Aramark (ARMK) 2010 Q1 法說會逐字稿

Good afternoon and welcome, ladies and gentlemen, to the Aramark Corporation first quarter 2010 earnings conference call. At this time, I'd like to inform you that this conference is being recorded for re-broadcast and that all participants are in listen-only mode. At the request of the Company, we will open the conference up for questions 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 2010.

Here with me today is Fred Sutherland, our Executive Vice President an Chief Financial Officer. Fred and I 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'd 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 earlier today, which contains our first quarter results for fiscal 2010. 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 today, include reconciliations of these non-GAAP financial measures to the most comparable GAAP measures as required by SEC rules. Our discussion of operating income during today's call will in each instance exclude the incremental intangibles amortization and property and equipment depreciation expense resulting from the going private transaction and the impact of stock option expense. These items are detailed in the schedules posted to our website before the call.

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 Risks, Factors, MD&A and other sections of our Form 10-K and the Form 10-Q filed earlier today. We disclaim any duty to update or revise such forward-looking statements, whether as a result of future events or otherwise.

Now, let me turn the program over to Fred Sutherland.

Good afternoon and thank you for joining us for our first quarter 2010 results call and in between a 22-inch snowfall last weekend here in Philadelphia and expected 15-inch to 18-inch snowfall over the next 24 hours. Setting that aside, I'd like to review our business and operating results and then have Chris cover a few additional details on our performance this quarter. We're pleased with our overall performance in the first quarter as our less economically sensitive businesses delivered solid performance, while our cyclically sensitive business showed signs of improvement. We welcome these recent signs of a more stable economic environment, but remain cautious in our outlook, as we wait to see signs of improvement in the employment and spending environment over the balance of 2010. In the meantime, we believe our balance and resilient portfolio along with the talented and committed group of owner-managers puts us in a solid position as we continue to move through this still challenging economic period.

Let me first turn to our consolidated results for the quarter. We achieved sales of $3.2 billion up 1% from the prior year quarter and down about 2% on an organic basis, which was an improvement in organic growth year-over-year compared to the fourth quarter. Operating income, which is adjusted to exclude the items that Chris described earlier, increased 4% to $186.4 million. The positive impact of currency translation contributed about three percentage points of the growth in operating income for the quarter.

In our North American food and support services segment, first quarter sales were up 1% to $2.2 billion, with solid growth in higher education and healthcare being mostly offset by the decline in the business and industry sector. Organic sales growth was flat for the quarter, again an improvement over Q4 of last year. Our business and industry sector had sales decline at a mid-single digit rate primarily reflecting lower employee population levels at many of our client locations as compared to the same period last year. During the first quarter, we did see discretionary spending and employee population levels in many of our business food service accounts begin to stabilize, which is a welcomed improvement from the trends we saw in the latter part of our fiscal 2009. As a result the year-over-year decline in the quarter reflected an improvement of a comparable results for last year's fourth quarter. While these recent trends are a positive early sign, we will ultimately need to have higher employment levels in order to generate material and sustained improvement in sales from current levels in this sector. In the meantime, we remain focused on appropriately managing our cost structure and margins.

The education sector had a mid-single digit sales growth, led primarily by solid based business growth in our Higher Education food business, offset somewhat by the sales decline in K-12 due to the impact of some lost business during fiscal 2009. In the healthcare sector, sales grew at a mid-single digit rate lead primarily by new business results in both food and facility services, reflecting solid levels of new business we signed during the course of fiscal 2009. Our sports and entertainment sector had a sales decline at a low single digit rate, primarily due to the softness in convention centers, cultural attractions, and national parks. Our stadiums and arenas business has performed at levels comparable to the prior year, with both attendance and per capita spending levels about flat overall. Adjusted operating income in the North American food and support services segment increased 6% to $137.2 million led primarily by strong profit growth in higher education and solid overall profit performance in the other sectors. The positive effect of currency translation on our Canadian operations contributed about two percentage points of the profit growth in the quarter. Segment margins improved by about 30 basis points compared to the prior year.

Now, turning to the international food and support services segment. first quarter sales of $648 million were up 8% over the prior year period, due entirely to the positive impact of currency translation in the quarter. Organic growth was down by the mid-single digits with negative organic growth in a number of our country operations, more than offsetting strong sales growth in Chile and Argentina. Many of our business food service client locations are experiencing reduced discretionary spending and lower employee population levels as compared to last year. We are cautious about the rate of improvement we will see in 2010 especially in countries with economies that have been particularly hard hit such as the UK, Ireland, and Spain.

first quarter adjusted operating income of $24 million was up 12% compared to the prior year quarter, with all of the growth resulting from the positive impact of currency translation. Excluding the impact of currency profit was about flat for the quarter. Many of our country operations continued to do a good job of managing their cost structures in the face of a challenging overall environment. In our uniform and career apparel segment, first quarter sales of $381 million were down 11% from the year ago quarter, primarily reflecting reduction in the number of uniform wearers at our client locations as compared to the prior year. The segments overall organic sales growth was comparable to the reported decline with the direct marketing business continuing to produce weaker sales results than the rental business. The rental decline in the quarter was roughly comparable to the fourth quarter fiscal decline.

Because of the sensitivity of the uniform business to employment levels we will need to see stability and growth of employment for this segment to begin to generate better performance. This is the case with our business and industry sector within food and support services. We are seeing signs of stabilization among our uniform client base as well. And our year-over-year performance should improve as we move to the back half of the year; however, our outlook for this segment will remain cautious until we see signs of meaningful and sustained deployment growth. In the meantime, our team continues to manage the cost structure, while delivering high quality service to our clients and to our customers.

Uniform segment adjusted operating income was $32.4 million down from $37.4 million in the year ago quarter, as a result of the decline in sales as compared to the last year. The aggressive cost reduction efforts have clearly taken hold during fiscal 2009 and early 2010, which have allowed the business manage through this difficult sales environment and position us well to benefit once sales growth returns. Corporate expenses, adjusted to exclude the items Chris described earlier, were $7.1 million in the quarter compared to 8.6 million in the year ago quarter primarily reflecting reduced staff and administrative spending.

Now let me turn it back to Chris for some additional details.

Thanks, Fred.

I'd like to make a few comments on our capital structure and cash flow. We are pleased that for the trailing 12 months ending January 1, 2010, our adjusted EBITDA increased to $1.058 billion up from $1.35 billion at October 2, 2009. Interest and other financing costs were $109.1 million for the first quarter compared to $125.2 million in the prior year quarter. Approximately 75% of our total debt portfolio is at fixed interest rates and our overall weighted average cost of debt at quarter end was approximately 6.40%. Total reported debt at the end of the quarter was $5.777 billion. Our secured debt as defined in our credit agreement totalled $3.987 billion, including a term loan balance of $3.612 billion and a revolver balance of $66 million. Our $250 million accounts receivable securitization facility was also fully utilized as of quarter end, up from $235 million of utilization at the end of fiscal 2009.

We continue to enjoy a strong liquidity position, and as of quarter end, we had approximately $520 million of available borrowing capacity under our revolving credit facility. We also had reported cash of $123 million at quarter end including approximately 55 million of excess cash. Based on our growth and trailing EBITDA and lower debt levels, compared to the same quarter last year, our secured debt ratio improved to 3.70 times as of January 1, compared to 3.77 times in the year ago quarter and compared to 3.72 times at our fiscal 2009 year-end. Net capital expenditures for the quarter were $58 million compared to $75 million in the prior year quarter as we continue to maintain a disciplined approach in evaluating and investing in opportunities. For the full year, we would expect that net capital expenditures would be modestly lower than prior year levels.

As expected and consistent with historical patterns, working capital was a use of cash for us during the first quarter, but our performance was favorable in comparison to prior year and to our own expectations coming into the quarter. This relative improvement partly reflects our continued emphasis on aggress every managing our investment in working capital across all of our businesses and these efforts will remain a key priority for us; however, as we have previously indicated, for the full year we do still anticipate that working capital will be a more typical use of cash for us, overall. During the first quarter we spent $79 million on acquisitions, primarily related to the completion of the previously announced acquisition of a facilities and property management company in Ireland which we funded out of our excess cash resources at the end of October. We will continue to seek to invest strategically but prudently in certain sectors and geographies as we move forward.

Now let me turn the call back to Fred.

Thanks, Chris.

Considering the difficult economic environment we are operating under, we are pleased with our overall performance during the first quarter. Both our year-over-year top line and bottom line performance has improved sequentially over the fourth fiscal quarter, and we're quite pleased with the fact that we're able to improve our margins in the North American segment and that our margin decline in uniform segment was relatively modest in light of the sales decline. While our more cyclically sensitive businesses remain clearly constrained, we continue to benefit from a portfolio, sectors, geographies, and clients that provide us with a good balance overall.

We also have and will maintain a high focus on managing our cost and cash flow as we move through 2010. We continue to remain quite excited about the longer term growth opportunities we see as we look across our businesses and sectors, importantly, including our ability to grow significantly with our existing clients, and we believe we are well-positioned to seize these opportunities as we move through 2010 and the years ahead.

Thank you again for your time this afternoon and for your continued support of Aramark, and we would now be happy to take your questions.

(Operator Instructions). Our first question comes from Karru Martinson with Deutsche Bank.

Good afternoon. When we look at the year, one could argue that this was the year most challenging comp quarter here and we should get easier as we go forward. Is that how you're looking at the year from your end?

This is Fred. I think in general the comps get better in the back half of the year. I think the second quarter is a bit of a swing quarter.

It varies a little bit by business. I think for the uniform business, clearly the comps start to get better in the back half of the year, less so in the second quarter. I think in our business food and facilities business, the comps get better a little bit earlier. I don't want to split hairs, but I think it's more third/fourth Quarter than second quarter.

Yes, just to remember, the sectors had different weightings in the quarters. Q1 is a very significant quarter for the higher ed business, which is obviously performing well in a higher margin business. Q2 is less prominent and so there are some sector mix issues that may add a little bit of ebb and flow to the quarterly performance.

Okay, and when we look at North America, you guys I think last quarter was kind of a mid-single digits organic revenue decline. Obviously, we are seeming to get some traction there. Do you feel that that will still kind of improve more as you said third fourth quarter mix or should we potentially start to see some traction there on a positive side in the second quarter?

I think there may be some improvement in the second quarter but more likely in the back half of the year. As you know, we and most other companies regardless of the business were weakening as they moved through the year. In our business food and facilities business, we did see some benefit over the holidays and some increased spending by our clients for events around the holidays that was cut back pretty dramatically with most of our clients last year.

What we haven't yet seen is any meaningful pick up in employment and that's one thing that caused the disparity between say business food service and uniform services, because it's really more dependent on employment, so over the period of several quarters, it's going to be driven in some part by actual increases in employment levels.

Okay, and we haven't seen really any change in your client retention rates, still in the mid-90% range; correct?

Yes, first quarter it was certainly in line with our expectations and so for the full year we would expect -- we're certainly targeting to achieve those similar levels in the mid-90s.

Thank you very much guys.

You're welcome.

Next up, we'll hear from Reza Vahabzadeh from Barclays Capital.

Good afternoon.

Hi, Reza.

So, in the USFS business, on a year-over-year basis, your margins moved up nicely, I think first time in a while. Any particular drivers of that?

Yeah, I think a couple of factors. We obviously from a cost perspective as we work through the balance of 2009 aggressively manage cost structure, certainly in some places, but reduced and removed some overhead; and as we started to see a little better performance on the growth side or rate of decline side there's certainly some increased flow through.

Fred's point about increased discretionary spending on the business food service side, that is a higher margin service line for us, so that was helpful. And then certainly the food cost inflation environment is one that's much more benign than its been in quite some time. It certainly got more benign as we went through 2009, but on a year-over-year basis, that's now become a bit helpful to us overall.

Got it, and is the education business higher margin than the other businesses you have?

It's somewhat higher margin. Healthcare and higher education would be on the higher side and corrections for that matter. They would be higher than the average with V&I and S&E somewhat lower than the average so that's obviously helpful with those businesses growing.

Right. So you touched on cost savings both in the USFS business and previously on the rental business. Are you now at your full run rate of cost savings in your various businesses and I know rental uniform business is still in a challenged environment, but I don't know if you have more cost savings to roll off your P&L or are you at your full run rate?

I think we consider ourselves pretty much now at our full run rate. If there's a further downturn in the economy, obviously, something we would all have to, as a Management team, think about where we go from here, but assuming that we've stabilized, we have essentially taken the cost out of the system that we needed to take out.

Okay. And then on the healthcare business, you've been talking about the new business gains you've had. When did you start to benefit from the brunt of the new business on the healthcare side and when do we start to cycle against it?

We really started to see it in this first quarter. If you remember, we were sort of flattish as we exited 2009 and again grew in the mid-single digits in the first quarter as we opened a lot of that new business fairly recently and obviously depending on what sort of new business year we have this year, that will dictate how we exit the year, but we anticipate again a mid-single digit type growth rate as we look out here over the next several quarters.

For the healthcare business?

For the healthcare business, right.

Right, I hear you. And then on the acquisition plans, is your appetite or is the target environment materially different than the last couple years?

I wouldn't say materially different. Again, I don't think we've seen by any stretch of a return of much more active environment on the uniform side. For example, we've talked about a lot of those smaller independents trying to weather this period and hopefully get back to valuation levels that I think they had long sought so I don't think there's been any change there yet, frankly.

I think obviously, the capital markets having opened up, starts to give people some other potential access to valuations that might be attractive to them, but sitting here today I don't think there's been a real material change in the level of activity or people's mentality.

Right, and so the use of free cash flow this year would be for what exactly?

I think it's the same strategy we've articulated. It will be first and foremost to fund strategic acquisitions that we can find that make sense both strategically and economically, and if to the extent we can, we will fund them and to the extent we can't, we will reduce debt.

As you see in the first quarter with the facilities acquisition, which was in the range of $75 million, and that's against, obviously, free cash flow that is clearly higher than that, and so the amount of debt reduction through the balance of the year will be a function of whether there are any additional acquisitions of any substance between now and--

Year-end.

Right. Just lastly, the level of financial challenges that any states in the US face, does that present challenges and/or opportunities for Aramark?

Well, in the challenge category, it certainly is a relatively small business for us, but it certainly challenges our goals to direct marketing business because they sell to essentially federal, state, and municipal governments in large part, but this is the public safety direct sale business.

Right.

And our corrections business, it's a plus and a minus. It's a minus in that as our municipal or other government clients come under pressure, sometimes that pressure flows through to us. On the other hand, as we've talked about before, we're a more effective provider of these services and typically at higher quality than they can be performed in-house so that opens up opportunities.

Got it.

I'd say right now neither one of those trends is overpowering the other.

Fair enough. Thank you much.

You're welcome.

Next up we'll go to Carla Casella with JP Morgan.

Hi. One housekeeping item. You do have some revolver during the quarter, I'm assuming it's because of the timing of the acquisition and cash flow. When would you expect to pay down the revolver borrowings or would you expect to sit on a balance through the year?

It will really depend on timing. A large part of that borrowing is up in Canada and just given the swings in cash flow here in the US, it's really timing. Certainly, by the end of the fiscal -- likely by the end of Q3, again putting acquisitions aside, we would expect the revolver to be to zero.

Okay, and then is there, do you have a cash flow sweep payment that you have to make in your term loan?

We do. It's based on the full year, so it's not calculated until the end of the year, and it is at our current leverage levels, 50% of our as defined free cash flow, so in '09 it required $107 million payment which we made and so there will be a 50% free cash flow requirement based on how cash flow ends up for the full year.

And it's all made the first quarter?

It's due when the K is filed so it's effectively due in December, but we would certainly anticipate making it in the September quarter.

Which we did last year. We estimated pretty closely what it was. Essentially, it was cash sitting on the balance sheet. Frankly, even independent of the requirement, we would pay the debt off, and in that case the debt was paid off in September of 09.

A small true up, right.

Okay, that's great. That's all I have for now, thanks.

You're welcome.

(Operator Instructions). We'll go to Bryan Hunt with Wells Fargo Securities.

Thank you. Fred, you all talked about how food costs have been somewhat -- or Chris -- of a benefit relative to last year. As unemployment has crept higher, has labor cost become a benefit as well in your cost savings initiative as you turned over some of your workforce?

I wouldn't, this is Fred. I wouldn't say that labor cost reductions have been a big factor. Our labor cost efficiencies over the last 12 months haven't come from reduced wages generally. They've come from operating more efficiently with a lower number of employees.

Okay, thank you for clarifying that. And then next, looking at your hedges, you all had some nice gains from hedging in the current quarter relative to a year ago. Could you talk about just your hedging strategy coming to this year? Have you all taken a more conservative position and taken bigger positions on whether it's natural gas or gasoline or diesel relative to the year ago period?

No. It's really just, both those programs are relatively new and so we've sort of grown into a strategy where we're really looking to hedge on a rolling six quarter basis, so prior to entering the near quarter, we would have about 80% of our exposure hedged and we would have layered in over a number of quarters to get there, and so really you're just seeing now a steady state nature of the program.

A year ago, given all of the volatility in gasoline prices in particular, there was obviously a lot of noise in the system based on when we did some of the hedging when gasoline was $4 and higher, but there's been no change in view. The idea is really to just build in some predictability into the natural gas and gasoline expense lines for the uniform business, so we're not exposed to the kind of volatility that we were a year or two ago.

Okay, and then lastly, there's been several stadium contracts awarded as an example, Banc of America Stadium went from self-manage to a third party provider. Could you talk about when these stadiums come up for contract renewal or get bidded out, 1.) the process you all go through in evaluation, and then 2.) whether or not you feel like you've missed out on an opportunity and not won a couple of those stadiums that were recently awarded?

Well, we, typically, because of our very meaningful position in the stadium and arena market, regardless of the sport although we're particularly strong in major league baseball venues, we would typically be in the mix if a facility either self-operating goes out to bid or it's with a contractor and goes out to bid; so it would be pretty unusual I think for us not to be involved, but like anything else, these are very competitive contracts, they're large contracts from a revenue point of view, which makes them attractive.

There's a certain visibility to them which makes them attractive to some and they tend to be more capital intensive and they tend to be long term, so we're typically in there as one of the leading providers in the segment; and we're competitive, but in some cases, at the end of the day, we just don't think that the overall economics are something that we can live with and when that happens we're pretty disciplined about knowing when to hold.

All right, and last question. It seems that the convention business has had a bottom and is starting to turn. Can you give us any clarification on that opinion or whether you feel like this is transpiring and I appreciate your time.

Sure, thanks, Brian. Yes, as we went through 2009, the convention center was very weak as we had talked about and there was certainly towards the back part of the year where we're seeing rates of decline in the 25% range on a year-over-year basis. That has clearly moderated somewhat.

I think we're still seeing rates of decline on a year-over-year basis that are more in the 10% to 15% range and I think as we look out over the balance of the year, there's some reason to feel more confident that that number will, that rate of decline will continue to narrow and hopefully at some point, we're looking at a business that's flat again year-over-year. Clearly, when the recession started to take hold we saw a lot of activity in terms of bookings not coming to fruition and certainly the attendance levels being at well below historical levels, and all of those trends are starting to moderate, but still I think a ways to go to get fully out of the woods.

At this time we have no further questions. I'd like to turn the call back over to Mr. Holland for any closing comments.

Well, thanks very much for your participation today and we hope you have a great afternoon.

A rebroadcast of this conference is available starting today at 6:00 PM Eastern time and will run until February 16, 2010, at midnight Eastern Time. You may access the rebroadcast by calling 888-203-1112 or 719-457-0820. Please reference passcode 9898420. That concludes our conference call for today. Thank you for participating and have a nice day. All parties may now disconnect.