Aramark (ARMK) 2012 Q1 法說會逐字稿

Good afternoon, and welcome, ladies and gentlemen, to the ARAMARK Corporation first quarter 2012 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 go ahead, Chris.

Thank you, and welcome to ARAMARK Corporation's conference call to review the results of our first quarter of fiscal 2012. Here with me today is Fred Sutherland, our Executive Vice President and Chief Financial Officer. Fred and I will present an overview of our first-quarter results and business operations, after which there will be an opportunity for phone-in participants to ask questions. I'd like to remind you that any recording or other use or transmission of this audio may not be done without the prior written consent of ARAMARK. As we discuss our results, you may want to refer to the Form 10-Q we filed earlier today, which contains our first-quarter results for fiscal 2012. 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 earlier to, ay include reconciliations of these non-GAAP financial measures to the most comparable GAAP measures, as required by SEC rules. Our discussion of operating income during today's call will in each instance exclude the incremental intangibles amortization and property and equipment depreciation expense resulting from the going private transaction, and the impact of stock option expense. These items are detailed in the schedules posted to our website before the call. In addition, the prior-year period results have been recasted to present the results of the Galls business as a discontinued operation, as we sold it in the fourth quarter of fiscal 2011.

Various remarks that we 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.

Now I'd like to turn the program over to Fred.

Thanks, Chris. Good afternoon and thank you for joining us for our first quarter 2012 results call. I'd like to review our business and operating results, and then have Chris cover a few additional details on our performance for this quarter.

Overall, we're pleased with our start in fiscal 2012, which has been consistent with our expectations. While the economic environment remains somewhat uncertain, we remain focused on initiatives and investments that position ARAMARK for balanced long-term growth and success. Our less cyclical businesses have continued to deliver the positive financial results we saw in 2011. While our more economically sensitive business have shown stable performance with pockets of strength. We continue to manage the impact of higher commodity costs. And we believe that our ongoing efforts to drive operating efficiencies will positively support our financial results as we move through fiscal 2012. Our balanced portfolio of sectors, clients and geographies also continues to be a source of strength and stability for us, and provides us with a solid growth platform for the future.

Now, let me turn to our consolidated results for the quarter. We achieved sales of $3.4 billion, which was up 4% from the prior-year quarter, and up 3% on an organic basis. Growth for the quarter was reduced by about 1 percentage point, as a result of the NBA lockout this quarter. And the fact that we served the Asian games in Shanghai in last year's first quarter. Operating income, again adjusted to exclude the items that Chris mentioned earlier, increased 3% to $211 million from $205 million in last year's quarter. Operating income growth was negatively affected by approximately $4 million of planned acquisition-related transition and integration expenses being absorbed in the quarter, relative to Masterplan and Filterfresh. As well as the recognition last year of approximately $8 million of income related to a compensation agreement signed with the National Park Service. You may remember that we discussed this in the first-quarter call last year. Without these two particular items, year-over-year growth on a more comparable basis, would've been in the high single digits.

In our North American Food and Support Services segment, first-quarter sales of $2.4 billion were up 6% on a reported basis and up 3% organically, led primarily by growth in higher education and healthcare. As I mentioned, segment sales and growth were reduced due to the NBA lockout in the quarter. Our business and industry sector reported a high single-digit sales growth in the quarter, reflecting the positive impact of the Filterfresh office coffee services acquisition, which closed in October. As well as solid base business growth in our facility services business. And mid-single digit growth in our legacy refreshment services business.

The education sector had mid-single-digit sales growth, led by strong base business growth in the higher education food business, and the benefit of new business won in the prior year. In the healthcare sector, sales grew in the high single digits, driven by the acquisition of Masterplan within our clinical technology services business in March of 2011. As well as solid base business growth across the sector. Our sports and entertainment sector had a sales decline at a low single-digit rate. This was primarily due to the impact of the NBA lockout, and fewer major league playoff games for us this October versus last year in those stadiums where we provide our services. Now, absent these two factors, the sector would have shown positive growth in the quarter, supported by solid attendance growth, and very good per capita spending at our NFL and NHL venues compared to the prior year.

Adjusted operating income in the North American Food and Support Services segment of $155 million was about flat for the quarter. Strong profit growth in higher education and healthcare was offset by a decline in business and industry sector profits by approximately $4 million of planned transition and integration expenses from the Filterfresh acquisition. In addition, results for the first quarter of 2011, as I mentioned before, included approximately $8 million of other income related to a compensation agreement with the National Park Service, under which they paid down a portion of our possessory interest in one of our concession contracts. Again, excluding these two particular items, the segment would have shown high single-digit profit growth in the quarter.

Now let's turn to the International Food and Support Services segment. First quarter sales of $685 million were up 2% on a reported basis, and up 5% organically. Results were led by very strong sales growth in South America, and solid growth in Germany and Ireland. China had a reported sales decline in the quarter due to last year's results having benefited, as I mentioned before, from our serving the Asian games in Shanghai. Excluding this particular large event, we continued to see excellent sales growth in China, primarily driven by robust performance in our healthcare facilities services business.

First quarter adjusted operating income was $23.3 million compared to $15.4 million in the prior year. With Germany South America, and the UK delivering solid profit growth in the quarter. You may recall that last year's results included expenses related to efficiency and cost-reduction initiatives, including severance charges across several of our countries. While a smaller amount of expense was recorded this year for further cost reduction and efficiency initiatives in the UK. Without these expenses in both years, the segment would still have shown very good profit growth overall.

In our Uniform and Career Apparel segment, first-quarter sales of $341 million were down 1% from the year-ago quarter on a reported and organic basis. Organic sales growth in uniform rental was offset by a decline in our direct sale business as a result of certain large customer direct sale programs, which were launched in last year's first quarter. We are continuing to invest in additional rental sales personnel resources to support accelerated new sales growth, while maintaining a disciplined approach to contract pricing. We are gaining improved traction in our new sales efforts. And during the first quarter, we were very pleased with the volume of new sales delivered by our sales force, which significantly exceeded both the prior quarter's results, and the prior year's first quarter results. And this was driven both by higher sales headcount, and by higher sales rep productivity.

The increased sales costs, which include upfront installation costs associated with a substantially higher levels of new business, are essentially being offset by the successful efficiency initiatives that we've talked about in previous calls. While higher rates of new sales will continue to depress profit growth over the next few quarters, as the ramp-up continues, we believe these efforts will lead to both improving rental sales and profit growth as we move through 2012. Uniform segment adjusted operating income was $40 million, down from $42 million in the year-ago quarter. Profit results in the quarter were reduced by costs, including severance expense, associated with additional organizational efficiency initiatives, following the successful integration of our rental and direct sales operations. And, as we mentioned last quarter, the completion of the Galls divestiture. As well as incremental expense from our investment in growing the sales force and the impact of higher energy costs.

Overall, the segment's profit performance was consistent with our expectations, as we ramp up our new sales efforts and continue our operating efficiency initiatives. And as I mentioned, we expect to reestablish profit growth and increasing sales growth as the new sales start to drop profits to the bottom line.

Corporate expenses adjusted to include the items Chris mentioned earlier were $7.1 million in the quarter compared to $8.2 million in the year-ago quarter. Now at this point, let me turn it back to Chris for some additional details.

Thanks, Fred. I'd like to comment on our capital structure and cash flow. We are pleased that for the trailing 12 months ending December 30, our adjusted EBITDA increased to $1.129 billion, up from $1.10 billion at September 30, 2011. And up from $1.051 billion at December 31, 2010. Interest and other financing costs were $109 million for the first quarter, just slightly below the prior year's first quarter expense. Approximately 45% of our debt portfolio is at fixed interest rates. And our overall weighted average cost of debt at quarter end was approximately 6.3%. Total reported debt at the end of the quarter was $5.908 billion. Our secured debt, as defined in our credit agreement, totaled $3.831 billion, which included a term loan balance of $3.288 billion, and a revolver balance of $249 million. Our $250 million accounts receivable securitization facility was also full utilized as of quarter end.

We continue to enjoy a strong liquidity position. And as of quarter end we had approximately $395 million of available borrowing capacity under our revolving credit facility. We are pleased that based on our solid growth and trailing EBITDA, compared to the same quarter last year, our secured debt ratio improved further to 3.3 times as of December 30, compared to 3.47 times in the year-ago quarter. Consistent with our plan, net capital expenditures for the quarter were $74 million, compared to $54 million in the prior-year quarter, reflecting growth in both client related investments. As well as investments in our systems and physical infrastructure to support future growth and efficiencies. In managing our capital budget, we continue to maintain a disciplined approach, as we evaluate and invest in opportunities.

For the full year, we do expect that net capital expenditures would be somewhat higher than prior-year levels. Consistent with historical patterns, working capital was a use of cash for us during the first quarter, and was in line with our expectations. For the full year of fiscal 2012, we anticipate that working capital will be a relatively modest use of cash for us overall. Finally, we spent $158 million on acquisitions in the first quarter, primarily related to the previously mentioned purchase of Filterfresh in October. And we funded these acquisitions with a combination of excess cash and revolver borrowings.

Now let me turn the call back to Fred.

Thanks, Chris. Overall, we are pleased with our start to fiscal 2012, which has been consistent with our expectations. As we move throughout this year, our teams are focused on driving a number of business-wide initiatives aimed at delivering improved organic growth and continued margin improvement over time. We believe through these initiatives we can bring greater efficiencies and improved effectiveness to how we serve our clients and customers, and how we generate new sales. We believe our efforts towards process standardization across our businesses and countries will help drive strong financial performance in the coming years. And finally, despite a persistently uncertain economic environment, we continue to be excited by the growth opportunities that we see across the Company. Even though certain businesses and geographies may remain more challenged than others, the diversity of our portfolio provides us with a very good balance to continue to mitigate challenges and to grow ARAMARK.

Thank you again for your time this afternoon, and for your continued support. At this point, we be happy to take your questions.

(Operator Instructions) Reza Vahabzadeh, Barclays Capital.

Just considering headlines surrounding what's happening across the pond, I was wondering if you could just talk about your business in Europe, excluding Germany, which you said was up. And your international business as well in some other markets outside of China, which obviously had a tough year-over-year comp.

Reza, this is Fred. We had a slight sales decline in the UK. A challenged economy. We actually were up decently in Ireland. And there in particular we've got a good package between facilities and food services through a recent acquisition that we made there. That's worked in our favor. We had okay growth in Spain. Mid-single-digit growth in Spain, organically in the quarter. So we were pretty pleased with that given some of the challenges that the Spanish economy's undergoing with very high unemployment rates. And then as we talked about, Germany was solid. The economy's pretty good there, although we think there will be challenges in Germany in the economy. And then we had very solid growth throughout South America and countries that we operate in, and in China.

Got it. And then on to the US business, you gave the growth numbers for healthcare in the B&I sector. But those numbers I think included your acquisitions. I was wondering if you could give us the growth numbers excluding the acquisitions and maybe your updated outlook for those segments?

Yes. The refreshment services business, ex the Filterfresh acquisition, did grow organically in the mid-single digits. The healthcare business, ex the Masterplan acquisition, grew just below the mid-single digits. So in the low single digits. With solid base business growth, there's a lapping a couple of lost accounts in the prior-year quarter. But we're continuing to see good, solid growth across the sector.

Right. But the mid-single-digit sales growth for healthcare is a little slower than what you experienced last year, if I remember correctly.

It may vary some year-to-year. We don't see any particular trend. It's the pattern of gains and losses. So we think over the next year or so, the healthcare business will probably grow faster. But right now it's probably performing at the lower end of the range, but within the range that we target for.

There can be some choppiness in new sales in healthcare. We talked about some of those accounts can be quite large and quite complex, and can lead to longer selling cycles. And so there have been periods where we've seen that business grow very nicely in the high single digits in some quarters, even in the low double digits. But again the timing of new sales can impact it pretty significantly.

Got it. And can you talk about potential additional tuck-in acquisitions if there are assets that are likely to come for sale that would meet your requirements? And then you really haven't spoken much about your Japanese joint venture. Any updated thoughts on that would be appreciated, as well.

Sure. Starting with Japan, again, that's a 50-50 joint venture with Matsui, going back now more than 30 years. The business was down somewhat from the prior year, obviously, because of the ongoing impact and aftermath of the earthquake and the tsunami. It is certainly stable though. It's just that the level of activity in given some of the conservation requirements that the government has imposed on businesses is just, frankly, reducing the availability of mealtimes and the populations in some of the accounts. But the business is stable and generated very solid profits for us, in the quarter. And so I don't see that changing as we look out through the rest of this fiscal year, at least. But again, very solid business. It's a $1.8 billion business for us on the top line. And again, good balance between healthcare and business and some good growth in areas like corrections and sports and entertainment.

Acquisition opportunities, otherwise again, I think Masterplan and Filterfresh were good examples of the kinds of things we're thinking about. We also continue to be focused on continuing to broaden and deepen our facilities services capability. The acquisition we made in Ireland a couple years ago, I think, is a good example of that. And as Fred said, that balance in Ireland actually held us in good stead this quarter with solid growth coming from the facilities business. So things like that in certain countries around the world, and in North America, are certainly things that fit what we're looking for strategically. And then in the Uniform business, there certainly will continue to be over time opportunities likely. More regional in nature, or local in nature. But as that business has improved and the economy's improved, I would expect that you'll, over time, see some more activity on the Uniform side, as well.

Great. Thank you much.

Carla Casella, JPMorgan.

Actually, just to follow-up on that, and maybe I missed it, but did you give a sense for what the multiples you've paid for your most recent acquisitions, and what you were seeing in terms of multiple trends?

Yes. I think in the 8 to 9 times EBITDA range, pre-synergy, is probably the right way. It's obviously going to depend based on the target and based on its strategic attractiveness to us. But the high single digits, pre-synergies, I think continues to be what we're seeing. And I don't think there's necessarily material change in multiples, at least from our vantage point, over the last 12 months or so.

Okay. And then just in terms of your capital structure, you commented in your 10-Q that the 5% notes are not being included in short-term debt because they can be refinanced with the credit facility. Your other bonds are all callable. Any view on whether you'd consider coming to market to refinance or how you look at your cap structure? Are you pleased with where it stands today?

Yes. I think we're obviously pretty comfortable with the capital structure. We obviously spend a lot of time thinking about it. And I think we'll continue to be prudent as we manage maturities as we move across time. The $250 million maturity on June 1 is very comfortably fit within our free cash flow and revolver, so we are not compelled to do anything other than that with that maturity. And we like the capital structure. We think we have a lot of liquidity. We obviously extended the revolver, which improves that liquidity. And I think we'll, step-by-step, deal with it again, prudently, as I think we have so far.

Okay. Great. And then have you given an expectation for dividends for the year?

No.

We're not a serial dividend payer, as you know.

Right. Exactly. I didn't know if you had any plans to.

Not at this point.

Yes. Not that we've announced. We paid a dividend, as you know, a year ago. But that was four years into the transaction, given the success of the Company, and the increased value of the shares, of the equity. But that's something we look at from time to time. But as you know, in the last five years, we've paid one.

Great. And you earned it. But thank you.

Karru Martinson, Deutsche Bank.

Just to be clear, on the 5% senior notes, that would be taken out with the revolver and cash. There's no contemplation of an additional term loan or anything like that under your senior secured credit facility?

Yes. That's correct. The current expectation is the $250 million will be repaid with a combination of free cash flow and revolver.

Okay. And then when we look at the quarter, a number of other companies, and in different sectors, have talked about how the warm weather hurt them. I was wondering, what were you seeing from a potential weather impact? Was the warm weather actually helping you guys as more people may have been out and about?

I think in the food service business, I don't think there was any big impact one way or the other. It's small for us, but I know that we did see some negative effect in our direct sales business. Which is part of our overall Uniform segment. The bulk of that is rental, but a portion of it is direct sales of work apparel. And that business in our first fiscal quarter, the quarter that we're talking about, is very heavily outerwear oriented. As businesses head into the fall, and look to directly purchase embroidered jackets and outerwear. And we've seen quite a negative impact on our outerwear sales, consistent with the weather. Now, fortunately for us, it's a smaller part of our Uniform business, which itself is certainly not the dominant part of the overall Company. So it was a blip on the radar for the whole Company, but we did see that clearly if you look at that component.

Okay. Then when we do look at the Uniform business, have you guys seen any change as at least the unemployment numbers have come down slightly? Has that started to translate into any changes on that Uniform basis?

We've seen an improvement in our base business performance over the last couple of years. And right now, we're operating on the base, pre-the impact of pricing, overall about flat, to slightly positive. So it's clearly an improvement from where it was 12 and 24 months ago. To be fair, we have not seen any particular spike up over the last three, four, five months, but it's clearly better than it was a year ago.

Okay. And as you guys have taken costs out of your markets like the UK, how much more room is there to streamline your operations?

Over time, we actually think there's a fair amount of opportunity. Some of what we've done today has been rationalizing our support structure and making it more efficient. There are additional benefits, as we alluded to in the prepared remarks, in the unit level. And the two major costs at the unit level in the food and facilities business, whether it's in the UK or the US or anywhere else, obviously are food and labor. And so we've got a number of programs which are really longer-term, frankly, multi-year programs to become more efficient in our use of labor, and our use of food and preparation of food at the unit level. Again, that takes a while, because one is talking about literally thousands of units, because we run a very distributed model. So those benefits really are largely still to come.

Okay. Thank you very much, guys.

(Operator Instructions) Bryan Hunt, Wells Fargo Securities.

When you look at Clinical Technologies and Filterfresh, I was wondering if you could make some qualitative comments on how the cost and revenue synergies are playing out relative to your expectations?

I think in both cases, they are playing out consistent with our plan. We are much further along, obviously, with Masterplan, which we're actually coming up to the 12-month mark on. So that is, in terms of the integration within the operations, within the sales, within the various infrastructures, essentially behind us. And feel very good, again, about our position in that market, as we talked about, where we have a very attractive leadership position as a non-OEM provider of multi-vendor services. And Filterfresh, obviously much more recent. But we are now just about completed with the integration of what was 28 different markets, where we were both operating, that we're now essentially completed in terms of consolidating the operations in those markets. There is still some real estate that we need to work out over time. But in terms of synergy realization, at this point, in the process, we feel good about where we are.

And I think, just to add to that, on the revenue side, in the Clinical Technology business, we preserved the sales headcount of both our CTS legacy operations and Masterplan. And I think, as Chris said, we're well-positioned as the largest non-OEM provider. And so we think there are pretty significant revenue opportunities. Although the acquisition will be a good acquisition without huge revenue opportunities. And in Filterfresh, we've been pleased that our client retention has been maintained at the historic levels. You always run a risk in an acquisition like this that your client retention actually is reduced for a little while, as some clients may be unhappy that the company has been sold. But we haven't seen that, so that actually has been a positive to our expectations.

What is that honeymoon period? I believe you guys noted in the Q, there was some compensation between the previous owner and yourselves paid because one customer migrated away. So what's that typical honeymoon period where you get potential compensation from the loss of a customer?

That was actually a very discrete situation, Bryan. That was by far, that was the largest Filterfresh current that had already been in the middle of a re-bid process, as we approached the signing of the acquisition. So we carved that out and specifically got protection for that single large client. That ultimately wasn't retained and we were then compensated for it. As Fred said, by and large, across the portfolio, we've now touched all of the key client relationships, and our retention rate so far in the Filterfresh portfolio has exceeded our expectations.

Fantastic. And my last question, if you look at total retention for the quarter, are you all maintaining that high 90%s or mid-90%s type of rate?

Yes, absolutely. Typically in the first quarter, you are in the 98%, 99% range, which is where we are. And we would at this point expect to deliver another year of mid-90%s retention for the full year.

Thank you for your time this afternoon.

Jordan Hughes, Goldman Sachs.

I was wondering if you could talk a little bit about what's been driving really the strong comps in the US. Has it been mostly higher pricing, new accounts, or more transactions?

It's a combination of both. We certainly have seen, actually in 2011 and in 2012 in the first quarter, a very good base business growth. And that's a combination of pricing and volume growth. Our higher education business, for example, had a terrific quarter in terms of base business growth. And that's, again, some pricing, but very importantly capturing more of the demand on the campuses that we serve. New -- we continue to generate good levels of new business. Stronger in some quarters than others and stronger in some businesses than others. And, as I mentioned, our retention rates have continued to track with historical levels. So I think there continues to be more opportunity on the new business front. And we're continuing to make investments in new sales resources. And as we've seen more stability and hopefully an even better economy in the US, that should certainly help in terms of driving base business growth to even better levels.

Okay. Great. And then in terms of pricing, what have you been seeing in terms of commodity cost increases and food costs? Is there any new developments there?

It's really stabilized relative to the levels we were seeing towards the end of fiscal '11, where we had seen prices continue to rise over the course of the year into that really 6% to 7% range. And that's where we continue to see them today. I think our expectations would be that they would perhaps begin to moderate from that level, and not push any higher. And we certainly hope and expect that to be the case. But that being said, I think, as Fred said in his prepared remarks, we continue to manage through pretty effectively those types of cost increases through a combination of pricing, a combination of menu engineering. And also a combination of delivering better efficiencies through the business and at the unit level. So, fortunately, we have a number of different levers to pull that allow us to manage even in levels of somewhat above average rates of inflation.

Great. And just one last question. Have you seen any of your customers in the government or education sectors really be impacted by budget cuts that you've noticed?

I think not directly. And the government in general is a pretty small part of our portfolio. I think in certain parts of the government sector, K-12 for example, corrections market, for example, which are really small g, government, continue to look at outsourcing at I think a higher rate than they have said historically. As a result of their budget pressures that those institutions and those municipalities are under. So I think as we look at the pipeline and opportunities, we think the pressures that government at large is under may indeed help drive higher rates of new sales in a couple of the sectors.

Okay. Great. Thank you.

And, Chris, that does conclude the Q&A session for today. I'll turn the call back to you.

Great. Thank you very much. We appreciate your attendance this afternoon and hope you all have a great evening.

And, ladies and gentlemen, that does conclude today's conference. We thank you for your participation.