Aramark (ARMK) 2010 Q2 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the ARAMARK Corporation's second-quarter 2010 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 up the conference 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 operations for the second quarter of fiscal 2010. 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 and year-to-date 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, you may want to refer to the Form 10-Q we filed this morning, which contains our second-quarter results for fiscal 2010. This Form 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 Form 10-Q as well as schedules we posted to our website prior to this call 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; the impact of stock option expense; as well as the $34 million charge we recorded in the second quarter of fiscal 2009 to reposition our Uniform and Career Apparel segment. All of these items are detailed in 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 Risk 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.

I would now like to turn the program over to Fred.

Good morning and thank you for joining us for our second-quarter 2010 results call. I would like to review our business and operating results and then have Chris cover a few additional details on our performance in the quarter and in the half.

Overall, we are pleased with our performance in the first half of fiscal 2010 in light of the still challenging operating environment. Our less economically sensitive businesses delivered solid overall performance in the first half, while our more cyclical businesses in general continued to stabilize, with these sectors showing sequential improvement in organic sales growth in the second quarter compared to Q1.

We're also pleased with our cash flow performance, having delivered solid improvements so far this year compared to both last year and our expectations. Our first-half client retention rates and levels of annualized new business improved over last year, and our pipeline of new business opportunities remain solid.

Now turning to our overall results for the second quarter, we achieved sales of $3.1 billion, up 2% from the prior-year quarter. Organic sales growth -- which excludes the impact of currency translation and acquisitions -- was negative 1% in the quarter.

Adjusted operating income was $143.9 million, down 4% from the prior-year level, including a 3 percentage point positive impact from currency translation.

Profit results in the quarter in part reflect a seasonal portfolio mix, with the more economically challenged business sector and Uniform business having greater relative weight than higher education when compared to the first quarter. Results in the quarter also reflect lower levels of activity in our remote camps business in Canada; some softness in healthcare base business profitability, as we adjust our service models to support the changing needs of our clients; and the impact of the earthquake in Chile on our operations there.

For the first half of fiscal 2010, sales were $6.3 billion, up 1% over the prior year and down 2% on an organic growth basis. Our adjusted operating income of $330.4 million was flat to the prior year, with currency translation contributing about 3 points of the growth for the half.

Now turning to our North American Food and Support Services segment, second-quarter reported sales were up 2% to $2.1 billion with solid growth in higher education and healthcare largely offsetting declines in the business and industry sector. Organic sales growth for the segment was flat in the quarter.

For the first half, reported sales were up 1% to $4.3 billion. Organic growth was also flat with the overall performance again being led by solid growth in higher education and healthcare.

Turning to the sectors within the North American business, in general the as-reported sales growth rates I am about to describe reflect a positive 1 to 2 percentage point impact from a stronger Canadian dollar.

Our business and industry sector had a low single-digit sales decline for the quarter and a mid-single-digit sales decline for the half, primarily reflecting the lower employee population levels at many of our client locations compared to the same period last year, as well as reduced activity in our remote camps business in Canada resulting from lower drilling and exploration activity.

During the second quarter, we did see continued stabilization in discretionary spending and employee population levels in many of our business Food Service accounts. As a result, the year-over-year decline in the second quarter reflected a modest sequential improvement over this year's first fiscal quarter. While we are still awaiting signs of any material and sustainable improvement in employment levels, we do expect this sector to generate positive growth as we move through the rest of the year.

The education sector had mid-single-digit sales growth for the quarter and for the first half, with solid base business growth in our higher education Food business offset somewhat by the negative impact of inclement weather and some prior-year lost business in K-12. We have generated strong new business so far this year and both Food and facilities services, and we are continuing to invest appropriately in pursuit of this growth opportunity.

In our healthcare sector we realized mid-single-digit sales growth for the quarter and for the first half, driven by solid base and net new business growth in both Food and facilities services. Across our service portfolio we continue to see attractive base and new business growth opportunities, and our current new business pipeline is robust.

Our sports and entertainment sector had low single-digit sales growth in the quarter and for the first half, reflecting stabilizing trends in both our convention centers and parks businesses. In our stadium and arenas operations during the first half, we generally saw somewhat lower attendance levels year-over-year, offset by somewhat higher per-capita spending. These trends are generally consistent with what we are seeing so far with Major League baseball, improved per-caps and somewhat lower attendance, which as always is further influenced by team performance.

Adjusted operating income in the North American Food and Support Services segment fell 2% in the quarter to $107.7 million, with solid year-over-year performance in education and sports and entertainment offset by declines in our business and industry and healthcare sectors. Currency translation contributed approximately 3 percentage points of the growth for the quarter.

For the first half, segment adjusted operating income grew 3% to $244.9 million led by strong profit growth in education and good cost control in sports and entertainment, offset by demand-driven profit declines in business and industry and some softness in healthcare base business profitability as we adjust our service models to support the changing needs of our clients. A stronger Canadian dollar contributed 3 percentage points to the profit growth in the half.

Turning to our International Food and Support Services segment, second-quarter reported sales of $634 million were up 13% from the prior-year period with organic sales up 1%. Organic growth in the quarter was led by continued solid performance in Chile, Germany, China, and Argentina, offset by organic sales declines in the UK, Ireland, Korea, and Spain primarily reflecting the particularly challenging economic environments in those countries.

For the first half, reported sales were up 10% to $1.3 billion with negative organic growth of about 1% led primarily by growth in Chile, Argentina, and Germany offsetting organic declines in the UK, Ireland, Korea, and Spain.

Second-quarter adjusted operating income was $18.7 million, down from $21.4 million in the prior-year quarter. Profit results in the quarter primarily reflect the weakness in the UK as well as an approximately $2 million negative profit impact in the quarter due to the earthquake in Chile. Currency translation contributed about 3 percentage points of the growth in the quarter.

For the first half, adjusted operating income was $42.7 million, flat compared with the prior year due to the positive impact from currency translation which added about 8 percentage points of growth. Excluding the currency impact, the lower first-half results were primarily driven by profit declines in the UK.

In our Uniform and Career Apparel segment, second-quarter sales of $360 million were down 10% from the year-ago quarter on both an as-reported and an organic basis, with our Uniform rental business declining somewhat less than the segment overall, as the direct marketing business declined as planned due to the WearGuard restructuring.

For the second consecutive quarter the segment did show ongoing modest sequential improvement, though the market environment remains extremely price competitive. For the first half, segment sales of $741 million were down 11% from the prior year on both a reported and organic basis, with our Uniform rental business down in the high single digits.

As with our business and industry sector clients and Food and Support Services, we have seen signs of stabilization among our Uniform client base. Our year-over-year performance should continue to improve as we move through the second half of the fiscal year. However, our segment outlook remains cautious as price competition remains fierce and we have yet to see signs of meaningful and sustained jobs growth.

The segment's second-quarter adjusted operating income of $25.5 million, down 9% compared to the last year on a 10% decline in sales. So we were able to hold our margins roughly constant. These results in part reflect our ability to mitigate the profit impact of the sales decline through our cost-reduction efforts and the repositioning and integration of our WearGuard direct marketing business within the rental business, which we successfully completed this past quarter. As a result, we now have a more focused direct sale business which is more tightly coupled with our much larger rental business.

For the first half, adjusted operating income was $57.9 million, down 11% compared to last year on an 11% decline in sales. Again reflecting the benefits of our cost reduction and mitigation efforts across the segment.

Corporate expenses, which exclude the items that Chris mentioned earlier, were $8 million in the quarter compared to $9.2 million in the year-ago quarter, primarily reflecting reduced staff and administrative spending. For the first half, expenses were $15.1 million compared to $17.8 million in the prior quarter.

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

Thanks, Fred. I would like to comment on our financing, capital structure, and cash flow.

Our adjusted EBITDA for the trailing 12 months ending April 2 was $1.048 billion, down slightly from $1.058 billion at January 1 of 2010, and up from $1.035 billion at October 2, 2009. Interest and other financing costs were $117.8 million for the second quarter compared to $119.2 million in the prior year.

The current quarter's total includes approximately $8 million of expenses related to the Credit Agreement amendment and term loan extension we completed in March. We are very appreciative of the broad support that the amendment and extension received from our investors. We believe that the success of the extension further enhances our financial and capital structure flexibility; and we would like to thank all (technical difficulty) provided their consent and participated in the extension.

Turning back to interest expense. For the first half, interest and other financing costs were $227 million compared to $244.4 million in the prior year. Approximately 76% of our total debt portfolio is at fixed interest rates; and our overall weighted-average cost of debt is approximately 6.3%.

Total reported debt at the end of the second quarter was $5.751 billion, down from $5.853 billion at the end of last year's second quarter. Our secured debt as defined in our Credit Agreement totaled $3.951 billion, including a term loan balance of $3.590 billion and a revolver balance of $65 million, which has since been reduced.

Our accounts receivable securitization facility had $244 million utilized at quarter end. We continue to enjoy a strong liquidity position overall and at quarter-end had approximately $520 million of available borrowing capacity under our $600 million revolving credit facility, and $252 million of reported cash including approximately $175 million of non-operating invested cash.

Based on our trailing adjusted EBITDA, our secured debt ratio was 3.70 times as of April 2 compared to 3.70 times as of January 1, 2010, and 3.72 times as of October 2, 2009.

Net capital expenditures for the quarter were $49 million compared to $75 million in the prior-year quarter. For the year to date, net capital expenditures totaled $107 million compared to $150 million last year. While we anticipate a higher level of spending in the second half of the year as compared to the first half, for the full year we do expect our net expenditures to remain somewhat below the prior-year level as we continue to be disciplined in managing our use of capital.

As expected, and consistent with historical patterns, working capital was a use of cash for us during the first half of our fiscal year. However, we are pleased that our year-to-date working capital performance was comparable to last year's very strong performance; and we have nicely exceeded the expectations we had coming into the year.

Overall, our teams are continuing to do an excellent job in managing our receivables. And our days sales outstanding are improved again this quarter as compared to last year. While some reinvestment in working capital will be required when sales begin to grow, we are continuing to maintain a sharp focus on working capital management as we move through the balance of fiscal 2010.

For the year to date we spent a total of $81 million on acquisitions compared to $49 million in the prior-year period. This year's spending relates primarily to the acquisition of an Irish facilities management company which we closed in the first fiscal quarter and funded out of our cash resources at that time. We do continue to seek to make strategic investments in certain sectors and geographies, but we will be prudent and disciplined in the pursuit of these opportunities.

Now let me turn it back to Fred.

Thanks, Chris. Summing up our performance so far this fiscal year, our Food and Support Services business has improved to deliver flat organic growth and comparable levels of profitability. Our Uniform rental business is performing relatively well in today's high unemployment environment, and we have moved decisively in recent quarters to reduce our direct sales cost structure and better integrate our rental and direct sales capabilities, an effort that we are pleased to say is now largely complete.

We are also pleased with our overall cash flow performance so far this year, which has improved compared to last year's strong results and is ahead of our own expectations. We are remaining disciplined in our use of capital both for investment and in working capital management.

While we expect improving growth trends, as we look forward the economic environment will continue to challenge certain sectors and countries more than others. Until we see sustained levels of employment growth it will be difficult for our more cyclical sectors to drive significantly better performance. Fortunately our portfolio of sectors, geographies, and clients continue to provide us with a good balance overall. And we remain excited about the growth opportunities we see as we look across our businesses.

We will continue to invest and to pursue these many opportunities as we move through the balance of 2010, while still managing our cost structure and cash flow appropriately.

Thanks again for your time this morning and for your support of ARAMARK. We would now be happy to take questions.

(Operator Instructions) Reza Vahabzadeh, Barclays Capital.

Good morning. Just a couple of housekeeping items, perhaps for Chris. What was the contribution of currency and the acquisition in dollar amounts, if you happen to have it handy, on revenues and EBIT or EBITDA?

This is Fred. I think on revenues, which is broken out in the non-GAAP schedule, I think the overall impact of currency year-over-year was about $80 million.

Okay.

We don't show and break out the EBIT impact; but it's roughly in line with the comments we made in our prepared remarks where we talk about for the whole Company and both for North America and for International what the percentage impact is. So I think you can see that off of our prepared remarks.

Okay. Then the acquisition?

For the -- we closed the acquisition the end of October, so for the half there is about five months' worth of sales results of the business. It was approximately a $70 million to $75 million annualized revenue business.

Is it relatively even, evenly distributed throughout the quarters and months?

Yes, it is. As a 100% facilities management business, you typically see very little seasonality.

Although we acquired it November 1.

Yes, I said we acquired it at the end of October, right. So --

Got it. Okay. Then you talked about the healthcare business would seem to have decent revenues organically, but you talked about softness in the EBIT performance. Can you elaborate on that, please?

Well, as we work with our clients we have been adjusting some of our service delivery models and our support cost to be responsive to some of the pressures that our clients face. So that had some impact on our overall profitability, but we expect that to be worked out as we approach the back half of the year. And as you mentioned, we are seeing pretty decent top-line growth.

Got it. Then as far as the B&I business, just trying to better understand your comments on that. Is that a business that you think will show organic revenue growth in the second half, or at least flattish trends?

We're hoping so.

Yes.

One needs to think of that in a couple of components. There is the traditional business dining business, which is still negative but probably better than the overall sector.

Our refreshment services business, office coffee, which is more akin to our Uniform business, which is targeting small businesses and is weaker. And then as I mentioned, we are also affected in the quarter by our Canadian remote camps business, which is supporting drilling activity. That really is more affected by natural gas prices year-over-year and that sort of thing.

But we are expecting to see hopefully flattish to positive organic growth as we move to the end of the year.

Got it. Then you talked about price competition in the Uniform rental business. Any other areas where price competition may have intensified recently?

Not recently. Price competition remains in effect across our businesses. We mentioned it specifically in Uniform, but clearly in Food and Support as well. But I wouldn't say that in the last three months it has really changed for the better or for the worse.

Right. Then on the European side of the business, I don't know if this is accurate, but it sounded like many of the European countries were still weak for you. Is that any weaker than recent quarters' performances? Or is it any stronger, even though they are all lower year-over-year?

I think, and again -- there is a couple -- Germany we said actually has held up well. Obviously the UK and Ireland in particular, which are relatively large businesses for us within our International portfolio, sequentially are not continuing to really weaken much; but from a year-over-year perspective you are continuing to see very significant organic declines compared to last year.

So I think we would characterize them as stabilizing sequentially, but at lower levels certainly than other economies. And in particular the US business services sector have stabilized that.

Right. Then on the other hand, Germany was sequentially stronger and year-over-year stronger?

Correct, modestly.

Got it. Thank you much.

Karru Martinson, Deutsche Bank.

Just a follow-up on that, the European business. Is it just that you lost the business to someone else? Or is it that your customers have just completely scaled back and this is something that over time you feel that you can return to a normalized growth rate?

It's really a couple of factors. In the UK in particular, we are highly financial services concentrated, which obviously is a sector that has become much more significant within the UK economy, but also a sector that has been pretty dramatically impacted here.

So -- and as you may know, there have been several consolidations within the financial services sector in the UK on the back of some of the government-related bailout activity. So through both lost business through some of those consolidations, where we were on the losing end of some of the consolidations; and then fairly significant reductions in populations at the sites, as well as dramatic declines in discretionary spending, we are feeling and seeing an impact in the UK.

Again, that is disproportionate compared to other countries where we just never had the same financial services sector concentration. So certainly we would expect stability over time. And then certainly we think we have got nice growth opportunities within the UK over time outside of business services, healthcare, education, our remote services business, etc.

But it is just again coming through what is a very challenging economic environment.

On the Uniform and Career Apparel side, you posted a nice improvement in operating segment profitability. Is that the new run rate for the business at these levels? Or do we think we can further improve on that?

Our expectation is as we move through the back half of the year that our year-over-year top-line performance and year-over-year EBIT performance will continue to improve sequentially.

We're seeing a lot on higher protein costs going forward here, especially through the summer. Are you expecting any kind of impact on your margins? And how are you addressing that?

We have seen some pickup in our overall food costs going back as you know a year and a half ago or so. We were seeing very significant increases, we and others across the economy.

We actually moved into a position where we saw modest year-over-year declines about six months or so ago. And now we're seeing modest increases overall.

So the level of increases we're seeing across the mix of what we buy -- which as you know includes, for example, a significant amount of beverages which is not the affected by the trends that you mentioned -- we're seeing modest year-over-year increases.

It is not something that is a particular problem for the business in terms of managing the profitability. As you know we have quite a bit of flexibility in the mix of what we serve.

So at this point, we are keeping a close eye on it, and I wouldn't say we are not somewhat concerned about it. But we think we can work our way through it given what we see.

Okay. Just lastly, with the successful amend and extend of a chunk of the term loan here, how are you guys looking at your capital structure and your use of cash flow going forward?

Yes, again, I think we were pleased with the outcome. I think we look to a capital structure now that is very manageable from a maturity standpoint, at least in our opinion. And we will continue to use free cash flow, absent having acquisitions that we think make sense for us to finance, use free cash flow to reduce debt. And as we move through the back part of the year, that is what we will intend to do -- again, depending on what sort of acquisition activity we see.

Thank you very much, guys.

Bryan Hunt, Wells Fargo Securities.

Thank you. I was wondering if you all could give us a little bit greater detail about your International business in particular. Your exposure to Portugal, Italy, Greece, and Spain, given the recent disruptions in those markets?

That is a pretty easy one for us. We have zero exposure to Italy, Greece, and Portugal. We don't operate in any of those countries.

We do operate in Spain. It has been a country in which we have operated for quite a long time. We have a pretty established operation there. I think within the constellation of ARAMARK country operations it is in the medium category, so not one of the largest and certainly not one of the smallest.

One of the benefits that we have in the Spanish market is that we actually have a meaningful percentage of our overall sales coming from public schools, from the K-12 market. Our B&I revenues in Spain are actually relatively small, one of the smallest across all of our country operations. Not that schools aren't under pressure themselves, but that does help us somewhat in Spain.

Additionally, could you talk about your Chilean exposure, what the makeup of businesses is there?

In Chile, we have a large operation; we are the overall largest provider in Chile. So in the larger, medium, and small category it would be in the first rank of operations. Sort of the lower part of the first rank in terms of overall size.

I believe about 50% or so of our sales are related to the mining industry, which is very substantial in Chile. We also have mining contracts now in Peru and in Colombia, essentially off of the Chilean operation. And a pretty good sized subsidiary in Argentina.

We have got a very solid level of B&I business in Chile as well. It is a very fine operation.

It was, as we mentioned, affected by the earthquake. Some of that was property damage, and we absorbed in the quarter part of the $2 million I mentioned was absorbing a deductible on property losses. The rest of it being insured.

And then some operational impact. Most of the earthquake was felt most significantly in the south, down around Concepcion. And our operations actually in the south are relatively small. So we don't see any long-term damage.

So it sounds like that business has normalized going into Q3, it sounds like.

We think so. Pretty close to it. We don't see any meaningful lingering impacts as we move to the back of the year.

Okay. Thank you very much.

Reade Kem, Bank of America Merrill Lynch.

Good morning. Thanks. Just wanted to follow-up on the discussion around the healthcare services model which is the evolving. It sounds like that you are maybe reducing rates or maybe service intensity.

I was just wondering, is that because of general pressures on the customer base there? Perhaps their nonprofit nature? Just wanted to learn a little bit more about that.

Well, we do -- there is some pressure through the overall healthcare system. Having said that, we can clearly improve efficiency and drive cost savings in that market. You may recall that a significant percentage of the overall healthcare market for our services, Food Service and facilities services, is self operated.

So while we have to be increasingly efficient in our overall cost structure vis-a-vis our existing clients, which we're very comfortable we can do, we're benefiting really in terms of the new business from the fact that -- against the majority of the market, which performs services in house -- we have really got something to offer both in terms of quality and cost.

Okay. That kind of shift that is going on with some of the existing clients, is that likely to register in organic growth rates, or operating income, or more the latter?

I think we are hopeful that we will continue to show pretty decent top-line organic growth rates in healthcare. As I mentioned, pipeline in healthcare remains robust. We have gotten a pretty solid level of new business.

So there is still, as we said, still a lot of opportunity there, for sure.

Yes, I think a little context for you. There are certainly some clients and some of it is going to be geographically driven, where they are seeing pressures from increased indigent care. Obviously the increases in unemployment rate means fewer people with healthcare.

So there is certainly some clients that are feeling pressure as a result of the overall economic environment that we certainly think will work its way out over time. We are certainly working to continue to support those clients through a challenging period.

But overall, this is a sector that we see having attractive top- and bottom-line growth opportunities for us over time.

Okay. Then in the same vein on the education side, are you seeing those kinds of economic pressures exert themselves in terms of customer feedback or requests for any modifications? Or is it just still pretty much the way it has been for various quarters?

I wouldn't say we are immune to it. Particularly -- well, both private schools and public schools feeling some pressure in terms of tuition they can charge, reimbursement from governments or funding from governments. But I wouldn't say that it is a major factor in the business right now or that it has really changed one way or the other over the last quarter or two.

We continue -- that business continues to show very solid top-line and bottom-line results. The amount of new business we have signed year-to-date is quite a bit higher than last year.

And we continue to show base business growth because there is a lot of opportunity particularly on the retail side inside our existing college campuses.

Got it. Just last question. In general, are there any segments or sectors where you're less aggressive on bidding for business because you may be seeing more aggressive behavior on the part of your competition? Thanks.

Yes, I think -- and this is maybe a little bit of a longer-term trend that we have seen. But within the sports and entertainment and stadium and arena sector in particular, we are probably sharpening our pencil a bit more as we have seen the level of competition increase and the aggressiveness of some of the economic terms increase.

So there is a sector where I think we maybe have backed off a little bit as we have seen a multiyear trend play out towards more aggressive terms.

At this time we have no further questions. I would like to turn things back to Chris for closing or additional remarks.

Great. Thank you very much. Thanks for your attendance today and we hope you have a terrific day. Take care.

Once again, ladies and gentlemen, that concludes our conference. Thank you all for your participation.