Aramark (ARMK) 2013 Q3 法說會逐字稿

Good afternoon, and welcome ladies and gentlemen to the ARAMARK Corporation third 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 everyone, and welcome to ARAMARK's conference call to review the results of our operations for the third quarter of fiscal 2013. Here with me today is Eric Foss, our Chief Executive Officer and President, and Fred Sutherland, our Executive Vice President and Chief Financial Officer. Eric and Fred will present an overview of our third quarter and year-to-date results in 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 (technical problems) 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 third quarter and year-to-date 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 mentioned 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 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 costs 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 10K 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 Eric Foss.

Thank you Karen, and good afternoon everyone. Thanks for joining us on the call today. As some of you may have already seen, we disclosed in our 10-Q filed earlier today that we've commenced preparation for a potential initial public offering of our Company. Of course, there can be no assurance we will elect to proceed with such an offering, or if we do elect to proceed, when it would ultimately be completed. Due to SEC quiet period restrictions, we're unable to comment further about the proposed offering at this point in time, and we similarly will not be able to answer any questions on this topic beyond what appears in our 10-Q during the Q&A period on the call. Let me share with you our third quarter results. I'm pleased to report that Q3 was another strong quarter at ARAMARK. One key strategic imperative I shared with you on our Q1 call was to define a path to sustainable top line growth. Our Q3 organic revenue growth was up 5% versus year ago.

We delivered that growth through strong retention rates, and by growing our core business by leveraging consumer and client insights to build innovative solutions. The third quarter was also another excellent quarter for us on the new business front. During the quarter we added some outstanding new business wins, including Dignity Health. In education we successfully sold the Chicago Public School System. In sports and entertainment, we signed the Chicago Bears. Our corrections team added the Prison System in the State of Ohio. And in international, we added Transocean. Our growth in the quarter was broad-based and consistently strong across sectors and geographies. In our North America food and support services business, we grew organic revenues 5%, lead by our education and healthcare sectors. In uniforms, we saw 4% top line growth, driven by new business wins, pricing, and increased sales productivity. Our international food and service segment posted organic sales growth of 8% in the quarter, with strong growth in China, South America, Ireland, and Germany.

Another strategic imperative I emphasized on our call in February was to insure we continued to drive productivity to support that growth and expand margins. In the quarter we improved profitability, as we implemented several Company-wide initiatives to reduce our costs across food, labor, and above-unit overhead costs. Our focus on operational excellence and continued emphasis on improving our efficiencies and effectiveness, while controlling costs and driving productivity improvements, resulted in improvement in our operating margins in excess of 30 basis points. Our margin improvement was broad-based across geographies and sectors, which I think demonstrates our breadth of strategic productivity initiatives and the commitment and capability of our people.

So as a result for the quarter, our adjusted operating income grew 13% versus prior year. In fact, our key lines of business in North America, including education, business and industry, sports and entertainment, along with our uniform business, as well as our developed and emerging market international businesses showed good top line growth, expanded their margins, and delivered profit improvement versus prior year. So all-in, a good strong quarter. As we look to the rest of our fiscal year, the outlook continues to be positive. We continue to effectively execute our strategy across all lines of business. Our focus continues on our quality, service, and innovation to help satisfy consumers and build client loyalty, while also continuing to create long term value for all our constituents. And with that, let me turn the call over to Fred.

Thanks, Eric. For the third quarter, we reported sales of $3.5 billion, up 5% on both a reported and organic basis. Our adjusted operating income of $177 million was up 13% from the prior quarter. For the first nine months of this fiscal year, sales were $10.4 billion, up 3% on a reported basis and 4% on an organic basis. Adjusted operating income increased 10% to $597 million. As you recall, this year was negatively affected by the NHL strike and hurricane Sandy. Through three quarters, the estimated total impact was about 1% on both sales growth and operating income growth. In our North America food and support services segment, sales in Q3 were $2.4 billion, up 4% on a reported basis and 5% on an organic basis. This quarter was somewhat positively affected by the timing of the Easter holiday. As Eric said, we were very pleased that the growth was broad-based across most all of our sectors, and was lead by our education sector, which was up in the high single digits.

Adjusted operating income in the North America food and support services segment was up 10% in the quarter to $113 million, and was particularly strong in both our business and industry and education sectors. Turning to the international segment, Q3 sales increased 8% on both a reported and organic basis to $728 million. This growth was lead by strong double digit growth in our key emerging market geographies, China and South America, with modest growth in Europe. Third quarter adjusted operating income increased 24% to $32 million, with good growth in our emerging market geographies, and solid improvement in Europe from our efficiency initiatives. In the uniform and career apparel segment, sales in the third quarter increased 4% on both a reported and organic basis. Adjusted operating income grew 14% from higher sales performance and the result of productivity initiatives that we've discussed earlier.

Corporate expenses were $10 million in the quarter, up slightly from the third quarter of last year. Our adjusted EBITDA for the trailing 12 months ended June 28 was $1.173 billion, which is up from adjusted EBITDA as of March 29, 2013 for the 12 months of $1.148 billion, and up from $1.136 billion at September 28, 2012. Interest and other financing costs were $81 million for the third quarter, compared to $88 million for the third quarter of the prior year. Including the impact of interest rate hedges, approximately 30% of our total debt portfolio is now at fixed interest rates, and our overall weighted average cost of debt is about 4.5%. Now as most of you know, we completed several significant refinancings during the first and second quarters of this year, calling all of the outstanding notes of both ARAMARK Corporation, which totaled $1.8 billion, as well as the $600 million of notes issued at the parent company, ARAMARK Holdings. We refinanced this debt through the issuance by ARAMARK Corporation of $1.4 billion of term loans and $1 billion worth of notes. Now, the effect of this for registrant purposes has been to shift $600 million of debt from ARAMARK Holdings to ARAMARK Corporation. As a result, the registrant ARAMARK Corporation Consolidated reported total debt at the end of the third quarter that increased from $5.8 billion to $6.2 billion, again from a year ago. So without this refinancing shift between ARAMARK Holdings and ARAMARK Corporation, total debt would have decreased by $165 million.

We continue to enjoy a strong liquidity position overall, and at quarter end had approximately $450 million of available borrowing capacity under our $600 million revolving credit facilities, and about $100 million of balance sheet cash. Based on our trailing adjusted EBITDA, our secured debt ratio was 4.35 times at the end of Q3. Net capital expenditures for the quarter were $94 million, compared to $74 million in the prior year quarter. For the year-to-date, net capital expenditures totaled $255 million, compared to $219 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 this higher growth. As expected, and consistent with historical patterns, working capital was a use of cash during the first nine months of the fiscal year. We continue to be very focused on working capital, and we are currently ahead of our plan levels year-to-date. For the year-to-date, we have spent a total of $23 million on acquisitions, compared to $151 million in the prior year period. We continue to evaluate strategic investment opportunities in certain sectors and geographies, but will of course maintain a prudent and disciplined approach in pursuit of these opportunities. Eric?

Thanks, Fred. Before we take your questions, let me just emphasize as I did back in February my confidence in ARAMARK's future, which is filled with potential. We're a leader in a large fragmented and growing market, with significant opportunities to drive revenue growth. We have a diverse set of business sectors and geographies that have proven resilient in difficult times, and we have a passionate and talented team from our front line to our senior leadership team, all of whom I want to thank for delivering another very solid quarter, and whom I could not be more proud. The many strengths of our Company can be captured under three headlines. Successful momentum, as evidenced by the sustained strong performance we're delivering; substantial magnitude, in terms of growth opportunities across sectors and geographies; and superior management, along with that front line capability which will allow us to capitalize on opportunities and achieve the results we intend to deliver consistently. So momentum, magnitude, and management. Those are the keys we're leveraging to build an ARAMARK future. Thank you, and we'll open up the lines. Operator, we're ready for any questions.

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

(Operator Instructions)

Our first question comes from Karu Martinson with Deutsche Bank.

Good afternoon. When you guys talk about improving retention rate, what do you feel you're doing differently now to drive that improvement versus what you had before?

This is Eric. I think as we look at the growth opportunities, we tend to think of them in three buckets. One, our ability to grow our base business, and our ability to grow our base business is really all about our ability to execute through excellence at the point of sale and maximize those selling opportunities. I think the second lens is our retention, and again, if we're doing what we need to do relative to servicing and satisfying clients, that's going to ultimately improve our retention rates. And then the third bucket of that growth is about nailing new business. And I think the good news is, is that all three of those are working pretty well for us right now. We had another great quarter on the new business front. We're on our way to a record net new business year at ARAMARK, and on the retention side, I mean, we're building off of already very high retention rates. But I think the key thing that drives that retention number is our ability to service and satisfy clients on a day-in-and-day-out basis at the moment of truth.

All right. When we look at Europe, a large part of it seems to be kind of moving into the positive column, UK kind of still in declining. What are we seeing in the UK market, and kind of what can you do to address those shortfalls?

Well, I think a couple of things. One, let me just point out, again we have somewhat limited exposure to Europe than maybe some of our other competitors, but what we're doing right now is we think, and we saw in the quarter, we did grow our European top line. I think as we go forward, it's really about playing this game of, in particular making sure our cost structure is right, and as we look at that cost structure across food, labor, and above-unit SG&A, we have the right structure for the growth potential of that business. But as you saw in the quarter, we had really strong growth in Ireland and Germany, and we had some good momentum on the new business front in our UK business as well, but those are the things we're doing.

Just lastly, when we look at the kind of $40 million to $65 million of costs over the next 18 months as you guys optimize the business, could you break that out kind of into what are the big buckets of where those costs will fall and kind of the timeframe?

As we look at our overall productivity initiatives, they are really focused around three big buckets of cost, as you would expect. Two of those buckets are essentially at the operating level, at our unit level, and then another is above. So the first two are food costs, and of course the translation in the uniform business is merchandise cost, and our direct labor costs, and then the third bucket is our above-unit cost. And we're working on programs across all three of those major costs buckets with respect to standardizing our operations, providing more tools and technology to our front line managers, simplifying menus and SKUs, standardizing processes, scheduling labor better at the unit level with technology and with tools, and those initiatives, as you would expect, are pretty widespread, and it takes awhile to get those really working across literally thousands of units. And then above the unit level, we're looking at making sure that we're as efficient as we can be at the district region business unit and corporate levels, and we've been benchmarking ourselves against peers and that sort of thing. And I'd say really all three of those are -- they're significant opportunities, they're multi-year opportunities, and the opportunities in all three of those are relatively comparable in terms of potential.

And that total savings number, where do we kind of shake out on that?

It's a meaningful driver of our overall profitability, let me just put it that way.

All right. Thank you very much, guys. Appreciate it.

We'll go next to Kevin Coyne with Goldman Sachs.

First on food inflation, can you just discuss how it impacted the year-over-year quarterly comparison, and then looking forward? I know in the past you've built in expectations for 3% to 5% food cost inflation estimates. Is that still accurate?

I think on the inflation front, we saw it at the lower end of that range that you just mentioned. If you look at it on a year-to-date basis, kind of at the lower end of that range. So I think going forward, we would expect it to be somewhere in that range that you identified.

Okay, and then on the uniform apparel segment, operating margins looked like they were up about 100 bips. Just again another input cost question. How much, if any, of that benefit was related to lower cotton costs?

Relatively small.

Small, okay. And then just finally, I know we've asked this question before around the time of the debt transaction, but what's the long term expectations, or what's the right leverage for the business going forward?

Well I think, as we've said before, we don't have a specific leverage target. We've had, obviously, a fair amount of debt leverage, literally for decades, and have shown that we can manage it very effectively, and it doesn't impede us from reinvesting in the business, which you see through a healthy level of capital expenditures and making strategic acquisitions. So on the one hand, it's important for us to maintain access to the capital markets pretty much under all conditions, which we're able to do. Clearly, we have to be prudent in our capital structure to do that, but frankly, we don't drive towards a particular mathematical target.

Okay, thank you.

(Operator Instructions)

We'll go next to Hale Holden with Barclays.

Thanks. I just had three quick ones. Just a follow-up, Karu's question on the UK. Would it be possible for you to give us kind of a breakout of the UK versus international on sort of percentage basis, and when do you expect to start cycling to growth there?

Well I think -- let me talk about our Europe business. I mean, our Europe business is roughly 6% to 7% of our revenue base. So that's Europe in total. I don't think we go down to the country level. And again, as we look at the business in Europe and across that developed market matrix, we grew our business in the quarter, which we were very pleased with in light of the overall economic conditions. So I would say we saw growth in the quarter across Europe. That was important for us, given the market conditions, and that plus the margin improvement translated into a strong quarter acrosst our European business.

Okay, great. And then second, you mentioned the potential for kind of acquisitions, and I was just wondering if that's -- if the IPO process, or potential IPO process, causes you to pause on acquisitions, or those are just separate and not intertwined, and shouldn't think of a relationship there?

I think we think of acquisitions strategically. The core principle of the Company is to drive growth organically, but we recognize that we have to supplement ourselves in terms of capabilities and geographic build-out through acquisitions selectively, and I think that as a part of our overall business strategy doesn't change.

Okay, and then finally, great continued really good growth on education. I was just wondering if you could sort of talk about the puts and takes there, and what kind of runway you see going forward?

Well, the great news in education is I think that we operate from a position of strength, and as you well know, our education business has performed in a strong way for several quarters in the last couple of years. So I think that business in total, as you look at the marketplace potential, is a business that continues to have tremendous outsourcing opportunities. We're the share leader in the higher education large institution, and we expect that to continue to be a key growth driver for us going forward.

Okay, thank you very much.

We'll take our next question from Bryan Hunt with Wells Fargo Securities.

Thank you. Eric, I was wondering if you could -- when you look at your ballpark's business and industry, and national parks' business overall, is there anything you can take away, when you look at the most recent quarter, about the condition of the US consumer?

Well, some of that business tends to be, relative to our other businesses, a little more consumer-sensitive. I think as you look at the quarter, we continue to be very pleased with our sports and entertainment business. We continue to see growth momentum in that business. I mean, we grew the top line low single digit. We continue to have very good net new business momentum. I mentioned the Chicago Bears that we signed up. And I think as you look at the parks business, that's a similar business for us in terms of growth opportunity. So overall, we were pleased with that business top line, bottom line, and margins.

And if I look at your either your uniform or your international food and support services, I mean, nice margin expansion in both businesses. How much am I supposed to build in, or what are we supposed to think about your initiatives on efficiency and cost savings, and how that impacted margins for the quarter? Are we so early in the process that am I supposed to believe this is more of a mix issue driving these benefits?

Well I can't tell you what to build into your model, obviously, but we have, if you look at the margin improvement, it's pretty much across-the-board, and clearly, it does vary, and the opportunity varies by segment. But I think it's safe to say that we are looking forward to, and expect to drive margin improvement across all three segments.

And should we expect to see the margin improvement sooner in the North America food and support services and the uniform business before we see it in Europe, because it's kind of a lagged rollout, more complicated in those fragmented markets in Europe and South America, or is that an unfair statement?

No, I think if you look at the quarter and look at the last couple of quarters, not just third quarter, what you'll find is we showed in third quarter margin improvement across North America food and services business, we showed margin improvement in our uniform business, we showed margin improvement in our Europe business. So all three of those businesses, we saw margin improvement and to Fred's point, we continue to look at opportunities to become more effective and efficient, and have a series of what are fairly comprehensive initiatives in place to drive cost and productivity, and hopefully margin improvement as we go forward.

And my last question. If I look back in my notes, you all have had years recently where you've gained new business well in excess of $1 billion dollars. When I think about record new business wins for this current fiscal year, is there any way you can help us frame the size of new business wins relative to historic achievements?

Well, I think again, this year -- last year was a record year for us. So if you looked at our results last year, that was a record year for us, and we're going to lap it this year with another uptick in that net new business. So order of magnitude, it will be a double-digit increase in our net new business year-over-year.

And just to clarify it, this level of $1 billion dollars of new business is a relatively recent level.

Okay. Eric, Fred, thank you so much.

Thank you.

We'll go next to Andrew Berg with Post Advisory Group.

Two questions. With respect to working capital, you said you're a little bit ahead of where you thought you were going to be. Does that imply that as we look at the fourth quarter, we shouldn't expect it to be as cash-generative as it usually is?

I don't think it's going to influence the fourth quarter all that much. As we look at working capital for the full year, we expect it to be a slight use of cash, and I don't think that the timing, though, is all that big a dollar amount between the first nine months and the fourth quarter.

Okay, and then I know you can't go into any detail, but can you at least comment on when you'd hope to file the S1?

We really can't. We really can't comment beyond what's in the 10-Q.

All right. I appreciate it. I had to give it a shot.

And I had to give you that answer.

Yes, that's what I was afraid of. Thanks guys, appreciate it.

At this time, there are no further questions in the queue.

Well thank you, operator. And in closing, let me just thank everybody for your time and interest in ARAMARK, and we look forward to speaking with you again on our Q4 earnings call. Thanks very much.

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