Aramark (ARMK) 2013 Q2 法說會逐字稿

Good afternoon, and welcome, ladies and gentlemen, to the ARAMARK Corporation second-quarter 2013 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 Karen Wallace, Vice President and Treasurer. Please go ahead.

Thanks, Jennifer. And welcome, everyone, to ARAMARK Corporation's conference call to review the results of our operations for the second quarter of fiscal 2013. Here with me today is Fred Sutherland, our Executive Vice President and Chief Financial Officer. Fred and I will present an overview of our second-quarter and year-to-date results and business operations. There will be an opportunity for phone-in participants to ask questions following our remarks. I would like to remind you that any recording or other use or transmission of this audio may not be done without the prior written consent of ARAMARK. As we discuss the results, you may want to refer to the Form 10-Q we filed earlier today which contains our second-quarter and year-to-date results for fiscal 2013. The 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 our going private transaction in 2007, the impact of stock option expense, the impact on the change in fair value related to our gasoline and diesel fuel agreements. As well as approximately $76 million of expenses we recorded in the second quarter of 2013 for severance and related costs, goodwill impairments, asset write-offs, and certain transformation initiatives. These items are referenced in the schedules posted to our website before this call.

Various remarks that we may make in this call relating to matters that are not historical facts, including remarks about anticipated future cost and savings, 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 will now turn the program over to Fred.

Good afternoon, everybody, and thanks for joining us for our second-quarter 2013 results call. I'd like to review our business and operating results, and then have Karen cover a few additional details on our performance in the quarter. We're pleased to report results for our second fiscal quarter that continue the trend of solid operating performance that we saw in the first quarter. We believe that our focus on initiatives and investments that position ARAMARK for long-term growth have contributed to our strong results for the quarter. And are continuing to build a solid foundation for the future. Our ongoing efforts to improve our operating efficiencies continue to allow us to leverage our top-line sales growth into solid earnings performance.

Now, before I discuss the results for the quarter, I'd like to comment on some of the costs we recorded in the quarter. As Karen mentioned, excluded from our calculation of adjusted operating income are $76 million of transformation costs. This total includes severance and related expenses, goodwill impairment, and asset write-offs, which resulted primarily from a review of our European operations in light of the continuing economic weakness throughout Europe. And other expenses incurred in connection with both growth and cost initiatives. We estimate that we will incur approximately an additional $50 million to $75 million of costs over the next two years. Of the $76 million recorded this quarter, approximately $23 million of these expenses are non-cash.

Now turning to our overall results for the quarter, we reported sales of $3.4 billion up 2% on both a reported and an organic basis. Adjusted operating income of $200.1 million was up 13% from prior-year quarter. For the first half of 2013, sales of $6.9 billion were up 3% on both a reported and organic basis. Our first-half adjusted operating income increased by 8% to $419.5 million. As you'll recall, our growth in the first quarter this year was reduced somewhat as a result of the NHL strike and Hurricane Sandy. We estimated the total impact of these items in the first quarter was $50 million of revenue and $10 million of operating income.

We saw a smaller impact on our sales in the second quarter from these two items, approximately $10 million. While the impact on operating income was essentially negligible. In addition, Q2 sales growth was reduced by the timing of the Easter holiday, with the overall estimated effect of these items aggregating to be about 1%. Our net new sales through the first half of the year are nearly 30% ahead of last year, as we continue to improve our focus on customer relationship management, and standardize our selling process.

In our North America Food and Support Services segment, second-quarter sales of $2.4 billion were up 1% as reported, and 2% on an organic basis. For the first half, reported sales of $4.8 billion were up 2% versus the prior year on both a reported and organic basis. Overall sales performance for both the second quarter and for the first half was led by our B&I facilities and higher education businesses, and by our healthcare sector. As I mentioned, first-half growth was reduced by the NHL lockout, Hurricane Sandy, and the timing of the Easter holiday.

Excluding the revenue from our Seamless business, which we spun off, as you'll recall, in October of 2012, our business and industry sector within North America reported a low single-digit sales increase in the second quarter and for the first-half. The sector benefited from particularly strong growth in our facilities services. Sales in our education sector were up low single digits for the quarter, and mid single digits for the year to date, led primarily by continued strong base and new business growth in our higher education food business. As I mentioned earlier for North America, sales for the quarter in this business were somewhat affected by the calendar shift around the Christmas holidays and the timing of the Easter holiday.

In the healthcare sector, sales grew in the low single digits for the quarter and for the year to date. Driven primarily by growth in our healthcare technology business, as well as business wins in our healthcare hospitality business in the prior year. Sports and entertainment sales declined in the low single digits in the quarter and year to date. Solid growth in our parks and destination business was more than offset by the impact of the NHL lockout. Adjusted operating income in the North America food and Support Services segment was up 23% in the quarter to $159.4 million. During the second quarter, we recorded an approximate $14 million gain related to a contract investment in one of our National Park Service sites, which was terminated in the current quarter. Further adjusting for this $14 million, our adjusted operating income in North America food and support services would still have been up in the low double digits. A quarter with which we are very pleased.

All sectors contributed to profit growth in the quarter, led by strong contributions from our education and business and industry sectors. For the first half, segment adjusted operating income grew by 16% to $330.5 million. In addition to the $14 million gain just mentioned, results for the first-half, of course, also included the impact of the NHL lockout and Hurricane Sandy, which, as I mentioned earlier, we estimated reduced operating income by about $10 million.

Turning now to the International Food and Support Services segment, second-quarter reported sales of $702 million were up 5% on a reported basis, and up 4% organically versus the year-ago quarter. Organic growth in the quarter was led by strong performance in Ireland, South America and China. For the first half, reported sales in International of $1.4 billion were up 5% on both a reported and organic basis. For the half, sales growth was driven by strong results in South America and China, which grew at double-digit rates, and Ireland which grew in the mid single digits. Second-quarter adjusted operating income for International of $22.4 million compares to $24.8 million in the prior year's period. Results for the second quarter of 2012 last year benefited from a gain on the settlement of a VAT matter in the UK. For the first half, adjusted operating income was $44 million, down from $48 million in the first half of the prior year. Base business profitability in Ireland and favorable UK results were more than offset by continuing economic weakness in Continental Europe, most notably Spain and Germany. In addition, our operations in Chile and Argentina reported solid adjusted operating income growth, which was somewhat offset by new contract start up costs in Peru.

In our Uniform and Career Apparel segment, second-quarter sales of $347 million were up 3% on a reported and organic basis. For the year to date, sales of $701 million were also up 3% on both a reported and organic basis. The segment's second-quarter adjusted operating income of $30.1 million was about flat with the prior-year quarter. Included in the results for the quarter was a net charge of approximately $5 million related to a multi-employer pension withdrawal, and a preliminary settlement of wage and hour claims, net of a favorable risk insurance adjustments. Adjusting for these items, our adjusted operating income for the quarter in the Uniform segment would have been up mid double digits.

For the first-half, adjusted operating income was $67.9 million, down from $70 million in the prior year's first half. Again, primarily reflecting the items that I just mentioned. Excluding the items I mentioned from the second quarter of '13, profits and margins continue to improve favorably in this segment, as the higher amortization expense associated with a ramp-up of new business merchandise in the larger sales force are being more than offset by lower operating costs. Corporate expenses, which exclude the items Karen mentioned earlier, were $11.8 million in the quarter compared to $7.5 million in the year-ago quarter. And for the first half, expenses were $23 million compared to $14.6 million in the prior year. Increased expenses year over year were primarily due to compensation expense for, and an accounting charge related to the retirement obligation to our current Chairman and former CEO.

At this point, let me turn it back to Karen for some additional details on the quarter and on the half.

Thanks, Brad. I'd like to now comment on our financing, capital structure and cash flow. Our adjusted EBITDA for the trailing 12 months ending March 29 was $1.148 billion, up just slightly from adjusted EBITDA at December 28 of $1.147 billion. And up from the $1.136 billion that we reported at September 28, 2012. As most of you know, we completed a significant refinancing during the second quarter, calling all of the outstanding notes at both ARAMARK Corporation, which totaled $1.78 billion, as well as the $600 million of notes that were issued by ARAMARK Holdings in 2011. We refinanced this debt with $1.4 billion of new term loans and $1 billion of new notes. Both the term loan and the new notes were issued by ARAMARK Corporation.

We're very appreciative of the broad support that the refinancing transaction received from many of you, our investors. And we believe that the success of the refinancing further enhances our financial and capital structure flexibility. The refinancing will result in an estimated annualized pretax interest savings of $50 million. Interest and other financing costs in the quarter were $110 million compared to $118.5 million in the prior year. As a result of the refinancing, the interest expense for the quarter included approximately $20 million of expense related to the refinancing, including the non-cash write-off of $17 million of deferred financing fees. While the second quarter of 2012 included approximately $11 million of expense related to the term loan extension completed in March of that year. Interest expense was also favorably impacted by the maturity of interest rate swaps in March of 2012 that were at fixed rates that are higher than current rates.

For the first half, interest and other financing costs were $209 million, compared to $227 million in the prior year. In addition to the refinancing expenses reported in both the second quarter of 2012 and 2013, interest in the first half of 2013 also includes $12 million of expenses recorded in the first quarter of 2013 related to the refinancing of our non-extended 2014 term loan. As with the second quarter results, interest expense was also favorably impacted by the maturity of interest rate swaps in March of 2012 at fixed rates that were higher than current rates. Including the impact of remaining interest rate hedges, approximately 27% of our debt portfolio is at fixed interest rates. And our overall weighted average cost of debt is approximately 4.5%.

Total reported debt at the end of the second quarter was $6.224 billion, as compared to $5.817 billion at the end of last year's second quarter. However, the refinancing actions this quarter that I mentioned earlier replaced $600 million of higher cost debt previously issued at ARAMARK Holdings, with lower cost debt that was issued at ARAMARK Corp. Our secured debt, as defined in our credit agreement, totaled $5.176 billion, including a term loan balance of $4.68 billion and a revolver balance of $146 million. Our accounts receivables securitization facility had $300 million utilized at quarter end.

We continue to enjoy a strong liquidity position overall. And at quarter end had approximately $443 million of available borrowing capacity under our $605 million revolving credit facility. And we had $120 million of balance sheet cash. Based on our trailing adjusted EBITDA, our secured debt ratio was 4.44 times as of March 29, 2013. Net capital expenditures for the quarter were $90 million compared to $71 million in the prior-year quarter. For the year to date, net capital expenditures totaled $161 million, compared to $145 million last year, as our rate of new sales increases, and we make appropriate and prudent investments in our physical and systems infrastructure in support of the growth.

As expected, and consistent with historical patterns, working capital was a use of cash for us during the first half of the fiscal year. While some reinvestment in working capital is required as certain sectors and countries in particular see improved levels of sales growth, we will continue to maintain a sharp focus on working capital as we move through the balance of fiscal 2013. For the year to date, we have spent a total of $22 million on acquisitions compared to $150 million in the prior-year period. We continue to evaluate strategic investment opportunities in certain sectors and geographies, but we'll be prudent and disciplined in pursuit of those opportunities.

Now let me turn the call back over to Fred.

Thanks, Karen. To sum up, we're coming off a solid quarter. And we are gaining both top-line and bottom-line momentum. Our year-to-date rate of new sales on a net basis is strong. And we have shown solid margin improvement based on adjusted operating income for the first half. The actions we have taken in the second quarter to further streamline our business, and to adjust our European operations to the current economic reality, should position us well going forward. Our systematic focus on growth and on our key operational processes is beginning to pay off. And we anticipate steady and continuing progress in the future.

So once again, thanks for your continued support of ARAMARK. And at this point we'd be happy to take your questions.

(Operator Instructions)

Bryan Hunt, Wells Fargo.

I was wondering, first of all, Fred, is there a way you can just give us, from a very high level, commentary what's going on in your larger markets internationally, in the UK, Germany, Chile and Ireland? What's the pace in the business in those markets relative to a year ago? And does it feel like things are gaining momentum? Or have you reached a bottom?

I think, trying to answer your question, it varies by market. We continue to see a very weak environment in Spain. And so I would say, at best, maybe that's reached a bottom, but I wouldn't swear to it. Fortunately, Spain is less than 1% of our total revenues. As you know, that's really our only exposure across the tier of countries in southern Europe.

Germany is fairly weak. I'd say that economy is pretty much flat. Not deteriorating but not improving. Ireland, we've had pretty good results, and we're seeing some strengthening in Ireland. And I think, as we mentioned, we had mid single-digit top-line growth in Ireland in the quarter. In the UK, I would say also remains weak and pretty flat. Although our UK team's done a good job of navigating through this, and actually we're starting to pick up some interesting new business. So we see our growth rate in the UK picking up a bit, although I couldn't attribute it to the economy.

And just to dissect, you mentioned new business, your comment about 30% more new business signed in Q2 versus a year ago. If I look at your business historically, you retain 94% to 96% of your business on an annualized basis. Is that a fair assessment?

Yes. Although to be fair, the number I mentioned was net new. So it's the annualized value of new contracts less the annualized value of lost contracts. Our new business is also up year over year. But the increase that I referred to was net new. And you're right on the retention, we're typically running in the 95% range.

Okay. And so, if I try to forecast growth based on that comment, would that put you more in a mid single-digit type of growth rate as opposed to historically low single digit?

We think that the -- our overall target is to get into the mid single-digit growth range. And we were a little higher than that in Q1, a little lower than that in Q2. But overall, we think we are approaching the low end of that range. So, as we see the increase in new business, the flat to slightly improving retention, we can see ourselves picking up another point or so of growth. So we think we can target, really, over the next 12 months is to get pretty firmly in that 4% to 6% top-line growth range.

And if I look at the mix of new business, would you say that skews more to your higher margin mix of items such as higher education and healthcare? Or is it, in general, a mix similar to the total business overall?

Honestly, it's pretty much of this year, has been spread evenly across the various markets. So we've had some terrific wins in sports and entertainment. We've had some really great wins in the business sector, business dining. Wins in higher education. A big win Cleveland Clinic in healthcare. So I'd say it's across the board.

Okay. And then if I look at -- and I know no contract is more than 1% -- but if I look at all these wins, is there any lumpiness in terms of them phasing in throughout the rest of the year?

I don't think so. The contracts tend to be, if anything, on average, I think larger than they were two, three, four years ago because some of the larger institutions are now starting to outsource that were self operated before. But I wouldn't say that there's any lumpiness that would materially affect the overall growth rate.

And my last questions, are there any material changes to your outlook for CapEx or working capital? I think traditionally your CapEx guidance is somewhere, or at least it was somewhere, in line with the year ago, maybe slightly less. And I think your working capital you're looking for slightly up. Are those similar forecasts from where we were last quarter?

Yes. I'll comment on the CapEx and Karen can comment on the working capital. CapEx is up a little bit year over year. And, frankly, we expect that to continue because there is capital associated with new business. So when new business goes up, typically CapEx goes up.

And a general rule of thumb is that our CapEx is high 2% of sales, close to 3%. We've been a little bit lower than that recently but that's a good rule of thumb. In terms of working capital, obviously, as we said, through the second quarter working capital is typically a use for us. We would anticipate that for the full year working capital, it typically bumps a little bit around zero. Some years it's positive, some years it's negative. But when we're typically in sales growth mode, I would look to see working capital around about a $50 million or so use of cash for us for the full year.

Very good. I'll get back in the queue. Thank you very much.

Carla Casella, JPMorgan.

Just wanted to clarify, on the severance, was that all included in corporate? And was it related to -- which businesses was the bulk of that related to?

The severance actually was spread throughout the segments. So it depended on, really, where the action fell in the operations. So some of it was associated with some streamlining in the center, if you will. And some associated with the North American segment. As I mentioned, we took a very hard review in Europe, given the economic uncertainty there. And there were severance costs associated with actions in Europe that would be reflected, or were reflected in the International results. And then the asset impairments were actually more focused in Europe.

If you look at our non-GAAP schedules, Carla, that we posted, I think you'll see, at least in terms of the split between North America Food, International Food, and Uniforms how those charges break out, at least a little bit more detail there.

Great. Sorry I missed that schedule. And if we look over the next -- you said there's $50 million to $75 million in additional charges over the next few years. Can you give us some idea of how that will be spread? Is it something you'll do in the first quarter of every year? Is it something that should be spread evenly between now and over the next few years?

These are really -- I don't know that I'd characterize them as charges per se. They're incremental costs associating with repositioning, streamlining some of our activities. And they're incurred -- they're expenses that are incurred. So I'd say that of this remaining amount, probably roughly one-third of it might be incurred in the balance of the year. The bulk of the remainder would be incurred in next fiscal year.

Okay. Great. And then you've done so much with your capital structure refinancing this year. Is there anything left that is on the horizon?

I think right now, Carla, our next significant debt maturity isn't until 2016. Obviously, we continue to look at the markets, given the strength of the markets. But I don't think anything is too high on the radar right now.

Okay. Great. Thanks a lot.

Hale Holden, Barclays.

I had just two quick ones. On the 30% net new business wins, is that because of the change in environment or change in your selling prospects? I was just wondering how you were viewing the competitive environment.

I think the competitive environment is constant. If anything it's more competitive. As I mentioned in an earlier call, we've talked about standardizing processes across the Company. And one first thinks about standardizing processes around cost management, labor cost management, food cost management, merchandise cost management, and Uniform business. But there's quite a lot that can be done, too, in standardizing the sales process itself. So that would be point one.

And point two would be that we are really thinking more holistically across the Company about how to deploy our sales resources, sales folks, against the opportunities, segment by segment. And I think we're being smarter about how we do that. And I think the combination of those two is pretty much the driver of the increase in the new sales. And the services we are providing are becoming increasingly sophisticated. And I think resonating with the prospects.

Great. And then, second, I know you've turned up the GAAP structure and fixed it a little bit. Any thoughts on M&A pipeline, or any holes that you're looking at potentially on that front?

On the M&A front, I think we will become, probably be a little bit more acquisitive or a little bit stronger in stronger in looking at opportunities over the next 12 to 24 months. We're certainly always interested in adding add-on acquisitions to our Uniform business. As you know, that's a fragmented business in the US, with lots and lots of small companies still operating. We are selectively interested in expanding internationally. And add-on acquisitions in a few countries where we're strong, and there is a good economic environment.

And then we continue to think about in the emerging markets area. Which, as you know, we have a separate group focused on that, which is Asia and South America. Whether there are really a small handful of countries that we may want to enter through acquisitions. And then the other category would be facilities. Our facilities business is strong, but we're always looking to add in the facilities area since the predominance of our revenues is food service.

Great. Thank you. I appreciate it.

(Operator Instructions)

There are no other questions in the queue at this time.

Great. I appreciate everybody taking the time out this afternoon to listen on our call. And certainly if you've got follow-up questions let us know. Otherwise, we'll talk to you next quarter.

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