well-positioned to seize more of these opportunities as a private company going forward.

As you can imagine, we are still in the process of developing our communication strategy as it relates to a new private company. We look forward to communicating with you in this format on a quarterly basis. Although the spokespersons will most likely be Fred and Chris, who by the way is the Senior Vice President -- we haven't promoted him yet, as the conference coordinator tried to this time, Chris -- with periodic participation by me. We, again, want to thank you for your time this morning and for your support of ARAMARK. And now we will be happy to take any questions that you have.

Thank you. Today's question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) Zafar Nazim, JPMorgan.

Hello. Good morning, everyone. A few questions. First, in the U.S. FSS segment, your Company did, I guess, pretty well in this quarter compared to the margins that we have seen in the back half of '06. And where we sell a decline in margins year-over-year 1Q, I guess, your margins were flat year-over-year. And I am just wondering, for the remainder of the year, do you expect margins to revert back to the levels we saw back in 2005, especially in the back half of the year?

Well, I think our target is to carve out modest improvements in our overall EBIT margins year-over-year. And so I think that is really what we are shooting for as we look at '07.

Okay, in the uniform rental space, I was wondering is there some way to quantify the impact of lower fuel prices? Is there some way to say, okay, maybe $0.10 change in fuel prices would mean so much in terms of margins for that business?

It is difficult to do, because our energy cost has a number of components to it. There is a fuel component and even there, looking at national averages is a challenge because of the mix of the way our operations fall across the geographies. For example, we are more heavily represented in California than in certain other parts of the country. And then number two, a major component is natural gas cost. And even there, as we have talked about in earlier conference calls as a public company, some of our natural gas is hedged forward, so therefore, would not be subject to changes in the overall level of the spot market. But clearly, it was a help in the first quarter year-over-year.

Okay, and in the international business, your first quarter was helped by, I guess, your remote camp business in Canada. How much -- does this business last through the second quarter and then beyond that, we should see essentially margins going back to what we had in the back half of '06? Is that a reasonable assumption?

This is Joe. I think it is clearly a seasonal business, because as you know, they operate when it is frozen there. So I think that the impact there is a seasonal business just as some other of our seasonal businesses. I think that the rest of our international business had also very solid performance, so I wouldn't discount that. This was unusually strong.

Okay, and just on -- Sodexho has been talking about doubling its facilities management business over the next five years or so, and I am just wondering if you have seen any changes in the competitive activity by Sodexho in competing with you for contracts in facilities management recently?

Well, I think, as we have said all along, this business is a very competitive business. We haven't seen any significant change in competitiveness either positive or negative over the last several months.

Okay, and just finally, any comments on the business dining portion of your U.S. FSS segment? How that falls in terms of looking at the topline and in terms of margins this quarter versus last year?

I think we continue to do relatively well there, with improving result. It is one of our more-competitive market segments, as we have talked about in the past. As a result, its overall organic growth is somewhat lower, as I mentioned in my remarks. I think we have -- the group there has done a terrific job of controlling cost and improving efficiency, and I think we have been a little more selective in some of the new business that we have taken on. And as a result, the business has improved year-over-year.

Okay, said that improvement is in terms of margins?

Yes, that's correct.

Great, thank you.

Bryan Hunt, Wachovia Securities.

Thank you. I was wondering if you could give us an idea how much currency helped your international segment during Q1?

I think in the topline is in the range of the 7% or so. It clearly was a factor in the first quarter results.

Okay, next, there is obviously headline news of corn prices going up, it is pushing protein prices higher, dairy prices higher, as well as wage costs are going up due to minimum wages. I was wondering if you can address what the Company's plans are to address some of these cost increases and how freely are you able to raise prices, considering you are addressing captive audiences in many instances?

Let me start with the minimum wage impact. Actually, a very small percentage of our wage of our labor force is at the minimum wage. It is less than 5%. And as a result, the increase in the minimum wage that is expected over the next 24 months or so, I believe, isn't expected to have any direct, significant direct impact on us.

What about wage compression?

I guess, it is certainly debatable, but our view is to the extent that the vast majority of our employees are well above the minimum wage, that those are rates that are set competitively within the market. And the minimum wage, which hasn't been increased, as you know, for I think six years or so, is essentially catching up to where the market is. So not to say that there won't be any ripple effect, but that is the way we view it. It does not automatically ripple up the wage scale.

With respect to product prices, we, as you know, we buy food products and serve food products across the entire range of food categories, since we are not locked into any one narrow food concept. And year-over-year, our overall food costs are in very good shape in terms of increases, because, obviously, there are a lot of beverages in the mix and other aspects beyond corn and protein.

We have about 25% of our contracts as management, so in that case, those costs are passed along to our clients. And the other contracts, we typically, working with our client, have the right to increase prices. And to the extent that that is working its way through the economy, because everyone is seeing food cost increases, we would participate in that. And last point, I guess, would be we do have a fair amount of flexibility in the mix of product that we serve and use in our operations.

And on some of your bigger cost items, do you hedge on some of those items, some of your protein exposure?

In some cases, but not to any significant extent. Probably more in coffee than any other category.

More in coffee? And then, also, you had one category in the rental business where it looked like you were down about 8% during the period. Could you give us a comment on what occurred there?

When you say category, you're talking about our Direct Marketing segment? I don't know what you mean by category.

I'm referring to your Uniform and Career Apparel Rental, not Direct Marking.

Well, there was nothing -- we have two segments in the overall uniform group, one is uniform Rental and one is the uniform Direct Marketing. They're separate segments.

Yes, and the rental segment, --.

The rental segment is not -- is up in sales and up in profits.

Yes, according to what is in the Q, you've lost some business which contributed to an 8% decline in revenues. And I was wondering what you could --?

No, our revenues were up --

8% in the Rental business --

Yes, they were up 8%

I read that, but also, on the top of page 25 on your Q, it says you lost some business and revenues were down 8%?

I think what you are referring to is that our overall growth rate, which was 8%, is a function of new business added, business lost, and the growth in our base business. I think we break that out in the MD&A in the Q. And so the annualized impact year-over-year of lost business was 8% as a part of that overall net growth rate of positive 8%. And that 8% lost business year-over-year is very consistent with our historical results. We just lose 6, 7, 8, 9% of our customers every year.

Okay, say you have like an 8% turnover rate, roughly?

Yes, it is actually relatively low, but that is just normal turnover in the business.

Okay, thank you very much.

Reza Vahabzadeh, Lehman Brothers.

Good morning. The EBIT margin in the U.S. Food Service business seemed to be declining at a slower rate in this quarter than the last three or four quarters. Can you comment on that? Are there driving factors that allows your margin to be more stable in that business going forward?

There were a couple of effects in the first quarter. First, as I mentioned earlier, we had $4 million worth of insurance proceeds from Katrina in the first quarter of last year. And that was reflected within the domestic Food and Support Services segment, which clearly affects the margin year-over-year since it is noncomparable. And then secondly, we did have some margin decline in sports and entertainment because the sales were down slightly year-over-year. But we had very solid margin improvement across the remainder of the domestic Food and Support Services.

And that was my point, in that the overall margin performance, taking into account the prior-year gains, seemed to be better than the last three quarters. And so, I don't know if you're seeing better pricing or better business mix, anything that would have contributed to that change in margin performance?

Look, this is Joe. You tend to focus on one part of the business versus another part of the business. We manage the total mix. And what we strive to do is make the total mix go up, as Fred said, by 10 or so basis points every year. By the way, we don't promise to do it every quarter. Because of one line of business which might be too heavy in the quarter could be off and we will make it up the next quarter in another line of business.

So I don't think we see any unusual instances or reasons one way or the other that would go up or down. I think that, overall, we strive to get better and we accomplished that during the first quarter. And we hope to be able to accomplish that going forward throughout the year.

So the overall dynamics around that business this quarter versus last quarter is roughly unchanged?

Yes, I would say slightly better.

Slightly better? Okay, that explains something. And on the uniform rental slide, you had healthy margin, EBIT margin expansion in this quarter, but it was weaker year-over-year in the fourth quarter. And so, I am wondering if there was any movement in expenses between those two quarters that helped this quarter, but compressed last quarter?

No, we clearly were aided by reductions year-over-year in fuel costs and natural gas costs. And I believe the benefit in the first quarter was better than the benefit in the fourth quarter, but again, I think if you look at the business -- by and large, I think if you look at the business over the last eight quarters year-over-year on a margin basis, I think six of the last -- I'd guess six of the last eight quarters that margin is up anywhere from 20 basis points to 60 or 70 or 80 basis points. So, and as Joe said, it will tend to fluctuate a little but quarter by quarter, but in general, the trend continues to be up.

Got it. And then, can you touch on the outlook for acquisitions which have been part of your, I guess, recent history in terms of acquisitions?

Well, as you know, we can't comment on any pending acquisitions, overall, but during the quarter, we closed on one significant acquisition in the uniform business, uniform rental business in the Pacific Northwest, which just happen to be the largest acquisition we made in that line of business I guess in four or five years.

That was about $80 million.

Which was in the order of magnitude of about $80 million, so we keep looking at acquisitions on a continual basis, both in that marketplace, which continues to consolidate. That happened to be a very large one; several of them are 10, 20%, 30% of that order of magnitude. We also continue to look at possible acquisitions, particularly overseas in the food side, but we have been disciplined for the last 20 years and we will continue to be disciplined as to what we look for in terms of both strategy and in terms of financial ability to perform. Because we think we have the capability, certainly, in most of the markets in which we operate, to handle everything that comes our way. And therefore, we are not doing it for size. It has to make significant strategic sense and it has to make significant economic sense for us.

Right, I guess the total acquisition spending, though, in the last 3 years, has been per year on an $80 million to $130 million range and I'm just wondering if that is a reasonable range to use going forward?

Well, I think, again, pending a significant acquisition, which could be 100, $200 million, that is a reasonable rate to use.

Okay, and lastly, do you have any expectations or guidance on free cash flow for the year?

I don't think --.

We don't give separate guidance on free cash flow. It is really driven by our net income, right, because depreciation, amortization, CapEx are all about the same. Working capital isn't a big source or use. So I think if you take our normal EBITDA growth and just reflect the new capital structure, that is pretty much where you come out.

And would cash taxes approximate book taxes, give or take?

Yes, they will be pretty close.

Thank you much.

Zafar Nazim, JPMorgan.

Yes, hello. I was just wondering if you can mention or comment on any significant new business that you may have won in the domestic food and sport business or lost during the first quarter?

Well, let me try a different way. We are very pleased with the level of new business that we have garnered in the first quarter throughout the whole enterprise. It is ahead of last year. And our lost business is slightly less than it was last year, so the net businesses in pretty good shape. And we are very pleased that.

Okay, thank you.

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

Okay, well, we appreciate everybody's participation today and have a great day.

A rebroadcast of this conference is available starting today at 12:00 PM Eastern time and will run until February 21, 2007 at midnight Eastern. You may access the rebroadcast by calling 888-203-1112 or 719-457-0820. Please reference pass code for 4929634. This concludes our conference call today. Thank you for participating and have a nice day. All parties may now disconnect.