Aramark (ARMK) 2010 Q3 法說會逐字稿

Good afternoon, and welcome, ladies and gentlemen, to the ARAMARK Corporation third-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 the conference up for questions after the presentation.

I will now turn the conference 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 third 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 third quarter and year-to-date 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, you may want to refer to the Form 10-Q we filed earlier today, which contains our third-quarter results for fiscal 2010. This Form 10-Q can be found on our website at 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 the schedules posted to our website before this 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'd now like to turn the program over to Fred.

Good afternoon, everybody, and thanks for joining us for our third-quarter of 2010 results call.

I would like to review our business and operating results, and then Chris will cover a few additional details on our performance.

In light of a still-challenging operating environment, we are pleased with our overall performance for the first nine months of fiscal 2010. In general, our less economically sensitive businesses have delivered solid overall sales performance so far this year, while our more cyclical businesses have stabilized.

We continue to be very pleased with our cash flow performance, which has exceeded our expectations so far this year, and as a result we chose, as you may know, to make a $150 million optional term loan payment in June.

Our year-to-date levels of annualized new business and our client retention rates have both shown solid improvement compared to last year. And our pipeline of new business opportunities is quite strong across a number of our sectors.

We've also continued to invest this year in order to drive future growth, having spent additional P&L dollars to expand our sales resources in several of those sectors which have particularly attractive longer-term growth opportunities.

Now turning to our overall results for the third quarter, we achieved sales of $3.1 billion, up 3% from the prior-year quarter and up 2% organically, representing a return to positive organic sales growth for the first time since the end of 2008.

Adjusted operating income was $131.2 million, down 4% from the prior-year level.

For the nine months of fiscal 2010, sales were $9.4 billion, up 2% over the prior-year period and essentially flat on an organic growth basis.

Our adjusted operating income of $461.5 million was down 1% from the prior year, with currency translation contributing about 2 percentage points of growth for the nine months.

Now turning to run North America food and support services segment, third-quarter reported sales were up 4% to $2.1 billion, led primarily by growth in the education, business and industry, and healthcare sectors, which offset a modest sales decline in sports and entertainment.

Organic sales growth for the segment was 3% in the quarter.

For the nine months, reported sales were up 2% to $6.4 billion with organic growth of 1%.

Year-to-date performance was led by solid growth in higher education and in health care.

Turning to the sectors within the North American business, in general the as-reported sales growth ranges I'm about to describe reflect an approximate positive 1 percentage point impact from a stronger Canadian dollar.

Our business and industry sector had a high single-digit sales increase for the quarter and a low single-digit sales decline for the nine months.

The sector's quarterly results benefited significantly from our contract to provide support services, including temporary accommodations and feeding, for the vast Canadian security detail that served the G8 and G20 meetings in June, north of Toronto.

Excluding this single event contract, sector growth in the quarter would have been slightly positive.

During the quarter we did see some improvement in discretionary spending on the part of corporate clients, but have yet to see an increase in employee population levels at most of our business food service accounts.

The education sector had high single-digit sales growth for the quarter and mid single-digit growth for the nine months, led by solid base business growth in our higher education food business. We have generated strong retention rates, and new business in both higher ed and K-12 this year, positioning the overall sector well as we look towards 2011.

We have also been reinvesting in our sales and retention resources to support our future growth objectives in this very attractive sector.

In our healthcare sector we realized mid single-digit sales growth for the quarter and for the nine months as well, driven primarily by solid new business growth in both food and facilities services.

Across our service portfolio we continued to see numerous new and base business growth opportunities, and our current new business pipeline is strong.

In the current economic environment, we have experienced some pressure on base business, as existing healthcare clients attempt to address their own budgetary challenges and pressures.

Our sports and entertainment sector had low single-digit sales decline for the quarter and flat growth for the nine months, reflecting stabilization of stadiums, arenas and convention centers, as well as the positive impact of new sales on our parks and destinations business.

Consistent with major league baseball's results overall, our stadium operations -- which are obviously important in the summer -- continue to see slightly lower attendance levels in total, partly offset by higher per capita spending in comparison to the prior year.

These results are of course, as always, further influenced by individual team performance.

Adjusted operating income in the North American food and support services segment declined 4% in the quarter to $83.7 million, with strong profit growth in education, and sports and entertainment, offset by declines in our business and industry and healthcare sectors, reflecting the challenging budget situations faced by many of our clients.

For the nine months segment adjusted operating income grew 1% to $329 million, led by solid profit growth in education, and good cost control in sports and entertainment, offset by demand-driven profit declines in business and industry, and softness as I mentioned, in healthcare base business profitability.

A stronger Canadian dollar contributed about 2 percentage points of profit growth in the quarter and in the nine months.

Turning to the international food and support services segment, third-quarter reported sales of $603.1 million were up 3% from the prior-year period, with organic sales up 2%. Organic growth in the quarter was led by continued solid performance of Chile, Argentina, China and Germany, offset by organic sales declines in the UK, Ireland and Spain, primarily reflecting the continued difficult economic environments in those countries.

For the nine months, reported sales were up 8% to $1.9 billion, or flat organic growth, again led primarily by growth in Chile, Argentina, China and Germany, offsetting organic declines in the UK, Ireland, Korea and Spain.

Third-quarter adjusted operating income was $21.2 million, down from $25.7 million in the prior year. The currency translation contributed about $1 million of the decline.

Profit results in the quarter primarily reflect weakness in the UK, as well as the negative impact of Germany's results due to the timing of the soccer World Cup, which significantly reduced the number of soccer games in our German stadiums as compared to the prior year.

For the nine months, adjusted operating income was $63.9 million, down from $68.5 million in the prior year, driven by profit declines in the UK, reflecting the continuing weak economic environment in that country, as well as the impact of lost business earlier in the year.

The nine months also result -- the results also reflect an approximately $2 million negative profit impact from the earthquake in Chile, while currency translation contributed approximately $2 million of growth for the nine months in comparison to last year.

In our uniform and career apparel segment, third-quarter sales of $368 million were down 3% from the year-ago quarter on both a reported and an organic basis. Results would've been slightly better if we had adjusted for the impact of lost sales associated with certain exiting customer segments as a part of the WearGuard repositioning, which we've talked about before and which we successfully completed earlier this year.

For the third consecutive quarter, the segment did show sequential improvement, although the market environment remains extremely price-competitive.

For the nine months, segment sales of $1.1 billion were down 8% from the prior year on both a reported and organic basis. So as you can see, we have shown sequential improvement.

As with our business and industry sector, clients in the food and support services group have seen some stabilization among our uniform client base. And our year-over-year performance should continue to improve as we move forward. However, our outlook remains cautious, as price competition remains very challenging and we have yet to see signs of meaningful jobs growth among our client set.

The segment's third-quarter adjusted operating income was $33.9 million, up 7% compared to last year. So we were able to improve our margins on a somewhat lower sales base.

These results in part reflect our ability to mitigate the profit impact of a sales decline through our aggressive cost-reduction efforts across the segment, as well as the significant repositioning and integration of the WearGuard direct marketing business within the rental business, as well as lower energy costs compared to last year.

For the nine months, adjusted operating income was $91.8 million, down 5% compared to last year on an 8% decline in sales, again, reflecting the benefits of our cost-reduction and mitigation efforts across the segment.

Our corporate expenses, excluding the items that Chris mentioned earlier, were $7.7 million in the quarter, compared to $7.4 million in the year-ago quarter, and for the nine months expenses were $22.8 million, compared to $25.1 million in the prior year.

So at this point, let me turn it back to Chris for some additional details on the quarter and the year-to-date performance.

Thanks Fred.

I'd like to comment on our financing, capital structure and cash flow.

Our adjusted EBITDA for the trailing 12 months ending July 2 was $1.040 billion, down from $1.048 billion at April 2, 2010, and up from $1.035 billion at October 2, 2009.

Interest and other financing costs were $108.8 million for the third quarter, compared with $119.4 million in the prior year.

For the nine months, interest and other financing costs were $335.8 million, compared to $363.8 million in the prior year, with this year's number including approximately $8 million of expenses related to the credit agreement amendment and term loan extension we completed in March.

Approximately 80% of our total debt portfolio is at fixed interest rates, and our overall weighted average cost of debt is approximately 6.50%.

Total reported debt at the end of the third quarter was $5.521 billion, down from $5.885 billion at the end of last year's third quarter. Our secured debt, as defined in our credit agreement, totaled $3.726 billion, including a term loan balance of $3.429 billion and a revolver balance of zero at quarter end.

Our accounts receivable securitization facility had $247 million utilized at quarter end.

And during the quarter, as Fred mentioned, we made an optional principal repayment of $150 million on our un-extended US dollar term loan balance, reflecting our solid cash flow year-to-date and our confidence in our performance for the balance of the fiscal year.

We continue to enjoy a strong liquidity position overall, and at quarter end our $600 million revolving credit facility was undrawn.

Based on our trailing adjusted EBITDA and our reduced debt levels, our secured debt ratio improved to 3.51 times as of July 2, compared to 3.70 times as of April 2 this year and 3.72 times as of October 2, 2009.

Net capital expenditures for the quarter were $45 million, compared to $97 million in the prior-year quarter.

For the year to date, net capital expenditures total $152 million, compared to $247 million last year.

While we do anticipate a higher level of spending in the fourth quarter compared to last year, for the full year we expect our net expenditures to remain somewhat below the prior year's 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 nine months of our fiscal year. However, we are pleased that our year to date working capital performance has exceeded our expectations coming into this year. Overall, our teams are continuing to do a good job in managing our receivables, and our days sales outstanding are in line with last year's improved levels.

While some reinvestment in working capital is required as sales continue to grow, we are continuing to maintain a sharp focus on working capital management as we move through the fourth quarter of fiscal 2010.

For the year to date we've spent a total of $84 million on acquisitions, compared to $135 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 continue to seek to make strategic investments in certain sectors and geographies but will continue to 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 positive organic growth and comparable levels of profitability. We are particularly proud of our teams at the G8 and the G20 who carried off that very complex and intensive operation without a hitch.

Our uniform rental business is performing relatively well in a still challenging pricing and unemployment environment.

We're also quite pleased with our cash flow performance so far this year, which has exceeded our expectations. As a result of our solid cash flow and outlook for the rest of the year, as Chris just mentioned, we made an optional principal repayment on our term loan in June, and we are continuing to be disciplined in our use of capital, both for investment and in working capital management.

As we look forward, while we continue to expect improving growth rates, the economic environment will continue to challenge certain sectors and countries more than others, although we do anticipate an improving profit trend into Q4 as we complete 2010 and look towards next year.

Our portfolio of sectors, geographies and clients continues to provide us with good balance overall, and we remain excited about the growth opportunities and relatively strong pipeline as we look across our businesses.

We will continue to invest in and pursue these many opportunities in the months and years ahead, while still managing our cost structure and cash flow appropriately.

Thank you again for your time this afternoon and for your support of ARAMARK. We would now be happy to take your questions.

(Operator Instructions) Karru Martinson, Deutsche Bank.

Last quarter we talked about lower attendance at major league baseball and other events in the sports and entertainment segment but that the tickets were up. Is that still holding true? Or what are the drivers there affecting that segment of your business?

We've seen low single-digit declines in attendance, which, as I mentioned, is pretty consistent with major league baseball's overall results. And we have seen generally a slight uptick in what we call per capita spending for our products and services. So overall I think the net of those two is a slight pickup.

Okay. And in terms of the remote camps business in Canada, have we seen that turn around here from where we were at the beginning of the year?

You said the "remote camps business," Karru?

Correct.

Yes, that's a very seasonal business, so if you don't generate activity during that part of the season, you're out of business, so to speak, for the rest of the fiscal year. So that's really a late Q1, fiscal Q2 period, just given the weather in that part of Canada.

So at this point we are looking to build a pipeline of business to deliver against in fiscal 2011, and at this stage, compared to last year, we actually are in a better situation in terms of new business, new in-season remote camps business for 2011.

Which would start up in the winter.

Okay. And just with that new business pipeline, when you guys are out meeting with potential clients, how are they looking at the world? And I would say things were a little bit rosier at the start of the year; certainly we've all pulled back expectations. How are your clients and potential clients looking at the world?

Well, I think generally our clients are pretty cautious. And where we see that most directly is in the reluctance of -- at many of our clients to bring back employees or rehire after the layoffs of the last 12 to 18 months.

All right. Thank you very much, guys.

Bryan Hunt, Wells Fargo Securities.

Fred and Chris, could you talk about the lost business you mention in the text in the Q in UK, Ireland, Korea and Spain? Whether it is in a particular industry? Or if it has any relation -- if there's any correlation you could put between the four countries?

Yes, that actually was a specific reference to the UK, Bryan, in terms of their performance so far this year, and if we go back to Q1, we may have mentioned it at the time, but we had a high concentration of financial services business in the UK, in London, and on the back of obviously the significant disarray in that sector and then some of the government-forced consolidation between some entities that were severely wounded during the crisis, we lost some large financial services accounts that really -- we lost very early in the fiscal year, and so they have been dragging us in that country all year here. And on the back of the very weak overall environment, that has really impacted the UK's results.

And I would say on top of that, in the other countries you mentioned, there are no particular patterns or trends with regard to lost business. And as I mentioned earlier, overall for the company, the aggregate amount of lost business through the first nine months of the year is actually down over prior year.

That's great to hear.

When you look at retention rates, could you talk about where you are at the end of the quarter in terms of retention? And whether there is any differential in retention in North America as opposed to your international? -- FSS.

Yes, there is. Again, driven by the UK actually in particular this year.

North America is trending nicely ahead of international. We are, as Fred said, improved versus prior year, both for the global food business as well as for the uniform business and obviously then the total company, and we are very much comfortable at this point that we will hit our targets for the year. But North America -- better than international, but international, again, largely driven by a very difficult year in the UK.

And could you talk about the timing? Fred, you mentioned that you guys have invested in sales staff. Did that sales staff recently come on? Or are some of the business wins that you're talking about today related to the increase in staffing?

Those additional sales resources have come on in the last 3 to 6 months. I wouldn't say that they are a major factor yet in the increase in new sales.

Could you talk perhaps about the -- is that a fixed cost base that's layered on? Or are most of those salespeople comp'ed on a performance basis?

It's a combination of a fixed base and then incentive compensation. So it clearly increases our costs, but there is enough opportunity out there that it is justified. And (multiple speakers)

We've been focusing them in those sectors where we think there are the highest opportunities.

Okay. My last question is, you mentioned financial discipline, and you all have done an admirable job of generating cash and paying down debt this year. With regards to that comment, what is your appetite for acquisitions? And are you seeing more acquisitions today, as the economy has maybe stabilized at a lower level, than a year ago?

Yes, I don't think -- again, the sectors we're focused on, the types of companies we are interested in acquiring, that strategy hasn't changed. It's the same one we've talked to you about for quite some time.

Clearly I think in some segments we still, frankly, see in those segments that have been more ripe for consolidation, a price gap still with some of the owners of those businesses, and I think as we are focused on managing our infrastructures, we haven't found opportunities that make sense to us right now, given people's price objectives.

So I don't think there has been, frankly, much of a change in availability or our appetite; we just haven't been able to make marriages with businesses that make sense for us.

Thank you for your time this afternoon.

(Operator Instructions) Reza Vahabzadeh, Barclays Capital.

Can you talk about the drop in the US or the North America food and support services EBIT in this quarter, despite the higher sales?

Yes. As I mentioned, we've seen some more intensified pressure in some of our business and industry markets, and we have also seen some increased pressure in health care, as our clients try to sort through the impact of healthcare reform legislation. Also some timing differences in the -- some of our healthcare facilities business, which is pretty substantial, is driven by individual projects, facilities-related projects -- HVAC and the like -- and in the third quarter we saw a lower level of activity by healthcare institutions in facilities-related projects that we would be involved in.

So I would say those were the two particular factors.

And when you are preparing to pressure on B&I and pressure also in health care, what are we talking about? Are we talking about pricing pressure?

Yes, pricing pressure, contract terms. We're basically -- basically discussions initiated on the client on the economic terms between us and the client.

Reduction in scope of work in some cases, both delaying, deferring project work, as Fred mentioned, and also just reducing the scope of work that we are being engaged to perform, as hospitals work through budget situations that are obviously challenged, given unemployment levels, given indigent care requirements, losses -- or reductions in endowments, contribution levels, etc.

And has that pressure intensified in this quarter from quarters past? Because it wasn't mentioned as much, or I did not I guess get the message in prior quarters.

I don't think it has intensified particularly in the third quarter. I think we made some references to it in the second quarter.

We also, in both those businesses, have done some rationalization of our support cost structure, which I think we actually mentioned in the Q2 call, as we looked towards Q3 we would take some actions to try to streamline some of our support structure, which we had been building up in the anticipation of some somewhat higher growth rates, which in fact we have done, which we think will have -- well, we know will have a very -- clearly a positive impact on the year-over-year profitability of those businesses as we move forward.

So I wouldn't say that we have seen a huge step-up, but we do see a moderate level of pressure there.

And another dynamic to remember -- and that business has had a very good new sales year and is one of the businesses with a very strong pipeline, as Fred mentioned -- as you are bringing on that new business, which we are doing throughout the course of the year, that comes on initially at a lower level of profitability with the startup costs associated with it, and so as we move into Q4 and you are moving into more profitable new business and with some of the efforts we've taken on the support cost side, we feel better about the profit outlook moving forward.

And then so are margins I suppose more stable in the other sectors you have, like education, and sports and entertainment?

Yes. In fact sports and entertainment margins were up during the quarter, year-over-year, because there was a -- essentially a slight decline on the top line and a pretty nice growth on the bottom line.

Higher education margins in general -- it's varies; it's a very small quarter for higher education, quarter -- but in general we have been able to hold or expand our margins there. So generally in the other markets we have been okay.

Right. And then you've had growth in the education sector for a couple of quarters now. Is that likely to sustain in the coming quarters? Is that a cycle of new business pipeline that you will likely maintain in the rest of the year?

I think, as Fred mentioned in the prepared comments, both higher ed and K-12, which you may recall has had some challenging retention years over the last couple of years -- both of those segments have had strong retention years and strong new business years, and so as a result, we've had a good 2010, and they are well positioned as we move into 2011, and they both are among the sectors that we see having good growth opportunities over time, both in terms of the self-operated conversion opportunity, the facilities opportunity, and increasing our capture of the spend on a college campus for example.

And the increase in new business sign-up, new sales awarded in education because of the school year clearly starts to have an impact in the fall, in September.

Okay. And then same question on the international food and support business. You talk about the weakness in the UK business because of the financial services industry, as well as the German soccer games. Would you attribute the entire decline in EBIT to those factors? With the German factor obviously not recurring and the UK one, you might have to cycle through that for a while?

I think that's a fair summary.

Yes. I think currency and then those two factors were the reason largely for the decline.

And you're going to cycle through the UK matter by the end of this calendar year? Or earlier?

I think -- as we get into the first quarter, I think we will be in a different year-over-year position. The first fiscal quarter.

Right, got it. A couple of housekeeping questions for you, Chris.

As far as the CapEx number you mentioned, you're running substantially below last year through the first nine months. Is it fair to assume that full-year CapEx will also be substantially below last year as well? I mean, you're running almost 30% below last year.

Yes, I mean, last year had some significant one-time related investments in baseball stadiums, as well as some investments in our remote camps business. So adjusting for those, I think we had said last year we would have been looking at a more normalized, lower CapEx number.

And as I said in the prepared remarks, we do anticipate on the back of a lot of this very strong new business, in higher ed in particular, having a fairly significant Q4 CapEx spending requirement, in excess of Q4 of last year but leaving us in a position for the full year where we are certainly below the prior-year CapEx spending level -- but not to the same degree that we are through nine months.

Right. And then maybe a -- just another housekeeping question -- accrued liabilities and expenses are running well above last year's levels. Is that just timing of when expenses are paid?

Yes, and it largely is timing. So a fair amount of that will work itself out as we work through Q4.

Got it. Thank you.

Carla Casella, JPMorgan.

This is [Matie Cionia] for Carla.

Could you talk about how much sales [boost] came from the G20 meeting?

Yes. In the quarter it was about $30 million in the B&I sector.

So it would be about a 1% impact on the overall company.

All right. And can you discuss the healthcare budgetary challenges as you see them?

Well, it's -- as I said earlier, we see pressure being exerted through the healthcare system. We think we can react to that. We are not too concerned about our ability to adjust to that, and so we think we will be -- as we move into the fourth quarter, we think we will be in a pretty good position in the -- in our healthcare sector overall.

So as I mentioned earlier, we are seeing some pressure in the second quarter, fiscal quarter, and the third fiscal quarter. We are continuing, though, to see opportunities on the new business side. Our retention rates are still solid. And we've, as I said, made adjustments to the operation of the business going forward so that we are optimistic about how this business will perform as we move to the end of this year and into next year, both from a topline and a bottom-line point of view.

Thank you. How much -- can you quantify how much the acquisitions contributed to EBITDA in the quarter?

It would be minor, very minor.

Yes, it's immaterial overall.

Right. It's really only one acquisition of any substance, which was the Irish facilities acquisition, which was completed in the first fiscal quarter. And it's been a great addition to the Irish operation, but it's quite small relative to the total company.

Thank you.

And there are no further questions. I will turn the conference back over to you, Chris, for any additional or closing remarks.

Sure.

Thank you very much. We appreciate you joining us this afternoon and hope you have a great evening.

A rebroadcast of this conference is available starting today at 7.30 PM Eastern Time and will run until August 18 at 7.30 PM Eastern Time.

You may access the rebroadcast by calling 888-203-1112 or 719-457-0820. Please reference pass code 2221449.

That concludes our conference for today. Thank you for your participation. Have a nice day. All parties may disconnect.