Aramark (ARMK) 2007 Q2 法說會逐字稿

Good morning and welcome, ladies and gentlemen to the ARAMARK Corporation's second-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 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 second quarter of fiscal 2007. Here with me today is Fred Sutherland, our Executive Vice President and Chief Financial Officer. Fred and I will present an overview of our second-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 the 10-Q we filed yesterday afternoon, which contains our second-quarter and six-month results for our fiscal 2007. This 10-Q 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, as well as schedules we posted to our website this morning, include reconciliations of these non-GAAP financial measures to the most comparable GAAP measures as required by SEC rules.

In addition, as you probably noticed in the Q, since we closed the transaction to take ARAMARK private on January 26 of this year, accounting rules require that we divide the financial results between the predecessor period or the period preceding our merger on January 26 and the period following the consummation of the merger, the successor period. Our discussion today will compare the sum of our results from the predecessor and successor periods to the year-ago periods.

Although this presentation does not comply with GAAP, we believe it provides a meaningful method of comparison. These combined results have not been prepared as pro forma results and may not reflect the actual results we would have achieved absent the transaction.

This quarter's results also reflect the impact of a number of transaction-related items. While we will try to identify these items as we describe the quarter's results on this call in order to give you a better insight into the underlying performance of the business, I would like to take a moment to highlight a few of the more significant items upfront.

First of all, in the January predecessor period, we expensed the stock options, restricted stock units and other payments that were triggered by the merger. This led to a bottom-line loss for the month of January. For the two-month successor period, the income statement reflects a number of both ongoing and one-time items, including the expensing of the bridge financing fee, a currency transaction gain from a foreign currency borrowing associated with the transaction, stock option expense under FAS 123 from our new equity programs, increased acquisition intangibles amortization and of course, additional interest expense. Additional information with respect to these items is available in the 10-Q.

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-Qs. We disclaim any duty to update or revise such forward-looking statements whether as a result of future events or otherwise.

With that, I'd like to now turn the program over to Fred Sutherland.

Good morning and thank you for joining us for our second-quarter 2007 results call. I would like to review our business and operating results and then Chris will cover a few additional details of our performance this quarter related to balance sheet items, cash flow and the like.

Moving to our results for the quarter, we achieved record sales for a second quarter of about $3 billion, up 5% from the prior year quarter and again this is on a combined basis as Chris mentioned. It was up about 4% on an organic growth basis. Excluding the impact of transaction-related expenses, as Chris mentioned and the incremental amortization of acquisition-related intangibles, our operating income was up 8% to $133.7 million, leading to margin improvement of about 20 basis points.

For the first half, sales were $6.1 billion, up 6% over the prior year period with organic growth of 4%. Our operating income, adjusted as I described above really, was up 9% to $308.6 million and our consolidated operating margin improved as compared to the prior year period.

While we continue to operate in a competitive environment across all of our businesses, we remain pleased with both our new contracts and our retained business, both of which improved somewhat over the prior year on a year-to-date basis.

Now turning to our US food and support services segment, second-quarter sales were up 5% to $1.9 billion, driven primarily by our healthcare, education and corrections businesses. Organic sales growth in the quarter was in the mid-single digits. Our business and industry sector had low single-digit sales growth, led primarily by refreshment services in the our corrections business.

The education sector had mid-single digit sales growth with strong base business growth in our higher education food business. 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 had mid-single digit sales growth in the quarter with the convention centers business delivering good top-line performance.

As described in our 10-Q, our segment operating income for this year's second-quarter results reflect incremental intangibles amortization related to the transaction. My discussion of segment operating income will exclude the impact of this incremental expense. If you refer to our 10-Q, you will see the details behind the intangibles amortization by segment.

Operating income in the US food and support services segment rose 9% to $80.5 million. Business and industry, education and healthcare sectors all delivered operating profit growth this quarter, which was partially offset by a decline in the sports and entertainment business. We are pleased with the segment's performance, which saw the operating margin improve to 4.3%, up from 4.1% in the year-ago quarter.

Turning to the international food and support services segment, second-quarter sales of $695.2 million were up 8% on solid growth in Ireland, Chile, China and Korea. Organic sales growth was in the low single digits for the quarter. Second-quarter operating income for this segment was $36.1 million, up 8% from the prior year quarter. Japan, Spain and Germany each reported solid year-over-year profit growth.

In our uniform rental segment, second-quarter sales of $318.5 million were up 6% from the year-ago quarter. Organic growth was in the low single digits, reflecting solid client retention and new sales, offset by a decline in base business sales. Operating income grew 4% to $32.5 million.

The uniform direct marketing segment reported second-quarter sales of $90 million, down 12% from the year-ago quarter, reflecting primarily the exit from the healthcare uniform business late last year and softness in other WearGuard-Crest channels. The segment reported a small loss in the quarter primarily as a result of the lower sales volumes. Excluding transaction-related expenses and as Chris mentioned the currency gain from one of our new foreign borrowings, corporate expenses were $14.3 million in the quarter compared to $15 million in the year-ago quarter.

So summing up the first half's operating performance, we have seen an increase in our level of new business and our net new business compared with prior year. We are delivering retention rates that are very consistent with our targets. We are being selective in terms of the type of new business we pursue and we have remained disciplined in our deployment of capital to win new accounts. And finally we have generated solid operating income growth and consolidated margin improvement in comparison to last year.

Now let me turn it back over to Chris for some additional details on the quarter.

Thanks, Fred. I would like to wrap up our remarks by commenting on our financing capital structure and cash flow for the quarter. Our adjusted EBITDA for the trailing 12 months ending March 30 was $1.022 billion, up nicely from $1.005 billion at December 30 and up from $983 million in the 12 months ending September 29, 2006.

Interest and other financing costs were $116.8 million for the quarter, which includes $12.8 million of bridge financing fees. And of course reflects our new capital structure since the closing of the transaction on January 26.

We have now entered into floating to fixed swaps on approximately $3 billion in notional of our term loans and in combination with our existing fixed-rate debt, approximately 70% of our total debt portfolio is now at fixed interest rates averaging 7.44%. Total reported debt at the end of the quarter was $6.226 billion and during the quarter, we made total principal payments on our term loan of approximately $50 million, including a $40 million voluntary repayment reflecting the strength of our cash flow during the quarter. Based on our solid EBITDA growth and debt paydown during the quarter, we are pleased that our secured debt ratio has improved to 4.26 times as of March 30.

Capital expenditures for the quarter and for the first half were down modestly from the prior year spending level as we continue to be disciplined in our deployment of capital. For the full year, we do expect to see some growth in capital expenditures on a year-over-year basis.

As you are also aware, the seasonality of our business is such that working capital is a use of cash for us during the first half of our fiscal year. Working capital requirements were consistent with our expectations for both the quarter and for the first half. The increase in working capital compared to the prior year periods reflect both growth in the business and the timing of disbursements. For the full year, we expect historical working capital patterns to continue.

Now let me turn the call back over to Fred.

Thanks, Chris. We are quite pleased with our performance during the first half of fiscal 2007 as most of our businesses have delivered strong operating income growth and solid margins. We are confident that the broad, significant management investment in ARAMARK as a part of our going private transaction will serve to further increase our focus.

We continue to see many new and exciting opportunities ahead across all of our businesses and we believe that we are well-positioned to seize these opportunities. So thanks again for your time this morning and for your support of ARAMARK and we would now be happy to answer your questions.

(OPERATOR INSTRUCTIONS). Reza Vahabzadeh.

Good morning, Reza.

Just a housekeeping item. In your balance sheet, you have something called common stock subject to repurchase. Is that going to be -- is that going to be cleared out in the next couple of quarters?

No, that relates to the ability for the Company to repurchase stock from management upon management departures. So the accounting just requires for us, even though there is no intention or expectation that you would see that level, to the extent there is puts on the management stock, which there are under certain circumstances, accounting actually requires you to reflect that stock in the format we have done.

So that will be permanently in that mezzanine level because of the put and call provisions surrounding the management stock, which you really only trigger upon departure by a manager.

I see, but is there a base level that might be put to the Company every year like some space level of repurchase activity?

Well, the way to think about it -- there are about 240 or so management investors. This is our executive leadership council. We have low teens turnover in that group, which would be pretty typical. So as individuals leave the Company, the Company would typically be electing its call to repurchase those shares.

On the other hand, as individuals are replaced or individuals are promoted up to this level, they would be purchasing shares. So you will see some activity as people come and go from this group.

I see. Okay. In the US food business, it looks like sports, as you touched on, was soft, but healthcare was strong. Can you elaborate on that, why sports and business timing is soft and healthcare is stronger?

In healthcare, we have got very solid top-line growth rates. Our retention has improved. We are selling pretty strong levels of new business. Actually our base business growth is also higher than it was a year ago and that is really reflective in the overall bottom-line performance.

In sports and entertainment, for the quarter, one of the factors was the mix of individual team performance. Although we have a number of teams in each of the major leagues, some team contracts are more profitable than other team contracts, so as we have a mix of performance, certain teams that do particularly well offset by teams that don't perform well and don't draw all that well, we can have that negatively affect our profitability and that was one of the factors in the second quarter.

Fair enough. And then as far as your sales growth in the US business, was that primarily price mix or volume?

I would say that it is mostly volume, the price impact -- Chris, do you want to add to that? Relatively low.

Yes, relatively low. Typically in the 1% range overall.

Okay. And how would you characterize the cost environment for the US and international food divisions?

I think our labor costs are in very good shape overall and we don't see a lot of pressure on our direct labor cost. We do see some pressure on commodities costs, on food cost. Typically in most of our sectors, we have the ability to either change our mix of food that we serve or to increase prices, which can help to offset that.

The one market where that is not the case is our correctional feeding business where the meals are very tightly specified and our price increases per meal are limited by contract. So that is -- I think to be fair about it, has negatively affected the corrections business, but in the other businesses, we are pretty much able to offset it. But we do see some price pressures in certain commodity areas.

Now are the contracts that you think you have pricing flexibility, those contracts are cost plus or you just think you have pricing power?

In some cases, they are cost plus, which pretty much by definition you have got 100% flexibility and as you remember, that is a meaningful portion of our overall mix. So that it's almost an automatic.

In our P&L contracts, in many of those, particularly as we have become more -- as retail becomes a bigger focus and component of our overall sales, we have -- we would change prices based on what the market will bear and what is appropriate. In some cases, we need to have a discussion with our client, but we do that in the ordinary course of business.

I see. What portion of your business do you think higher commodity food costs is an issue?

I think that is hard to quantify. I would be reluctant to take a stab at a number.

Would it be like as much of as a half or less than that?

No, I think it would be less than that.

Okay. And CapEx this year should be how much?

I mean in general as we have talked about for a long time, it generally runs slightly less than 3% of sales in total overall. This year, through the first half, we are down a little bit year over year, but some larger contracts, there can be a little bit of lumpiness. So I think in general both for this year and for years going forward, we would expect to see levels of spending that are pretty consistent with historical levels, vis-a-vis overall sales.

Thanks. And then the contribution margin on your revenue benefit from foreign currency, what is that?

In the quarter, it was about while 6% on the sales line and --.

I think the operating profit growth was higher than the organic sales growth, but it was a meaningful component of the overall growth for the quarter.

Okay.

I don't think it was the dominant component.

Yes.

So you have a fairly high EBIT flow-through from the foreign currency benefit?

Yes, certainly not one to one, but maybe two-thirds.

Got it. Thank you.

Bryan Hunt, Wachovia.

Hi, this is actually Meredith Fowler for Bryan. What significant new contracts or renewals occurred during the quarter?

We don't disclose that. But as I said earlier, our new business -- we really look at overall new business -- annualized value of new business on a year-to-date basis and our new business year over year is up over last year and our lost business is down over last year.

And the other point again just to remember is that no single contract is material to the Company overall and no single client is more than 1% of total sales.

Okay. Great. And then the Company provides food service at 420 school districts. How has this number grown organically in the last two years?

I think that -- well, I think you might be confusing school districts and higher education colleges and universities, but I mean in general we have had pretty decent levels of new business and I think the number of locations has probably been growing in the low single digits.

Yes, I think that's fair.

And as you know, that is only one component of our growth, right? We have the pricing component and we have the ability to increase our sales at our existing locations, which is an important component of our overall growth.

All right. Great. And lastly, what were the drivers of your growing SG&A?

Actually I think from a corporate standpoint, it was pretty flat year over year adjusted for obviously all of the one-time transaction expenses blowing through the corporate line item on the P&L. Other than that, it was flat.

So you really have to adjust for those one-time expenses. If you look at the segment results, what you will see is that our corporate expenses were actually down in absolute amount year over year and that our overall food service margin, segment margin was up year over year and our overall uniform margin was essentially flat.

Okay. Thank you.

Zafar Nazim, JPMorgan.

Hi, thank you. Without getting into any specific guidance, I was wondering if you can just comment on the back half of this year versus back half of last year because back half of last year was not exactly robust I guess in terms of margins. So should we think about back half of this year as having I guess better margin improvement as compared to what we have seen in the first half, especially given the easy comps you have from last year?

Well, we don't specifically provide guidance or projections. I think in general over time, the best way to think about it is that our year-over-year performance will be pretty consistent.

Okay. And then just looking at the international food service segment, the growth in that business, excluding foreign exchange benefit, was lower than what we saw in the first quarter. So I just want to see if there is any additional color you can throw out on that.

We have -- earlier in the year, we did terminate several unprofitable contracts, particularly in the healthcare space. These were contracts that were basically breakeven or slight losses and ones where we just thought that on a long-term basis couldn't be reasonably profitable. So that was one of the factors, main factors I think affecting the decline in the growth rate.

And to that point, actually while that business was down on the top line year over year, its EBIT performance was actually up to Fred's point about the contracts that we were exiting were not very profitable.

Okay. And then in talking about EBIT, your EBIT margin, adjusted EBIT margin, after excluding the additional amortization, in the uniform rental space was down roughly 30 basis points over last year. And just wondering what is going on over there?

In the uniform -- I don't think it was down 30 basis points in the uniform rental business. I think it was flat to maybe down 10 basis points. Right? And you may be thinking of the uniform business in total, including the direct marketing.

Okay. I may have my numbers -- but in general, isn't this a business we should expect some margin expansion over time given the difference in margins that you see between your Company and your biggest competitor in the space?

Well, there are some. As I think we have talked about in past conference calls, there are some structural differences that account for a meaningful portion of the margin difference. The factor -- one of the factors I think in the second quarter for us was the fact that the growth rate, as you will note, was down from what it was in the first quarter and this is a business with a fair amount of operating leverage and that can have an impact on the margin. I mean our expectations is we are working hard to get that growth rate back up, but the growth rate was down somewhat from Q1 to Q2.

Okay, thanks. Okay, great. And then just a couple of housekeeping questions on the cash flow. I was wondering if you can give us some estimate for what you expect in terms of cash taxes for the year and also if there could be a range that you can provide us on what working capital can be expected to be as you look at cash for the year?

I think from a working capital perspective and we have been consistent over many years and in this respect is on average it will be a modest use of cash for the year and in some years, it will frankly turn the other way and be a modest benefit, but somewhere in the $20 million to $40 million range either one way or the other is probably the right way to think about working capital. Cash taxes for the year should be relatively modest. I think in the $20 million or so range I think is our best guess at this point.

Great. Thank you very much.

You are welcome.

(OPERATOR INSTRUCTIONS). [Samir Fink], ABN AMRO Bank.

Yes, hello, good morning. I had a couple of questions. First of all, I think you said the adjusted last 12 months EBITDA was $1.022 billion. I just wondered whether you also gave the adjusted EBITDA for the quarter. That was my first question.

Yes, it was $1.022 billion for the trailing 12 months. For the quarter, it was $237.1 million.

Thanks a lot. Thank you. And the second question -- I am wondering do you expect the uniform career apparel direct marketing segment to make a positive operating profit anytime soon?

Well, there is seasonality to that business and it actually did make money in the first quarter and historically and going forward will make money on a yearly basis, but given the seasonality of the business and some of the weakness we saw, it modestly lost money this quarter.

Okay. Thank you. And then the last question -- I think you said CapEx for '07 should be slightly higher than last year, so slightly higher than the $319 million in '06, is that correct?

Yes, I think that is a correct way to think about it.

And do you give any guidance as to what that CapEx will be spent for?

Yes, I mean the types of things we are spending money on in the ordinary course is in conjunction with the winning of certain types of new business. There will be investments in the facilities that we would be running the food service on. In our uniform business, we have a plant infrastructure of roughly 200 facilities that we are, on an ongoing basis, investing in, adding automation, etc. So those are the two primary components of our spending.

Okay. Thank you. Thanks a lot. That was all.

Kevin Seagraves, Fort Washington.

Hi, good morning. I just had a couple quick detail questions. I got your number on the cash taxes for the year. Will they -- as you go forward in the third and fourth quarters, are you going to be kind of a normal taxpayer and then as we go into '08 or is it going to be lower than a normal corporate rate? It looked like you had like maybe a refund or something in the second quarter. I was just trying to figure that out from a rate perspective.

I think the reality is you are going to see a lot of variability in the rate quarter to quarter. So I don't want to give you a prediction frankly from a rate perspective to think about either for the second half or into '08. I think as we get a little further down the road, we can probably give a little more visibility.

Okay. That's fair. And then have all the acquisition transaction I guess cash numbers kind of ran through the cash flow statement at this point or is there more to come there?

Well, we will continue to look at acquisitions in the ordinary course.

Oh, no. I just meant from the --.

I think virtually 99 --.

From the --.

I can't think at this point of anything material that --.

That's right.

-- hasn't actually been paid for at this point.

Okay. Then one other number. On the cash flow statement, you had other operating activities, which look to be about $90 million to $100 million. Is that part of the working capital or is that something else? I was having a hard time figuring out what that was.

That relates to stock-based compensation expense.

Okay, okay. And then lastly, did you say -- I haven't had a chance to go through the Q in detail, the amortization -- incremental amortization from the transaction, is that broken -- you said that is broken out by segment in the 10-Q?

Yes, in the segment portions of the MD&A and in the non-GAAP, you can actually see the amounts by the four different segments.

Okay, great.

And that amount, just to add to that, that is a preliminary amount, so we are still revising really the split between goodwill, which is not amortized, and contract price, which are amortized and those are the two principal places in which the excess purchase price goes.

Okay, great. Thanks a lot. I appreciate it.

Sure.

Zafar Nazim, JPMorgan.

I was wondering if you can comment on any minority shareholders, joint venture partners, where you expect to buy out those partners or buy additional shares in any of your local or international businesses during the course of this year?

Yes, the only -- we actually only have a couple of joint ventures left. Our business in Chile, which we own 80% of and our business in Ireland, which we now are 100% owner of subsequent to quarter-and and that purchase was actually -- that sequence of events was put in place several years ago when we had gone from 45% to 90% ownership in that entity.

So essentially now we are 100% China too, right. Essentially now the only meaningful minority interest is the 20% minority interest in our Chilean subsidiary.

So you mentioned the Ireland business, you purchased the rest of the stake. How much was the amount paid for that?

It was the range of $20 million or so.

Approximately $20 million.

Okay. And then how should we think about -- your fourth quarter is typically a big cash quarter. How should we think about use of cash from quarterly performance? You prepaid $40 million of term loan during the first quarter and I was wondering if you don't have any acquisitions at that point in time, would you leave the cash on the balance sheet or would you just pay down some of your term loan? How should we think about that?

I think absent having acquisitions to spend money on, we would not be of the mind to keep cash on the balance sheet and incur the negative cost of carry. So I think every free cash flow dollar that we are not reinvesting somewhere else we would use to repay term loan.

Okay, great. And just one last question, if I may. I'm not sure you gave this already, but do you have an adjusted EBITDA number for the second quarter of last year?

Not in front of me.

Okay. I'll follow up.

It probably is part of the offering documentation.

Yes, there is -- yes, not in front of me, but you can actually I think get to it by all of the three filings that are out there related to adjusted EBITDA will allow you to get to it. I just don't have it in front of me.

Okay. No problem. Thank you.

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

Okay. Well, thanks again for your time this morning and I hope you have a great day.

A rebroadcast of this conference is available starting today at 12.30 p.m. Eastern time and will run until May 17, 2007 at midnight Eastern. You may access the rebroadcast by calling 1-888-203-1112 or 719-457-0820. Please reference passcode 8444491. This concludes our conference call today. Thank you for participating and have a nice day. All parties may now disconnect.