Aramark (ARMK) 2013 Q1 法說會逐字稿

Good afternoon and welcome, ladies and gentlemen, to the ARAMARK Corporation first quarter 2013 earnings conference call. At this time I'd 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 Karen Wallace, Vice President and Treasurer. Please proceed, Karen.

Thanks, Stephanie, and thanks, everyone, and welcome to ARAMARK Corporation's conference call to review the results of our first quarter of fiscal 2013.

Here with me today are Eric Foss, our Chief Executive Officer and President, and Fred Sutherland, our Executive Vice President and Chief Financial Officer. Eric, 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 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 our results, you may want to reform to the -- refer to the Form 10-Q we filed earlier today, which contains our first quarter results for fiscal 2013. 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 today, include reconciliations of these non-GAAP financial measures to the most comparable US 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 our going private transaction in 2007, the impact of stock option expense and the impact on the change in fair value related to our gasoline and diesel fuel agreements. These items are detailed in the schedules posted to our website before this call.

Various remarks that we make -- may make in this call relating 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 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'll l now turn the program over to Eric Foss.

Thanks, Karen, and good afternoon, everyone, and thanks very much for joining us as we review our first quarter results.

Because this is my first time speaking with this group let me spend a couple of minutes to briefly introduce myself. In May of last year I had the honor and privilege of joining ARAMARK as Chief Executive Officer and President. Prior to joining ARAMARK, I was part of the Pepsi and PepsiCo family for almost 30 years, recently as Chairman and CEO of publicly traded Pepsi Bottling Group, and then post a merger with PepsiCo, for about a year as CEO of Pepsi Beverage Company. I can tell you, I'm very excited about the opportunity to lead this global business at ARAMARK that touches so many lives each day.

You know, our Business is a people business, and ARAMARK is known for its great people, our roughly 250,000 associates who consistently provide quality service to millions of customers at thousands of client locations around the world. I spent my first 100 days with ARAMARK on a listening and learning tour across the Company. This was really a great opportunity to spend time with consumers, clients, investors and employees, and I believe there's really no substitute for listening to the constituents that matter most. I came away from that process with some key take aways around what we do well and areas where we can get better. And this has helped shape the direction on where we need to go as we face the future.

We have some great strengths at ARAMARK that we need to leverage, a culture with strong values and a desire to do the right thing with an absolute obsession around client service, and perhaps, most importantly, great people with a lot of pride and passion. Along with the strengths, we have some opportunities to make ARAMARK an even better company. We need to improve the strategic focus. We need to develop a more repeatable business model through improved processes and systems and further increase our speed and agility to meet the demands of an ever-changing marketplace.

In general, I believe there's significant potential over time to improve both our growth and profitability by increasing our focus on higher growth sectors and geographies and by insuring that, through a repeatable business model, we have the standards, tools and processes to better manage our food, merchandise and labor costs as well as become more efficient with our above unit costs. Our strategic agenda is really structured around three key imperatives, defining the path to sustainable growth, driving productivity to support that growth and enhance margins, and develop a high performing organization.

Let me shift to a quick overview of our first quarter results. Overall, I'm very pleased with our results in the first quarter of fiscal 2013. Our results were negatively affected by the NHL lockout and Hurricane Sandy which together reduced sales by about $50 million and operating income by about $10 million. Adjusted for those items, first quarter organic sales growth would have been mid single digit, while operating income would have increased strong double-digit from prior year with improved margins. And you can expect us to continue to focus on margin improvement as we go forward.

On the new business front, we also had a strong quarter. We've been working to standardize our selling process and further improve our focus on customer relationship management, and year-to-date that's paying off, with new sales growth up about 20% ahead of prior year. So simply stated, while it's early in the game, we're seeing early signs of effective implementation of our strategy and excellent execution from our associates to focus on consistently delivering value as well as a great experience for clients and consumers.

And with that, let me turn it over to Fred for more details on our results in the quarter.

Thanks, Eric.

Turning to our consolidated results for the quarter, we achieved sales of $3.5 billion, up 3% from the prior year quarter, and 4% on our organic basis. Organic growth, as Eric mentioned, was reduced in the quarter by about one percentage point as a result of the NHL lockout and Hurricane Sandy. Operating income, adjusted to exclude the items that Karen mentioned earlier, increased 4% to $219 million from $211 million in last year's quarter. Adjusted operating income growth for the quarter was also negatively affected by the NHL lockout, Hurricane Sandy and severance related expenses in our UK and Uniform businesses. And without these particular items, year-over-year growth would have been in the low double digits.

In our North America Food and Support Services segment, first quarter sales of $2.5 billion were up 3% on both a reported and organic basis, but primarily by growth in the Education and Healthcare sectors. As mentioned earlier, segment sales and growth were reduced due to the NHL lockout and Hurricane Sandy which reduced year-over-year growth in the segment by about two percentage points.

Reported sales in our Business & Industry sector declined slightly in the quarter. As you may recall during the quarter, we completed the spinoff of our majority interest in Seamless to our stockholders. The Seamless spinoff reduced reported sales growth in the sector by about two percentage points. Our Business Dining operations were negatively affected by the Hurricane in the quarter as we had a number of client locations that experienced business interruptions. And, without this effect, our sales would have been about flat.

Our Facility Services business reported strong sales growth for the quarter as a result of increased activity at our remote services sites, as well as new business wins from prior periods. Our Education sector experienced high single digit sales growth led by strong base business growth in both our Higher Education and K-1 2 businesses and the benefit of new business won in the prior year. In the Healthcare sector sales grew in the low single digits due to new business wins in the prior year in our Hospitality business as well as solid base business growth.

Reported sales in our Sports & Entertainment sector, as you would expect, declined at a low single digit rate primarily due to the impact of the NHL lockout. Now, absent the lockout, the sector would have shown strong positive growth in the quarter supported by strong NFL per capita spending and more Major League Baseball games in the first quarter of this year versus last year. Adjusted operating income in the North America Food and Support Services segment of $171 million was up 10% for the quarter.

Again, excluding the NHL lockout and the hurricane, adjusted operated income growth would have been in the mid-teens. Adjusted operating income growth was driven by solid performance from our Higher Education businesses; cost savings from the completion of the integration of the Filterfresh acquisition, which, as you may recall, occurred in October of 2011 and was an add-on into our refreshment services business; cost reduction initiatives in our Parks business and strong performance at our NFL venues, as I mentioned before.

Now turning to the international Food and Support Services segment. First quarter sales of $725 million were up 6% on both an as reported and organic basis. Results were led by strong sales growth in South America and in China, resulting both from base business growth as well as new sales. Solid results in Germany and Ireland also contributed to growth in the quarter. This growth more than offset sales declines in the UK and Spain, resulting from both lost business and lower year-over-year base business opportunity -- or activity in large part due to the economic situation in Europe.

First quarter adjusted operating income was $22 million, compared to $23 million in the prior year. The impact of exchange rates contributed approximately three percentage points of the year-over-year decline. Ireland and China delivered strong profit growth versus the prior year, while results in the UK were negatively affected by severance-related charges incurred in the quarter. In South America profit growth was negatively affected by new start-up challenges at a few large client sites.

In our Uniform and Career Apparel segment first quarter sales of $353 million were up 4% from the year-ago quarter on both an as reported and organic basis. We are continuing to see the benefits of our new sales efforts over the past months, and, during the first quarter, the volume of sales delivered by our sales force exceeded the prior year's first quarter results. Uniform segment adjusted operating income was $38 million, down from $40 million in the year-ago quarter.

As I mentioned earlier, profit results in both periods were reduced by severance related costs associated with additional organizational efficiency initiatives. We had a higher benefit to income in the prior year as compared to the current year resulting from a reduction in insurance reserves due to favorable claims experience. So, excluding these items, adjusted operating income would have increased mid single digits for the quarter. The increased sales costs, including the higher merchandise amortization associated with substantially higher levels of new business, are being substantially offset by lower operating expenses.

Corporate expenses adjusted to exclude the items Karen described earlier were $11.2 million in the quarter compared to $7.1 million in the year-ago quarter. Expenses are higher due to the compensation expense for an accounting charge related to the retirement obligation of our current Chairman and former CEO.

Now, at this point, let me turn it back to Karen for some additional details on the quarter.

Thanks, Fred.

I'd like to comment on our capital structure and cash flow. For the 12 months -- trailing 12 months ended December 28, 2012, our adjusted EBITDA increased to $1.147 billion up from $1.136 billion at September 28, 2012 and from $1.129 billion at December 30, 2011. Interest and other financing costs were $99.5 million for the first quarter, down from the prior year first quarter's expense of $108.8 million.

The reduction in interest expense is primarily the result of interest rate swaps that matured in March of 2012 at fixed rates that were higher than the current rate. And that was partially offset by approximately $12 million of costs we incurred in the quarter related to our term loan refinancing in December 2012. As of now, approximately 47% of our total debt portfolio is at fixed interest rates, and our overall weighted average cost of debt at quarter end was approximately 5.1%.

Total reported debt at the end of the quarter was $5.752 billion, and our senior -- our secured debt, as defined in our credit agreement, totaled $3.914 billion, and that included a term loan balance of $3.303 billion and a revolver balance of $265 million. Our $300 million accounts receivable securitization facility was also fully utilized as of quarter end. In December 2012, we refinanced the remaining $650 million of our 2014 term loan that had not been previously extended.

We are very appreciative of the broad support that the transaction received from our investors. We believe that the success of the refinancing further enhances our financial and capital structure flexibility, and we would like to thank all of those that provided commitments to the new term loan. We continue to enjoy a strong liquidity position.

As of the quarter end, we had approximately $384 million of available borrowing capacity under our revolving credit facility. While our trailing adjusted EBITDA has improved, and our total debt levels have declined as compared to the first quarter of last year, our senior secured debt balance is slightly higher year-over-year, primarily as a result of previously anticipated higher working capital requirements, driven by our higher levels of sales growth. As a result, our secured debt ratio of 3.35 times, as of December 28, 2012, was up very modestly from 3.33 times, as of December 30, 2011.

Net capital expenditures for the quarter were $71 million compared to $74 million in the prior year quarter. In managing our capital budget, we continue to maintain a disciplined approach as we evaluate and invest in opportunities. While spending for the first quarter was modestly below that of last year, we continue to expect that net capital expenditures for the full year will 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 that was in line with our expectations. For the full year of fiscal 2013, we anticipate that working capital will be a relatively modest use of cash for us overall.

With that, let me turn the call back over to Eric.

Thanks, Karen.

So, as we mentioned, we're pleased with our results in the quarter. Our year is off to a good start. And, as we look forward, we expect that our operating results will continue to be affected by the economic uncertainty in the countries in which we operate. We anticipate the economic conditions, specifically in Europe, and overall unemployment levels will remain challenging. However, we believe that the strategic agenda we've established will provide us with a framework to grow our Business and continue to improve our productivity.

So, as I wrap up, I just want to take a moment to thank each member of our One ARAMARK team across the globe. I am very grateful for their support and efforts as they continue to work each and every day to make ARAMARK a better company. And I look forward to sharing the results of our efforts with you from time to time as we move forward. I want to thank you again for your time this afternoon and for your interest and support of ARAMARK.

And, with that, Stephanie, we'd be happy to open up the lines and entertain any questions.

Thank you. Today's question-and-answer session will be conducted electronically.

(Operator Instructions)

Reza Vahabzadeh, Barclays.

Eric, appreciate you framing the opportunities and challenges that you see in -- at ARAMARK. I was wondering if you could discuss the role that acquisitions could possibly play in your strategy going forward, as well as financial leverage. And then, separately, if you can talk about the consumer as you see it in the US, as well as in Europe, in particular, and whether we have reached some level of stabilization in the US, or are we still in a period of meaningful ebb and flow in terms of spending? Thank you.

Let me start -- this is Eric -- and then I'll turn it over to Fred. I think as we think about our business and particularly the growth going forward, I think we look at what is a great marketplace opportunity, particularly as we look at the food and facilities business with about -- almost 50% of the market opportunities still self-operated. So, we continue to gain confidence in our ability to compete in that space and would expect that to continue. From an M&A standpoint, I'll let Fred comment on that. I think you will continue to see us look for kind of bolt-on acquisitions in that space.

On your question on the consumer, I think particularly in Europe, to a lesser extent in North America, but there's no doubt the consumer still has a lot of concerns on her mind. And I think, while we've seen some stabilization of that, I don't think we're out of the woods yet. I think you're going to continue to see a very cautious consumer environment. Fred?

Let me just raise -- add to that. I think on the M&A front, we're pretty much where we have been. And I think it's interesting, one of Eric's observations early on was, gee, this is a market where there's really a lot of growth available in the market because of this 50% self-op component. So I think we continue to see the primary driver of growth and the primary focus of all of our efforts on organic growth, increasing the rate of new sales which we were able to do, maintaining 95% retention and then, through consumer focus programs, growing our base business. Having said that, I think we'll be appropriately aggressive in looking at either bolt-on acquisitions or acquisitions to either expand us into attractive geographies where we're not located, or to expand our service capabilities logically as we look at our overall service portfolio.

So, I think that's pretty much the same as it's been. On the financial leverage side, as you know, this is a Company that, for literally decades, has operated with relatively high financial leverage. It's able to do that because of the tremendous stability of the cash flow from year to year, and so I don't think we see any change in how we think the business should be run and what we think an appropriate capital structure is. We obviously focus on making sure we have the right balance between fixed and floating rates and the right balance between near-term and longer-term debt maturities.

Got it. Thank you much.

Bryan Hunt, Wells Fargo.

Thank you for your time and, Eric, welcome aboard.

Thanks, Bryan.

If you could talk about perhaps your -- you've gone through this structured selling program. Could you explore the segments where you're experiencing accelerating growth and what segments have yet to get this new structured sales program?

Well, we're just in the process, Bryan, of rolling that out. So, I think what you'll see is, as we begin to talk about this consistent and repeatable operating model, the two dimensions of that are, what are the excel dimensions of that model that deal with growth? And I think there are three. There's kind of the selling model, which is all about driving new business growth. There's the service model, which is all about driving increased retention. And there's the executional model of that, which is all about building out your base business via adjacency opportunities. As we deploy that, you'll see us deploy it over time across all of our businesses. And that will take place over the next several months.

Relative to the businesses that are performing well for us now, as Fred highlighted, I think we continue to feel good and highly confident about what's happening in the Higher Ed business. Actually, our Education business overall in first quarter was strong. Certainly Healthcare is an important priority for us. So those two along with emerging markets I'd say are the three businesses, as we think about growth, that we want to make sure that we're addressing the marketplace opportunity.

Great. And two more questions. You said as you toured the Company and listened to the -- and formulated the opportunities, you see significant opportunities for efficiency and cost savings. I was wondering, is there any way you can frame that up for us? Is it a 100-basis-point opportunity, or is it greater than that potentially?

Yes, I don't think we're in a position where we want to quantify it right now. I would use the terms that I did, which is we think there's a significant opportunity here. And really, as we think about it, there's kind of a three-legged stool of how we'll address those opportunities. There's kind of the food bucket, and we've got a pretty disciplined approach now in how we're thinking about food productivity -- everything from purchasing to food production to menu management to waste. And the same thing on the labor front, looking at headcount and wages and scheduling and overtime and turnover. So, I think as we think about standardizing our approach to this, we'll uncover real opportunities. So, the three buckets of food, labor, and then SG&A are ones that you'll continue to see us address and talk about appropriately.

And then lastly, when you look at the capital structure, there's a significant amount of your fixed-rate capital structure, the three notes that mature within the next couple of years and all of them are in the call. Where does the Company stand in evaluating its capital structure with regards to its notes.

This is Karen. I think that's a -- that's an ongoing process. You've seen us very consistently address our maturities, typically 18 to 24 months in advance of their final maturity date. And, clearly, we are keeping a close eye on the markets. We're certainly well aware of the fact that the capital markets are very strong now, and we'll be obviously taking a look at those fixed-rate notes that are outstanding and developing strategies to deal with those within the coming months.

And, as you saw -- just to add on to that -- in December we did successfully extend the unextended portion of the term loan, and we were able to do that on attractive terms, and we had actually quite a strong demand for that.

Thank you. I'll get back in the queue.

Karru Martinson, Deutsche Bank.

When we look at the kind of the slowdown in Spain, part of the pitch had always been, we're in Healthcare there, we're in Education, we're a little bit more insulated. What are we seeing differently this quarter that's kind of seeping into those categories?

This is Fred. I guess a couple comments. One -- not that Spain isn't a great country, but one good aspect of Spain is it's quite small in the overall ARAMARK portfolio, certainly less than 1% of our total revenues. What we are starting to see, though, is in the education space -- which has typically, as we pointed out before, been certainly more resilient than the business space -- is we've seen as there are pressures on the state governments and their funding from the national government, is that, that pressure works through the system. And so, often the model there is that there's a subsidy which is provided by the school district or the state to subsidize the meals. So, we are seeing pressure on that which we haven't -- to be quite honest, we haven't seen quite the same way in the past. Although I would say that, as you think about our business in Spain, that this is all about the very difficult and challenging economic conditions and isn't anything relative to competing in the marketplace. So, I think it's really all about the macroeconomic conditions that exist, and all the players in the sector are dealing with that challenge.

All right. And then, when you guys talked about targeting higher-growth geographies in sectors, in the past you've kind of singled out Asia and South America as your faster-growing markets. Is that what you're referencing there, or is there something else there that I'm missing?

I think that's a fair characterization and, in fact, we are -- our international business is now organized under Eric into our Fast and Emerging Markets Group, and then the slower growth, more traditional European Group. I don't think our focus there we see has changed, and I don't think we see the opportunities, geographically, any different than we have.

Okay. And then just lastly, and I realize this is somewhat forward-looking and it's early days, but in terms of the payroll tax increase, what's the expectation on the impact here for you guys going forward?

That's not something overall that we consider to be all that significant. So, we're not too concerned about it.

All right. Thank you very much. Appreciate it.

Carla Casella, JPMorgan.

Just one follow-up. (inaudible) I know UK is a little bit bigger. Are you feeling that you're getting anywhere near the bottom in terms of the economic conditions there?

I'm sorry, Carla, were you talking in general? Or (multiple speakers).

Yes, in general, Spain and UK, just in terms of the conditions you're seeing in the market.

Yes, I'll let Eric -- Eric may want to weigh in as well. I think it's still difficult, and I couldn't sit here and say that we've -- we're confident that we've reached the bottom.

No. As I said in my prepared comments, I think the economic conditions in Europe have been and will continue to be challenging for the foreseeable future.

Do you think that could open up any more acquisition opportunities?

Well, it certainly could. You know, one would have to think long and hard in terms of deploying capital. We want to be prudent in how we deploy acquisition capital. And so, while we're prepared to be opportunistic, I think we'd have to think long and hard about deploying capital in economies where, at least for the near to medium term, it appears that the environment is going to be pretty weak.

Okay. Great. And then, you mentioned that the Sandy and the NHL impact together were $50 million on sales, $10 million on EBIT. Any relative -- like how much of it -- was most of it Sandy, or can you break out between that?

No, actually, most of it was the lockout. I think about roughly 75%, 80% of it was the NHL lockout. We have nine NHL teams, and obviously the quarter would have been a big activity quarter for us.

Okay. Great. Thanks.

And at this time there are no further questions.

All right. Great. Well, appreciate everybody joining us for our call this afternoon and certainly feel free to follow up if you've got questions. Otherwise, we'll talk to you next quarter.

Thank you for participating and have a nice day. All parties may now disconnect.