Aramark (ARMK) 2011 Q3 法說會逐字稿

Good afternoon, and welcome, ladies and gentlemen, to the ARAMARK Corporation third-quarter 2011 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 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 third 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 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 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 discussed the results, you may want to refer to the Form 10-Q we filed earlier today, which contains our third-quarter 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 non-GAAP financial measures. The Form 10-Q, as well as schedules we posted to our website prior to the 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, as well as the impact of stock-option expense. These items are detailed in the schedules posted to our website posted before the call.

Various remarks that we may make in the 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.

Thank you, Chris. Good afternoon, and thanks to all of you for joining us for our third-quarter 2011 results call. As in prior quarters, I'd like to review our business and operating results, and then Chris will cover a few additional details on our performance.

We're quite pleased with our results for the third quarter and for the year-to-date, as our businesses are delivering solid overall growth with improving margins. During the quarter, we generally saw the economic climate remain relatively stable, though with a still somewhat cautious outlook.

In this environment, our less economically sensitive businesses have delivered solid overall sales performance, while growth in our more cyclical businesses has been generally more modest. We continue to see positive growth trends in certain of our sectors as a result of contributions from both base business and new-business wins, and our pipeline of new business opportunities remains robust across the portfolio. We've remained focused on efficiently managing our operations and call structure, and as evidenced by this quarter's solid margin improvement, we continue to successfully drive for opportunities to further enhance our operational efficiencies.

Now, turning to our overall results for the third quarter, we achieved sales of $3.3 billion, up 7% from the prior-year quarter. Organic sales growth, which as you know, excludes the impact of currency translations, as well as acquisitions and divestitures, was up 3% in the quarter. Adjusted operating income was $153 million, up 17% from the prior-year level. For the first 9 months of fiscal 2011, sales were $9.9 billion, up 5% over the prior-year period, and up 4% on an organic-growth basis. Our adjusted operating income of $523 million was up 13% from the prior year.

Now, turning to our North American food and support services segment, third-quarter reported sales were up 4% to $2.3 billion, but primarily by growth in the education and healthcare sectors, which offset sales decline in the business and industry and support and entertainment sectors. Organic sales growth was 2% in the quarter, partly reflecting the normal seasonal change in our sales mix between our higher-growing education and healthcare sectors and our typically lower-growing business and support and entertainment sectors. For the 9 months, reported sales were up 4% to $6.7 billion, with organic growth of 3%. Year-to-date performance was also led by solid growth in education and in healthcare.

Turning now to the sectors within North America, our business and industry sector had low single-digit sales decline for the quarter, and a low single-digit sales increase for the 9 months. Now, the sector's quarterly sales decline was primarily due to the positive impact in last year's third quarter from our contract to provide support services for the Canadian security detail that served both the G8 and G20 meetings.

Our business dining operations continue to extend the trends seen in the first part of the year, with low single-digit top-line growth. We've seen some firming in volume despite limited employment growth, and catering activity remains positive on a year-to-year basis. The education sector had high single-digit sales growth for the quarter and for the nine months, with growth in our higher-education food business resulting from a good combination of solid base-business growth and solid new sales from contract wins from prior periods.

In our healthcare sector, we realized low double-digit sales growth for the quarter, and mid-single-digit sales growth for the 9 months, driven both by the acquisition in March of Masterplan within our clinical technology services business, as well as by solid base-business growth across the sector. Our sports and entertainment sector had a low single-digit decline for the quarter, and a mid-single-digit sales decline for the 9 months.

A solid base-business growth in our NHL venues and in our stadiums was more than offset by the impact of prior-year lost business, a reduced number of shows in our amphitheaters, and sales in the prior year related to the winter Olympics. Major League baseball performance has been quite solid overall, and somewhat higher per-capita spending and attendance so far this year.

Adjusted operating income in the North American food and support services segment increased by 17% in the quarter to $98 million, led by strong profit growth in education and healthcare, partially offset by modest declines in our business and industry and sports and entertainment sectors, with the G8 and G20 event in the prior year negatively affecting the profit comparison for the business and industry group in the quarter. For the 9 months, segment adjusted operating income grew 13% to $371 million, again led by strong profit growth in education and healthcare.

Now, turning to the international food and support services segment, third-quarter reported sales of $698 million were up 18% from the prior-year period, with organic sales growth of about 8%. Organic growth in the quarter was generally positive in most of our country operations. For the 9 months, reported sales were up 11% to $2 billion.

Organic growth was 7%, led primarily by solid growth in Ireland, Germany, Chile, Argentina, and China, which more than offset a sales decline in the UK and Korea. Third-quarter adjusted operating income was $26 million, up 20% from the prior year, with currency translation contributing more than half the growth.

Results in the quarter primarily reflect solid performance in Germany and improving profit performance in the UK, offsetting a profit decline in Chile. For the 9 months, adjusted operating income was $64 million, down modestly on a reported basis.

Currency translation contributed approximately $3 million of the growth in comparison to the prior year, offset by a profit decline in Chile, partly reflecting the impact of lost or closed business earlier in the year. In addition, a number of other items, including the gain on the sales of a non-core subsidiary in Chile, the receipt of VAT income in the UK, a gain on the sale of land in Chile, severance-related charges on a write-down of goodwill related to our operations in India, all net to a reduction of approximately $3 million for the 9-month period.

In our uniform and career apparel segment, third-quarter sales of $373 million were up 1% from the year-ago quarter on both a reported and an organic basis. For the 9-months period, segment sales of $1.1 billion were up 2% from the prior year, on both the reported and organic basis. We are balancing and an investment and additional sales resources to support and prove new sales growth, with continuing to maintain discipline in the pricing for new and retained uniform-rental business.

And we were pleased that the volume of new sales delivered in the quarter by our sales force exceeded the prior-year's quarter results for the first time this year. The segment's third-quarter adjusted operating income was $37 million, up 9% compared to last year. And for the 9 months, adjusted operating income was $112 million, up 22% compared to last year.

We are continuing to see the benefit of our consistent focus on improving operating efficiencies and our cost profile in this business. As previously disclosed, the year-to-date results also reflect a reduction in insurance reserves in the first quarter of the year due to favorable claims experience. Corporate expenses, excluding the items that Chris mentioned earlier, were $7.2 million in the quarter, compared to $7.7 million a year ago.

For the 9 months, expenses were $23.7 million, compared to $22.8 million in the prior year. Now 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 1 was $1.083 billion, up from $1.079 billion at April 1, 2011, and up from $1.036 billion at October 1, 2010. It's worth pointing out that in conjunction with the successful sale in June of a non-controlling interest in SeamlessWeb, we classified Seamless as an unrestricted subsidiary, and therefore, it is not being included in our July 1 adjusted EBITDA.

We are very excited about the opportunities for Seamless in this new ownership structure, along with our partners from Spectrum Equity Investors. The business continues to grow quite rapidly, particularly in the consumer segment, and we expect total managed volume this year to reach nearly $400 million.

Interest and other financing costs were $113 million for the third quarter, compared to $109 million in the prior year, with this year's number including $2 million of expenses related to the revolver amendment and extension we completed in April. For the 9 months, interest and other financing costs were $315 million compared to $336 million in the prior year.

The decrease is primarily driven by interest income of approximately $14 million recorded last quarter related to the settlement of UK VAT claims from prior years, as well as the $8 million of expense recorded in the second quarter of 2010 related to the credit-agreement amendment and the term-loan extension that we completed in March of 2010.

Total reported debt at the end of the third quarter was $5.851 billion. Our secured debt, as defined in our credit agreement, totaled $3.772 billion, including a term-loan balance of $3.310 billion, and a revolver balance of $214 million. Our Accounts Receivable securitization facility had $211 million utilized at quarter-end. We continue to enjoy a strong liquidity position, with approximately $430 million of available capacity under our revolving-credit facility as of quarter-end.

Based on our trailing adjusted EBITDA, our secured debt ratio was 3.41 times as of July 1, up modestly from 3.33 times as of April 1, 2011, and 3.37 times as of October 1, 2010. This slight increase in the ratio reflects utilization of the revolver to fund a portion of the dividends we paid in April, as well as the reclassification of the Seamless adjusted EBITDA. Overall, we are pleased with our EBITDA growth and our ratio improved momentum, and we anticipate further ratio improvement over time.

Net capital expenditures for the quarter were $60 million, compared to $45 million in the prior-year quarter. For the year-to-date, net capital expenditures totaled $180 million, compared to $152 million last year, as we make prudent investments in growth opportunities and in our infrastructure.

As expected and consistent with historical patterns, working capital was a use of cash for us during the first 9 months of our fiscal year. We are continuing to continuing to maintain a focus on working capital management as we were move through the fourth quarter, which is our strongest seasonal period from a working capital and free cash flow standpoint.

For the year-to-date, we've spent a total of $157 million on acquisitions, compared to $84 million in the prior-year period. This year's spending related primarily to the acquisition of Masterplan within our North American healthcare business in March. We continue to evaluate and seek to make strategic investments in certain sectors and geographies, but we will be prudent and disciplined in the pursuit of these opportunities.

As previously mentioned, during the quarter, we sold a non-controlling interest in our Seamless subsidiary, the leading provider of online and mobile food ordering to consumers and corporations in the US. Proceeds from the sale were used to reduce revolver borrowings in the quarter. Now let me turn it back to Fred.

Thanks, Chris. Summing up our performance so far this fiscal year, our global and food and support services business has delivered strong organic growth with strong profit growth and improving margins. The uniform rental business has also delivered strong profit growth in what is still a challenging pricing and unemployment environment. As we look forward, we will be working to deliver improving organic growth rates and continued margin improvements.

The economic environment remains somewhat unsettled, as everyone knows, and will likely pose a challenge to certain sectors and countries more than others. Overall, we continue to benefit from our portfolio of sectors, geographies, and clients which provide us with good balance, and we remain excited about the growth opportunities we see as we look across our businesses.

We will continue to invest appropriately in the pursuit of these many opportunities in the months and years ahead, while still managing our cost structure and cash flow in a disciplined manner. Thank you again for your time this afternoon and for your support of ARAMARK. We would now be pleased to take your questions.

Thank you.

(Operator Instructions)

Karru Martinson, Deutsche Bank.

Good afternoon. When we look at the education sector growth, the new business wins, those -- should we essentially model those forward through the course of the year, or were these one-time in nature?

Well, this is Fred, the education new business wins tend to be somewhat seasonal, because they follow the pattern of the school year. In the education business, we've seen both very solid base-business growth, same-store growth if you will, and improving new business wins.

Okay. I was just -- trying to make sure that there weren't one-offs in those product wins, that they were the regular type of wins.

No. No. On an annual basis, we're delivering new wins in the education market that we think we could sustain over time.

And retention rates that are north of 95%, right.

Okay. When we look internationally, given the turmoil that we've seen in Europe, and then also the recent unrest in the UK, wanted to see if there was any kind of acceleration of decline in the UK market in how Spain is doing. Also, with the UK, were there any damages to any of your facilities there?

There were no damages to our facilities as the result of the recent social turmoil in the UK. Our overall growth rate in the UK year-over-year was improved from earlier quarters. We're still suffering somewhat from lost business in the prior year, but that has clearly stabilized this year, and our lost business improved so far year-to-date compared to last year. And our overall profitability in the UK has actually improved as well from prior years. We've focused on operating efficiencies. So, bottom line in the UK, I'd say we feel certainly better than we felt 6, 9 months ago, a year ago.

I think it's obviously a little too soon to say what impact there is from these recent events, but we obviously -- it's too soon for us to have seen any impact.

Okay. And then just the environment in southern Europe for you guys?

For us, that's pretty much Spain. We've had pretty good growth in Spain. The organic growth there has been higher, about on or higher than the average. And the profitability has been okay. So, I would say we haven't seen any downturn in Spain so far this year compared to last year, recognizing that the economy's challenged.

And I think it's important to remember that actually our Spanish business is primarily education and healthcare, which was a very modest B&I content. So we have not, and don't expect to be impacted necessarily by the downturn in economy as much as if we were much more heavily B&I concentrated.

Okay. And lastly, in terms of input cost, I was wondering if you could provide an update on what you're seeing and how you're looking at pricing going forward?

Well, we're clearly seeing increases in food costs. And our food costs now, based on our weighted-average market basket, up year-over-year in the high single digits. So it's something we're watching very carefully. I think as we've talked about, when we were presented with this challenge a few years ago, we have a lot of flexibility in our menu mix, and we're certainly very active in that area. And we're pretty aggressive about pushing through the appropriate price increases, and as you remember, a portion of our business is cost plus, so price increases happen automatically.

All right. Thanks very much, guys. Appreciate it.

You're welcome.

(Operator Instructions)

Reza Vahabzadeh, Barclays

Obviously, some a macro concerns out there. Here in North America as well. Have you seen a notable softness in recent months in some of your more discretionary businesses, whether it's population counts or per-capita spend?

We really haven't, Reza. And actually if we look at July, in our stadium business, we're actually seeing very nice per-capita improvement over prior year. Now, as well we'd like to caution it's also team-performance driven, and we've got a number of our teams in our portfolio performing quite well. Again, I think it's a little too soon. We're right in the middle of our peak season in our parts business.

I think we're cautious but have not yet seen any real material change, although again, given certainly the events of the last week or two, it's certainly elevated our caution, but I think it's too soon yet to say. And again, we've seen firm populations and obviously, given the employment numbers, have not really seen material growth, both on the uniform part of the business as well as in our B&I populations within our accounts. So I think the same environment -- and the question from here forward is do we start to see more of a negative impact or not?

Got it. And then on the B&I business, I forgot if you mentioned it or not, but excluding the tough comp with the G8 meeting last year, how did the business perform?

It's up in the low to mid-single digits.

And that was driven by business wins, populations, or per capita?

It's primarily a combination of continued improvement on the discretionary side versus prior year. So on the catering and the like, I think firm to slightly improved populations, but not materially. And on the business dining side, net new business growth over prior year given, larger wins we had towards the back part of last year.

We are seeing positive growth year-over-year in our base business. It's relatively low, but in the business sector.

Got it. And then how -- I know you've [run us through this] before -- but I mean, in the coming quarters, to offset the cost inflation you are experiencing, for the non-cost plus business, how do you imagine managing to that?

Well, there are a number of ways that we do that. One, as I mentioned, is we have an awful lot of flexibility in how we change our menu mix. And while we're seeing high single-digit growth overall, that growth is quite different by product category. So we're taking advantage of that, number 1. Number 2, we are even more disciplined in an environment like this and making sure that we appropriately pass through price increases. Sometimes, frankly, we're a bit timid to do that in view of the client relationship, even when we have a contractual right to do that, so we're spending a lot of time focusing on that.

And then thirdly, and as we mentioned on earlier calls, and as you saw in the quarter, we really believe that we will continue to have margin-improvement opportunities, particularly in the food-cost line and in the labor-cost line, just through programs that drive more efficiency in both of those categories. And as I think we mentioned earlier, we've undertaken a food- and facilities-wide initiative in both of those areas, involving lots of folks, and are in the process of rolling out programs that we think will continue to benefit us in the quarters to come.

Have you been able to get better pricing at all? Better economic terms in the contracts that have come up for renewal?

Better compared to what?

Better than the prior contract?

No. I wouldn't -- no, I would don't think it would be fair to say that. The business continues to be very competitive, so the pricing in a contract is often -- many cases is pricing directly to the consumer, so we do that with the approval of the client. It's not really a negotiated portion of the contract. Or in board plans in colleges and universities, it's something that we sit down with and work out with the client each year. So typically in that side of the business, the pricing itself is not fundamentally embedded inside the contract. But in terms of the other terms, I'd say that the market is probably no more, no less competitive than it was a year ago.

Got it. And then with the free cash flow that you're likely to generate in the coming year, how would you balance your needs to deleverage versus acquisition opportunities or other opportunities?

Yes. I think again, as we said, we're certainly very focused number one, on improving organic growth in margins, which will drive EBITDA growth, which we're seeing very nicely this year, right? So the point one, continue to grow EBITDA, which will give us nice ratio improvement, free cash flow. So I think that's a key focus. We will continue to make acquisitions again as really the first priority to the extent that they fit with our strategy and we can do them on an economic basis that makes sense.

And so we like to think that we've got flexibility to invest in acquisitions without being concerned necessarily what its impact is on our credit standing and our credit statistics. As we've said, I think from day one, if we find the right acquisitions, we'll make them and hopefully, they'll make sense to you. And if we don't, we'll use that free cash flow to pay down debt. I think that model is still the one that we're looking to execute against.

Got it. Thank you.

You're welcome.

Bryan Hunt, Wells Fargo Securities.

Thank you. I was wondering if you could talk about your pipeline of new business. When we were coming into this fiscal year, I believe on your Q4 conference call you had mentioned that you all had about $1 billion of new business in the pipeline. And, one, can you tell us where the new business pipeline is today, relative to 3 quarters ago?

I'd say the overall new-business pipeline has been pretty consistent quarter-by-quarter. What we are seeing in some cases is a slowdown of decision-making. So we're a little frustrated by that. It seems that prospects take longer. Hospitals, for example, take longer to decide than they did a year ago, sometimes universities, but the overall pipeline is comparable to what it's been.

Okay. And then next, what has been your customers receptiveness to adding on additional services? If you're in the cafeteria, adding on janitorial services, any type of services? How much of that contribute or has contributed to your growth year-to-date?

Actually, we certainly do track our selling within existing accounts, and its continued to improve over the last number of years as we've had more focused efforts on cross-selling. As we look within the North American portfolio, where we really do have the right balance between food and facilities capability, we've seen in the 40% range in terms of new-business wins that have actually been additional growth within an existing client relationship. With a combination, but more typically you'd see the addition of facilities services within what historically may have been a food account or a broadening of the facilities services that we're offering. And within again, in particular healthcare, higher ed, and K-12, it continues to be very much a strategic focus of our sales forces. And it's going to continue to need to be a very important part of our new sales growth in the coming years.

I believe you mentioned your retention rate was 95%. Is that per facility or across the whole business?

It's across the entire business, including uniforms.

Okay. And then my last question, when you look at your $50 million of proceeds from the minority-interest sale of SeamlessWeb, is there -- I didn't see where in the Q it mentioned what percent of the business that you sold. Can you provide that to us?

Yes, actually, Bryan, we haven't disclosed that. We'll choose not to disclose at this point as well.

But it was a minority interest.

Minority interest, yes.

Okay. Thank you very much.

You're welcome.

(Operator Instructions)

Karen Eltrich, Goldman

Following up on SeamlessWeb, how does the decision come about to spin it out? What made you choose Spectrum as a partner? And in this new structure, where do you think it could go where it couldn't as a member of the ARAMARK family?

Sure, Karen. We -- again, over a period of time, and you've been, I think, pretty close to it as a good client, hopefully, at Seamless there at Goldman Sachs, the consumer part of the business has continued to grow very rapidly and now has eclipsed the corporate. And really, the expertise and capability to drive what's a very now consumer-focused business in terms of acquiring consumers and marketing to consumers is a capability that frankly is not a core one for ARAMARK.

We ran a very discreet process with really talking to a leading group of growth equity investors, Spectrum being one of them, and through that process, determined that Spectrum was the right partner for us, given their experience and capabilities. And I think in the current structure, we're now much better positioned to attract and retain the kind of talent that a rapidly growing e-commerce business needs to be successful, in terms of motivating and incenting the management team. Also, I think we're also much more nimble in terms of being able to make decisions and have people around the table now with an expertise to really help the business continue to succeed and move to the next level. So, I think we're off to a good start. The business is performing terrifically well, growing very rapidly, and we think it has a bright future.

Great. And different, changing gears, obviously, also in the headlines a lot are budget cuts. As you look at your lines of businesses, are there any that you're concerned about that could be vulnerable to lower government spending?

I'd say generally, we do not have a huge amount of direct government business. It's -- we have a nice government business across many of our sectors, but it's not huge. So, now, having said that, in the higher-education business, we're certainly doing business with hundreds of colleges and universities, and they in turn get a portion of their funding. It varies. Some are private and are not getting any funding, but the public schools are getting some portion of their funding from states.

So their potential indirect effects in higher education, K-12, and so far, it's not something that changed the curve. As you heard, our higher education business is performing quite well. These pressures are not new. These pressures are really developed over the last couple years. So it's something we're watching, and we'll have to see. It's a part of the -- how the economy moves over the next couple of quarters whether those pressures build. But so far, it's not something we haven't been able to manage.

And after that, there are a couple sectors where actually, we think those pressures could be helpful over time. And we talked about very robust new business pipelines and corrections and K-12 in particular, which are still predominantly self-operated, where we're seeing more and more institutions considering outsourcing because of the pressure that they're under. So in a couple of areas, actually, at the end of the day, could prove to be helpful as we're a part of the solution as these institutions need to deal with budget cuts and reduce their costs.

I'd say that most directly, as Chris mentioned, in corrections where the majority of statewide systems, for example, are still self-op. We do a number of states and have significantly reduced their costs, and also in K-12.

Great. Thank you very much.

You're welcome.

And we have no further questions at this time. I'll turn the conference back over to our speakers for closing comments.

Great. Thank you very much. Appreciate you joining us this afternoon, and we hope you enjoy rest of your summer. Thank you.

Thank you. Ladies and gentlemen, that does conclude today's conference call. Would like to thank you all for your participation.