Aramark (ARMK) 2011 Q2 法說會逐字稿

Good afternoon. Welcome, ladies and gentlemen, to the ARAMARK Corporation's second-quarter 2011 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 a listen-only mode. At the request of the Company, we will open up the conference for questions after today's presentation. I would now turn the call over to Chris Holland, Senior Vice President Finance, 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 2011. 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 with you may want to refer to the form 10-Q we filed earlier today, which contains our second quarter and year-to-date results for fiscal 2011. 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 measure. The form 10-Q, as well as schedules we posted to our website prior at the call, include reconciliations of these non-GAAP financial measures 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. All of these items are detailed in the schedules posted to our website before the call.

Various remarks that we may make 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 risk factors M&DA, 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.

Thank you, Chris. Good afternoon and thank you for joining us for our second quarter 2011 results call. As in prior quarters, I'd like it review our business and operating performance first, and then have Chris cover a few additional details on our overall performance.

The economic climate continued to slowly improve in our second fiscal quarter, and we're pleased that our results reflect this trend. Our sales growth so far this year reflects an improving base business growth environment as well as the benefits of our solid new sales wins over the past year. And our many efforts over the past 24 months to improve our operational efficiencies and effectively manage our cost structure, are allowing us to leverage the sales growth we are generating into quite solid earnings performance. Our first half client retention rates were consistent with recent trends, and our expectations and our pipeline of new business opportunities remains robust.

Now turning to our over all results for the second quarter, we reported sales of $3.3 billion, up 5% from the prior year quarter. Organic sales growth, which, as you know excludes the impact of currency translation and acquisitions and divestitures, was up 4% in the quarter. Adjusted operating income of $165 million was up 15% from the prior year level, with currency contributing approximately 2 percentage points of this growth. For the first half of fiscal 2011, sales were $6.6 billion, up 5% over the prior year period, and up 4% on an organic growth basis. Our adjusted operating income of $370 million was up 12% versus prior year, with currency contributions of about 1 percentage point.

Now, turning to our North America Food Support Services segment, second quarter reported sales were up 5% to $2.2 billion, with positive growth reported in most sectors, lead by Healthcare and our Education business. Organic sales growth for the segment was 4% in the quarter. For the first half reported and organic sales were up 4% to $4.5 billion, with the overall sales performance, again, being lead by solid growth in Healthcare and Education.

So, now let's turn to the sectors within the North American business. Our Business and Industry sector had a low single digit sales increase for the quarter and for the half, reflecting growth in both our cafe and catering sales. The improvement in discretionary spending we saw earlier in the year has continued, and we are seeing some pockets of population growth in certain client sectors. The Education sector had a high single digit sales growth rate for the first quarter -- or for the second quarter and for the first half. Growth in Higher Education for both periods was lead by a combination of base business growth, driven in part by increased demand for meal plans and the impact of new business we signed last year. K-12 sales growth continues to reflect the stronger new sales wins from fiscal 2010 as well as solid base business growth.

In our Healthcare sector, sales grew in the mid-single digit for the quarter and in the low single digits for the first half. Growth in this sector was primarily lead by a combination of base business growth across the sector and new business growth particularly in our Clinical Technology Services business. Our Sports and Entertainment sector had low single digit sales decline in the quarter and a mid-single digit sales decline for the first half. The sales decline in the quarter reflected in part the positive impact from the winter Olympics in last year's second quarter and the negative impact this year due to exited venues, in part offset by solid base business growth in the NHL and in convention centers.

In general, across our Stadium and Arena Operations during the first half, we have seen improved per capita spending and stable attendance levels in comparison to prior year. These trends are also generally consistent with what we are seeing so far with major league baseball. Of course, as always, individual team performance further affects venue specific results. Adjusted operating income in the North American Food and Sports Services segment was up 9% in the quarter to $117 million, lead by solid year-over-year growth in Healthcare and Higher Education. For the first half, segment adjusted operating income grew 12% to $273 million, again lead by strong profits performance in Healthcare and Higher Ed.

Turning to the International Food and Support Services segment, second quarter reported sales of $677 million were up 9% from the prior year period with organic growth of about 7%. Organic growth in the quarter was lead by solid performance in South America, Germany, Ireland, China, and Spain, offset somewhat by an organic sales decline in the UK and in Korea. For the first half, reported sales were up 7% to $1.3 billion, with organic growth of 6% and with solid sales growth in most of our countries and particularly strong performance in South America, Germany, Ireland, and China. Second quarter adjusted operating income was $22.5 million, up from $18.8 million in the prior year's quarter.

Results this quarter benefited from a gain on the sale of a small non-core subsidiary in Chile and the receipt of VAT income in the UK, partially offset by some severance charges in Chile related to the divestiture and a write down of good will and other intangible assets related to our relatively minor operations in India. Adjusting for these items and the effect of currency, international income was down slightly for the quarter. For the first half, adjusted operating income was $38 million, compared to $43 million in the prior year period. The lower first half results were primarily driven by expenses recorded in the first quarter, which we discussed before, related to efficiency and cost reduction initiatives, including severance charges taken across several of our country operations as well as profit declines in the UK and Chile.

In our Uniform and Career Apparel segment, second quarter sales of $372 million were up 3% from the year-ago quarter on both a reported and organic basis, with our Uniform Rental business sales growth in the low single digits and solid growth in our Galls direct sales business. For the first half, segment sales of $756 million were up 2% from the prior year period on both an as reported and an organic growth basis. The Uniform business, as you know, is quite sensitive to employment levels, and while we have seen some modest signs of head count improvement amongst our clients, we have yet to see strong indications of robust levels of employment growth.

While we are working on generating improved base and new sales growth through cross selling programs, higher selling productivity for our sales reps, and higher sales head counts, our team is also continuing to systematically drive efficiencies throughout the operations, while delivering high quality service and reliable service to our clients. Price competition for new business remains quite challenging, but we are working to maintain discipline as we seek to sign new business and retain profitable business. The segment's second quarter adjusted operating income was $33.4 million, compared to $25.5 million in the prior-year's quarter as our cost and operating efficiency efforts, including the improved performance of our now integrated direct marketing business, are providing significant bottom line leverage as sales have begun to grow again. Income in the quarter also includes $2.6 million, resulting from the successful settlement of an imminent domain claim.

For the first half, adjusted operating income was $75 million, up strongly from $58 million reported in the same period last year, again, reflecting the benefit of our cost reduction and efficiency efforts across the segment. A portion of the year-over-year profit increase also reflects, as we mentioned in the first quarter, a first quarter reduction in insurance reserves due to very favorable claims experience resulting from the business' very strong safety programs and resulting improved safety performance. Corporate expenses, excluding the items that Chris mentioned earlier, were $8.2 million in the quarter compared to $8 million in the year-ago quarter, and for the first half expenses were $16.5 million, compared to $15.1 million in the prior period. So, at this point, let me turn it back to Chris for some additional details on the quarter on and on the half.

Thanks, Fred. I'd like make a few comments on our financing, capital structure, and cash flow. Our adjusted EBITDA for the trailing 12 months ending April 1, increased to $1.079 billion, from $1.051 billion at the December 31, 2010 and up from $1.036 billion at October 1, 2010. Interest and other financing costs were $93 million for the second quarter, compared to $118 million in the prior year period. In the second quarter, we recorded interest income of approximately $14 million related to the settlement of UK VAT claims from prior years. Last year's second quarter total also included approximately $8 million of expenses related to the credit agreement amendment and term loan extension we completed in March of 2010. For the first half, interest and other financing costs were $202 million, down from $227 million in the prior year. Including the impact of interest rate hedges, a significant portion of which mature in March of 2012, approximately 75% 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 second quarter was $5.739 billion, down from $5.995 billion at the end of last year's second quarter, when also including utilization of our accounts receivable securitization facility in the year ago total. Our secured debt, as defined in our credit agreement, totaled $3.666 billion, including a term loan balance of $3.307 billion and a revolver balance of $74 million. Our debt balance at the end of the quarter reflects the impact of the funding of the acquisition of Master Plan in March of 2011, an attractive and strategic addition to our Healthcare Clinical Technology Services portfolio. The acquisition was funded with a combination of excess cash and revolver borrowings.

Our accounts receivable securitization facility had $246 million utilized at quarter end. We continue to enjoy a strong liquidity position overall and at quarter end, had approximately $510 million of available borrowing capacity under our $600 million revolving credit facility and $89 million of balance sheet cash. Based on our trailing adjusted EBITDA, our secured debt ratio improved to 3.33 times as of April 1, compared to 3.47 times as of December 31, 2010, and 3.70 times as of April 2, 2010.

Net capital expenditures for the quarter were $66 million compared to $49 million in the prior-year quarter. For the year to date, net capital expenditures totaled $120 million compared to $107 million in the first half of last year. While we anticipate full-year net expenditures to be somewhat higher than the prior year level, we continue to maintain a disciplined approach in managing our use of capital. As expected and consistent with our historical patterns, working capital was the use of cash during the first half of our fiscal year. However, we are pleased that our year-to-date working capital performance has exceed our expectations so far this year.

While summary investment and working capital is required as certain sectors begin to grow again, we will continue to maintain a sharp focus on working capital management as we move through the balance of fiscal 2011. For the year to date, we've spent a total of $155 million on acquisitions, compared to $81 million in the prior year period. This year's spending relates primarily to the acquisition of Master Plan, which I just mentioned. We continue to evaluate strategic investment opportunities in certain sectors and geography, but will continue to maintain a prudent and disciplined approached in pursuit of these opportunities.

As you know, during April, we successfully completed a $600 million hold code notes financing, which many of you participated in. The funds were used to pay a dividend to all of our shareholders, the first dividend we have paid since going private in January of 2007. We believe this dividend does not impact our ability to continue to grow and reinvest in our business while still pursuing appropriate strategic opportunities as well.

After the transaction, our leverage ratios remain nicely below the initial levels at the time of our going private transaction and absent further acquisitions over the balance of this fiscal year, we expect our leverage ratios to further improve as we enter our seasonal cash generation period. In conjunction with the notes offering, we also extended from January 26, 2013, to January 26, 2015, the maturity of the US dollar denominated portion of our existing revolving credit facility. As a result, we now enjoy access to a $665 million revolving credit facility through January of 2013, which will then step down to $500 million of capacity through January of 2015. We'd like to thank you for your support of this recent financing, and for your ongoing support of ARAMARK. Now, let me turn it back to Fred.

Thanks Chris. We are pleased with our solid overall performance during the first half of 2011. We are seeing, importantly, typically more solid performance in our less cyclical sectors, such as Healthcare and Education, but are also beginning to see low single digit sales growth in our more cyclical businesses. As our growth ramps up, we are also seeing the benefit of the significant operating efficiencies that we have generated over the past 24 months, and we should continue to benefit from these as the economy continues to strengthen.

We are also excited about a number of additional opportunities we have identified to further improve the efficiency and effectiveness across our operations. And we are well into a number of initiatives that we anticipate will deliver additional benefits in the coming quarters and years. We do expect to face increasing but manageable headwinds in the second half of fiscal 2011, as a result of rising gasoline and commodity costs. But our teams are and will be focused on aggressively addressing these challenges as we move through the back half of the year. Longer term, we continue to be quite excited about the growth opportunities we see, as we look across our portfolio of businesses and sectors, and we are appropriately focusing our resources and investments to best exploit these opportunities.

So, in conclusion, thank you again for your time this afternoon and for your continued support of ARAMARK, and at this point we'd be happy to take any questions.

Thank you. Today's question and answer session will be conducted electronically. (Operator Instructions) And we'll pause for just a moment.

We'll hear first from Micah Kaplan with Banc of America.

Good afternoon, guys.

Hi, Micah.

Just in terms of the building of business on a forward basis, could you talk about whether the new business for you guys is more stealing share driven for if it's the structural shift that you talked about before with more shift outsourcing? And to the extent that it is that, if you could talk about as the macro environment improves is that something that you think could accelerate even more?

This is Fred.

I believe that the mix of business that we've been adding between business that's been previously contracted or is contracted currently and business that has not previously been outsourced is pretty much the same, so we continue to do pretty well against our competitors in the marketplace in terms of what we win and what we lose. And, we continue to bring in at least a portion of our business from the -- what we call the self- op market, so I wouldn't really see any change there. I don't think we've seen any change in the last year or so in that mix.

Yes, I think, other than the fact that -- and we talk about this for the last couple of quarters -- that the sizes of the pipelines in particular sectors like K-12 and Corrections are as robust as they've, probably, ever been because those are both still highly self operated, and given the budgetary constraints, many of those constituents are facing -- more and more of those potential clients are pursuing outsourcing than historically and so at least from a pipeline perspective, we probably see more self-op conversion opportunities than we ever have.

Okay.

And then, you guys mentioned that the inflation issues at the end. The new distribute -- the master distribution agreement you filed with the Q today, is there anything that's unique relative to what you had in place previously with respect to fuel or -- in the past, there were certain costs, or is that going to be pretty consistent other than just the broader challenges that were already in place under the previous agreement?

Yes, I think it's very consistent with the recently expired agreement with Sysco, so I think no material changes to the economic model, vis-a-vis that relationship. And, as Fred said in his comments, while we're facing increasing headwinds, we've got a number of ways to manage through that and at this point, we think we've been pretty successful and while the headwinds will get a little bit stiffer in the back half, we're again working hard to mitigate them as best we can.

Thank you.

You're welcome.

Thank you.

And we will go onto Carla Casella with JPMorgan.

Hi.

Question on, as you're going into the spring season, baseball season, are you -- I would assume that would be a way to attract the health of the consumer or the consumer's willingness to spend at games, what you're seeing in the early part of the season. Any trend you're seeing there?

Well, we've seen in NHL, NBA, and major league baseball, though it's a little bit early for major league baseball, increases in per capita spending year over year, so to that extent, I think that's a positive.

Okay.

And then on the Education front, you've got so many interesting initiatives on the college. Can you just say -- when we -- as you, as go through the summer, will you be adding new accounts on the college front or is it more just gaining additional business through your existing accounts? And is it too late to add accounts through the summer? Is that a decision that's made earlier in the school year?

We'll continue to add accounts. We've got a very focused selling effort. Our sales activities are organized by market vertical, so there's a, a sales team that's focused against Higher Education, a sales team that's focused against K-12; and you're right, there's a certain seasonality to the pattern of bidding and the awarding of contracts.

And we are, I'd say, if anything, in the midst of that right now, so there clearly will be additional awards over the next, over the coming 3 or 4 months leading up to the start of next school year.

Okay. Great. Thank you.

You're welcome.

Thank you.

And we'll now hear from Reza Vahabzadeh with Barclays Capital.

Good afternoon.

Fred, you were kind enough to call out a few non-recurring items in your segment, EBIT, but could you kindly repeat them for us, some the imminent domain gain and some of other ones.

Sure.

And I think they're -- we just released our 10-Q a few hours ago, and those are described in the MD&A section of the 10-Q, but the bulk of them fell in international, and the principal ones, where we received some additional VAT rebate from the UK government, and you've heard about that from time to time before. In fact, we received an amount, a portion of which was reflected in interest expense as a credit to interest expense and then a portion is reflected in EBAT.

We recorded a gain as a result of the sale of this business within a business in Chile.

Yes.

And, we also took a small impairment charged on intangible assets in India. And then, in the Uniform business, we had a market center that was taken over by imminent domain and we have already moved all of our operations -- this is in California, southern California. Our operations were moved over some time ago, but the settlement of that was just completed in the second quarter and there was a gain relative to the book value of that property, which was recorded in the second quarter.

And Reza, that amount was $2.6 million, which were in Fred's prepared remarks and also in the Q, and really the net, if you think about all the net effects of international items Fred mentioned, income versus prior year would have been done, 2.5% to 3%, the net of all the effects.

Got it.

And then you mentioned FX was 2% for top line. Would it have been about the same or more on EBITDA?

Yes.

About the same.

About the same. Okay.

And then some of the your competitors, global competitors, have been more active than ARAMARK, seemingly, on the acquisition front. Now, with your balance sheet in cleaner shape, do you foresee being more active on that front? Is there an opportunity there that's alive and well or do you see a different game plan?

Well, I think that we've always viewed that we will take a hard look at acquisitions that make good strategic and business sense. And that is around the world, in addition to Food Facilities and the Uniform businesses. As you know, we recently acquired a company called Master Plan, is an addition to our Clinical Technology Services business, which is an very important component of our overall Healthcare business, and I would say that we continue to look at opportunities.

We've looked at several opportunities just in the last month or two, and my sense -- Chris, you may want to jump in here -- is that the, the pipeline of opportunities over the last six months is probably increased, and there have been some we've looked at pretty closely, but at the end have concluded that either the value's not there or the price is not the right price. And so we've been pretty disciplined, but I believe that we'll continue to look pretty actively at acquisitions as we go forward. And we've mentioned, and as you've mentioned, we've got plenty of horsepower to make the right acquisitions.

And that is both in the international business as well as the US business?

Right.

Yes.

And then, on the Education and Healthcare side, obviously, very good organic growth. Do you think you've gained a share of the pie or is this just a pie growing for the fiscal pressures that you highlighted, Chris?

Yes, I think, again, we -- this is a recurring theme, but within Higher Ed, we talk -- we had a very strong new sales year last year and a very good pipeline this year, some of which, looking at those discrete wins, was taking share because those were by and large already outsourced, but we continue to have and see very good base business growth opportunities within our existing accounts. When you think about Higher Ed, Q1, which is a big quarter for our Higher Ed business, and as you know it delivered 10% organic growth, that was a very nice mix of base and new.

And we continue to have that base business growth opportunity squarely in front of us, so on the margin, I think, over time you'll continue to see more conversion of self- op, which we're certainly seeing, especially as I said in K-12, Corrections, and also Healthcare. So, I think as Fred said, we're holding our own against our competition head to head. Some quarters we may take share, some quarters we may lose a little share, but given the base business growth opportunities and our net new over time, there's good ability to continue to growth at nice rates

And lastly, on the B&I business, are you seeing population stabilize or grow or is your growth mostly spend per capita?

It would appear the investment banks are adding headcount, so good for you Reza, so certainly in that sector we are seeing populations grow, in financial services, specifically, and I think there's other pockets within the economy, but it is very, I think sector or company specific. And, we're not at all seeing across the board population increases yet.

Thanks.

Sure.

Thank you, gentlemen.

We have no additional questions in the queue. I will turn the conference back over to Chris Holland for any additional or closing remarks.

Thanks, Catherine, and again thanks everybody for your time and attendance today. We appreciate it and hope you have a great afternoon.

Thank you.

Once, again, ladies and gentlemen, that does conclude today's presentation, thank you for your participation. You may now disconnect.