Aramark (ARMK) 2012 Q3 法說會逐字稿

Good afternoon and welcome, ladies and gentlemen, to the ARAMARK Corporation third quarter 2012 earnings conference call. (Operator Instructions)I will now turn the call over to Karen Wallace Vice President and Treasurer. Please go ahead, Karen.

Thank you and welcome to ARAMARK Corporation's conference call to review the results of our operations for the third quarter of fiscal 2012 . Here with me today is Fred Sutherland, our Executive Vice President and Chief Financial Officer. Fred and I will present 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 or use 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 10Q we filed earlier today which contains our third 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 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 transition, the impact of stockoption expense, and the impact on the change in fair value related to our gasoline and diesel fuel agreements. All of these are detailed in the schedules posted to our website before the call.

In addition the prior year period results have been restated 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 related to matters that are not historical facts including remarks about future expectations, anticipation, belief, estimates, plans, and prospects constitute forward-looking statements. Actual results may differ materially from those expressed or implied as the result of various risks, uncertainties. and important factors including those discussed in the risk factors, MV&A and other sections of our form 10-K and form 10-Q filed earlier today. We disclaim any duty to update or review such forward-looking statements, whether as a result of future events or otherwise. I will now turn the program over to Fred.

Good afternoon, everybody and thanks for joining us for our third quarter 2012 results call. As we've done in prior quarters I'd like to review our business and operating results and Karen will cover a few additional details on our performance focused on cash flow and the balance sheet. During the quarter we saw significant slowing in US job growth and continued economic uncertainty in Europe. Our organicgrowth rate declined slightly in part due to the normal seasonal mix-shift between our higher growing education business and our slower growing business in sports and entertainment sectors. 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.

Year-to-date our new customer sales are growing in the double digits and net new business results are also quite strong. Our client retention rates have been consistent with our expectations and better than prior years results. With the economic environment weakening as the year progresses we remain cautious and continue to maintain a very tight focus on efficiently managing our operations and our cost structure.

So now turning to our overall results for the third quarter we achieved sales of $3.3 billion which was up2% as recorded from the prior year quarter. Organic sales growth which I mentioned earlier, and excludes the impact of currency translations, and acquisitions and divestitures, was up 3% in the quarter. Adjustedoperating income was $157 million up 2% versus the prior year. For the first nine months of fiscal 2012 sales were $10.1 billion up 3% over the prior year period on both a reported and a non-organic growth basis. Our adjusted operating income of $544 million was up 4% from the prior year.

Turning to our North America food and support services segment, third quarter reported sales were up 3% to $2.3 billion led primarily by growth in the higher education business, and business and industry, and sports and entertainment sectors. Organic sales growth was 3% in the quarter. For the nine months reported sales were up 5% to $7.1 billion on organic growth of 3%. Year-to-date performance was also led by solid growth in most sectors and particularly strong growth in higher education.

Turning now to the sectors within North America, our business and industry sector had a mid-single digit sales increase for the quarter and a high single-digit sales increase for the nine months. This reflects the positive impact from the FilterFresh acquisition which closed on 2011-- October 2011 . Our B&I facilities business also contributed to the increase in the quarter, with our remote services growth primarily in Canada, and our business dining operations during the year were pretty much flat year-over-over.

The education sector had low single digit sales growth for the quarter and mid-single digit sales growth for the nine months. With growth in our higher education food business resulting from a good combination of base business growth and strong new sales from contract wins in prior periods.

In our health care sector we saw a slight decline in the quarter and mid-single digit sales growth for the nine months. The sales decline in the quarter was the result of modest base business growth that was offset by lower net new business. The growth for the nine month period was primarily a result of the acquisition in March 2011 of Masterplan within our health care and technologies business.

Our sports and entertainment sector had low single digit sales growth for the quarter and for the nine months. Forthe quarter we've seen solid performance in our major league baseball venues with growth in both attendance and per capita spending and good growth in our amphitheater business with a significant increase in the number of shows and attendance growth. Our growth for the nine month period was negatively affected by the NBA strike in the first quarter but that was offset more or less by solid results during the NHL season and recent strength in MLB performance as I mentioned.

Adjusted operating income in the North American food support services segment increased by 5% in the quarter to $103 million led by profit growth in our higher education business. For the nine month segment adjusted operating income grew 5% to $388 million, again led by strong profit growth in higher education business and the health care sector, offset by profit decline in our business and industry structure. Results for the nine months were reduced by approximately $4 of planned, acquisition-related transition integration costs, absorbed in the first quarter, as well as the recognition as we mentioned last year, during last year of approximately $8 million of income related to a compensation agreement signed with the National Park Service under which they paid down a portion of our possessed reinterest in one of our concession contracts. Without these two particular items year-over-over profit growth for the nine months would have been in the high single digits.

Now turning to the international food and support services segment, third quarter reported sales of $674 million were down 3% from the prior year period, primarily due to the strengthening of the US dollar. Organic sales growth for the quarter was actually 4% due to positive growth in Ireland, South America and China that was partially offset by sales declines in the UK and Spain. For the nine months reported sales of $2 billion decreased 1% compared to the prior year also primarily due to the stronger dollar. Organic growth was 4%, again led primarily by growth in Germany, Ireland, South America and China which more than offset a sales decline in the UK and Belgium. Third quarter adjusted operating income was $25 million which was about even when compared to the prior year quarter. But currencytranslation negatively affected profit growth by approximately 8 percentage points.

Results from the quarter primarily reflect improving profit performance in the UK, Ireland and Chile, offsetting a profit decline in continental Europe. For the nine months adjusted operating income was $74 million up from $64 million in the prior year. Growth was driven by the UK, Ireland, Germany, Spain, Chile, and China, partially offset by Belgium and our AIM joint venture in Japan. Currency translation also negatively affected profit growth by approximately 3 percentage points.

As you may recall, there were a number of unusual items last year and a couple this year in the international segment. In 2012 we recorded severance-related charges in VAT income in the UK, and in 2011 the results included a gain on the sale 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 and a write-down of good will and other intangible assets relating to our operations in India. Adjusting for currency translation in these unusual items in both years, adjusted operating income would have grown by double digits versus last year.

In our uniform and career apparel segment third quarter sales of $343 million up 3% from the year ago quarter on both a reported and organic basis. Improving organic growth rates in the uniform rental business which were in the mid-single digits for the quarter were offset by softness in our direct sale business partially reflecting large customer direct sale programs which were launched in the first half of 2011 that have not been repeated in 2012 . For the nine month segment sales of $1 billion were up 1% from the prior year on a reported and organic basis. We continue 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 continue to gain momentum as the volume of new sales in the third quarter and for the nine months delivered by our sales force significantly exceeded the prior results driven by both higher sales head count and higher sales rep productivity.

The segment's third quarter adjusted operating income was $37 million which was about even with the same period last year, and for the nine months adjusted operating income was $107 million down from $112 million from the same period last year. As we have discussed in previous quarters, the increased sales cost including installation costs associated with substantially higher levels of new business and higher merchandise amortization will continue to press profit growth in the near term. But we, of course, believe these efforts will lead to both improving rental sales and profit growth as we move forward.

Corporate expenses excluding the items that Karen mentioned earlier were $9 million in the quarter compared to $7.2 a year ago and for the nine months, expenses were $24.9 million compared to $23.7 million in the prior year. At this point let me turn it back to Karen for some additional details in the quarter and our 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 June 29th was $1.136 billion which was about equal to the $1.136 billion we reported as of March 30, 2012 and up from $1.1 billion as of September 30, 2011.

Interest and other financing costs were $88 million for the third quarter compared to $113 million in the prior year. Our interest expense in the quarter was lower primarily as a result of a number of interest rate swaps that matured at the end of March, 2012 . For the nine months, interest and other financing costs were $315 million equal to the prior year's expense. In the second quarter of 2012, we recorded approximately $11 million of expenses related to the term loan extension we completed that quarter. In 2011 we had interest income of approximately $14 million recorded related to the settlement of UK VAT claims from a prior period. Including the impact of interest rate hedges, approximately 50% of our total debt portfolio was at fixed interest rates, and our overall weighted average cost of debt is approximately 5.1%.

Total reported debt at the end of the quarter was $5.782 billion. Our secured debt as defined in our credit agreement totaled $3.953 billionincluding a term loan balance of $3.281 billion, and a revolver balance of $375 million. In June 2012 we amended our accounts receivable securitization facility increasing the maximum amount from $250 million to $300 million and extending the maturity date to January 2015. The facility had $253 million utilized at quarter's end. During the quarter our $250 million, 5% notes matured and were repaid with revolver borrowings which did not increase our total debt.

We had approximately $273 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 June 29 up modestly from 3.22 times as of March 30, 2012 and equal to the 3.41 times reported as of July 1, 2011 . The slight increase in the ratio from March 30 reflects our utilization of the revolver to fund the 5% note redemption. Overall we are pleased with our EBITDA growth and our ratio momentum and anticipate further ratio improvement over time.

Net capital expenditures for the quarter were $74 million compared to $60 million in the prior year quarter. For the year-to-date net capital expenditures totaled $219 million compared to $180 million in the same period last year as we focus on making 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 nine months of our fiscal year. We are continuing to maintain a focus on working capital management as we 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 have spent a total of $151 million on acquisitions compared to $157 million in the prior year period. This year's spendingrelated to acquisition of FilterFresh within our North American refreshment services business in October of 2011 . We continue to evaluate and seek to make strategic investments in certain sectors and geographies but will be prudent and disciplined in pursuit of these opportunities. Now let me turn the call back over to Fred.

Thanks, Karen. Summing up our performance so far this year our global food and support services business has delivered solid organic growth with strong profit growth. Our uniform rental business is gaining traction from the significant investment we have made over the past several quarters, and accelerating new sales and now it's performing in the mid-single digit growth levels.

As we look forward, while we will be working to deliver improving organic growth rates and continued margin improvement, slowing economic growth will clearly pose a challenge to sectors and countries. We believe that there are many attractive growth opportunities in front of us despite the economic climate, as many of our sectors remain significantly under-penetrated. And we remain excited about pursuing these opportunities.

Overall we continue to benefit from our portfolio of sectors, geographies and clients which we feel provide us with good balance. We plan 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 very disciplined manner. Thank you again for your time this afternoon and for your support of ARAMARK as always. We would now behappy to take questions..

(Operator Instructions). Our first question today with Carla Casella with JPMorgan.

I wonder if you can talk about the UK business and if you have any impact o the Olympics. We are hearing that businesses have been encouraging employees to work from home during the Olympics and wondering if this was an impact on you.

Carla, we have really two impacts. One is the Olympics themselves. As you I'm sure know we are the food service provider to the athletes for the summer games as we have been since 1968 in Mexico City and there's a negative impact which is the one you mentioned and I think it's fair to say we're feeling both of those. Our base UK business is feeling some negative effect from the Olympics.

As you know there was quite a bit of controversy about the traffic and the set up of special dedicated traffic lanes for VIPs and the like. And our sense is that many people particularly focused on taking vacation at this time. On the other hand we will clearly have sales associated with what's proving to be an incredibly successful performance by us in feeding the athletes at the Olympic games. It's not as you know really very much in the way of profit for us but does create a fair amount of sales which I'm sure, just from a sales point of view, would more than offset the weakness in our base UK operations.

Great. And on the uniform business, can you talk about how much of that now is rental?

About 90%, between 85% and 90% of total sales are rental. And the direct sale is the balance.

Great. And then on the commodity cost front can you talk about how you expect that to flow through your numbers with increasing commodities and what changes you can make to offset that?

Sure. Based on our overall market basket, we've seen relatively benign levels of food cost increases so far this year. And in the low single digit range. We haven't seen any major uptick in that right now. We're obviously keeping a close eye on it.

I think next year our forecast is to have price increases more in the 4%, 4.5% range overall of our basket. And as you know we have tremendous flexibility in our operations to manage against this as we have pretty much in most of our operations outside of the corrections business which is relatively small, significant control over the menus, how those menus, the items are engineered, the mix of items on the menus. So we are focused on it. I think we'll probably make even a greater, more focused effort as we move into next year in both our retail and our contract pricing, and we'll be on top of it from a mix perspective.

Okay. Great. Thanks.

And next we go to Reza Vahabzadeh with Barclays.

Good afternoon

Hi, Reza.

As far as spend per capita and traffic in your locations in the North America business, especially the discretionary businesses, how would you characterize your June quarter performance as you went through the quarter as well as sequentially from your March quarter?

Well, I would say depends on the individual market segment. We continue to see growth in our higher education business. Higher education business is not as significant in the June quarter as I mentioned earlier so we continue to drive our base business growth there. We have seen in our business locations clearly some fall off.

And the fall off is spend as well as traffic, or it's one or the other?

I think it's more spend than traffic. Because the unemployment rate has been, as you know, has been pretty constant. One of the challenges is the economy in North America or US is not generating jobs month by month at the level that it was towards the end of last calendar year. I don't think we are being negatively-- significantly negatively affected by traffic.

Right. And in the sports and entertainment business, that's been also constant or no?

It's been positive, actually.

Positive, okay. And then as far as acquisitions, the last batch of acquisitions from our vantage point seem pretty successful, FilterFresh and the health care one, are there more opportunities of that kind do you think in the next six to 12 months?

I think there are always opportunities. We're particularly focused on refreshment services and what we now call health care technologies, the clinical equipment management business, which was where those two acquisitions were. To further solidify our lead positions in the markets and we're pleased overall with those acquisitions and certainly put us in the market in a strong market position as we had targeted. Outside of that, the opportunities are always around add-on acquisitions in the uniform business. The potential to expand our facilities business around the world and then a couple of countries potentially we'd like to be in that we are not in. I wouldn't expect the acquisition activity in the next 12 months to be really significant but there are a couple of things in the pipeline that may come to fruition over the next nine to 12 months.

Right. How is your non-UK European business especially in say Germany and Spain?

I'm sorry, say that again?

How is your business in Germany and Spain?

Our German business is flattened somewhat in the third quarter. So to be fair I would say that Germany is not as strong as it was earlier in the year. I take that as our -- what we are seeing be pretty consistent with what you hear with respect to the German economy overall. And in Spain it's a challenge. It's areal challenge. We have a benefit, we have an advantage and a bit of a disadvantage.

The advantage in Spain is we are not very strong at all in the B&I market. We're strong in education, particularly K-12 and that's been solid. But we also have a decent size business in health care and some portion of that are public health care institutions and those are typically funded at the state levels and as you know in Spain there is quite a bit of back and forth between the states and the federal government with respect to funding. So that's clearly put some pressure on our health care clients. I'd say in Spain, it's a challenge. Fortunately for us, Spain, it's not a huge operation.

Right, right. And last you are happy with your debt maturity profile and capital structure right now?

Yes, Reza. We pushed out the vast majority of our term loan. The next significant maturity we've got coming up is roughly $650 million non-extendant term loan that would be maturing in January 2014. We've got time here before we need to address that but generally speaking we are in good shape.

Great. Thank you very much.

And next we'll go to Karru Martinson with Deutsche Bank.

Good afternoon. In terms of the acquisition front, I thought maybe reverse that. Are there parts of your business you would look to perhaps exit? Perhaps the growth isn't there or economic challenges make the opportunities more difficult than you thought?

I think it's difficult to answer that question definitively. Start with the US. Clearly we have businesses that are growing at different growth rates. And some have more potential than others. All of our -- we operate in pretty high return on investment businesses and so all of our businesses are more than earning their cost to capital.

So I think generally in North America which is, of course, the bulk of our overall sale, particularly when you include uniforms. I don't think it's primarily a matter of exiting certain businesses. I think it's more of a matter of internal resource allocation, capital allocation, sales resources, and those sorts of things. And I think you'll find us probably be more discriminating in that sense in that regard than we have been. Overall outside of the US in our base countries, our big countries, even though a couple of them are struggling because of the economy, we see those as long-term generally as long-term plays in countries which at least over the intermediate term we think we can add value, we want to stay in. The smaller ones we are always evaluating but it's hard to make a specific statement on the smaller ones.

Okay. And with those economies that have been struggling, is that creating opportunities that you see to enter new markets, perhaps with a longer term viewpoint?

It does. I have to say we haven't been very aggressive about that. I think in part because we're happy with the business that we have, but given the longer term uncertainty we'd like to see a few more cards played to see how some of these economies, where they level out and how they level out before we would be contributing, really investing more capital in those countries, the ones that are struggling.

When you talk about the job growth here in the United States, not really adding to the new jobs, when you look at the weakening economic environment. Is the view in terms of your planning that that will change once the election is complete or is this more of a longer term trend that you're seeing here?

It's hard to tell. We can all speculate. Let me put it this way, our current thinking is that there's no reason to think 2013 is going to be substantially different from where we sit today. And could it be a little weaker? My guess is the chances of being a little weaker rather than a little stronger are probably higher. So as we start to think forward to October which is the beginning of our next fiscal year, I can tell you we are not intrinsically counting on some pick up in the overall economy. And so we're planning in accordance with that.

And lastly, you repaid the 5% notes. What's your view on the rest of the capital structure which is (Inaudible - background noise)much through the call here, through their calls.

I don't think at this point there's anything that needs to be immediately addressed. Our next significant maturity is not until January 2014. I think we are fairly comfortable with where we sit now.

Thank you very much.

(Operator Instructions) And it appears we have no further questions at this time.

Great. Thanks, everybody, for joining us and we'll talk to you next quarter.

And that will conclude today's conference. Thank you, everyone, for your for your participation.