Aramark (NYSE:ARMK) Q1 2023 Earnings Call Transcript

Aramark (NYSE:ARMK) Q1 2023 Earnings Call Transcript February 7, 2023

Operator: Good morning, and welcome to Aramark's First Quarter Fiscal 2023 Earnings Results Conference Call. My name is Norma, and I will be your operator for today's 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. We will open the conference call for questions at the conclusion of the company's remarks. I will now turn the call over to Felise Kissell, Vice President, Investor Relations and Corporate Development. Ms. Kissell, please proceed.

Felise Kissell: Thank you, and welcome to Aramark's first quarter fiscal 2023 earnings conference call and webcast. Hope you all are doing well. This morning, we will be hearing from our Chief Executive Officer, John Zillmer; as well as our Chief Financial Officer, Tom Ondrof. As a reminder, our notice regarding forward-looking statements is included in our press release this morning, which can be found on our website. During this call, we will be making comments that are forward-looking. 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 Annual Report on Form 10-K and our other SEC filings.

Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found in this morning's press release as well as on our website. So with that, I will now turn the call over to John.

John Zillmer: Thanks, Felise. Thank you all for joining us today and I hope your year is off to a great start. I'm pleased to share that Aramark began fiscal 2023 with strong performance driven by a continued commitment to provide exceptional service to clients. I am incredibly proud of our teams across the globe who demonstrate each and every day what makes Aramark so remarkable. This morning, Tom and I will review our fiscal first quarter results as well as the key initiatives currently underway that we believe will drive continued success. As announced, just last week, we reached an agreement to sell our non-controlling 50% equity stake in AIM Services for $535 million. The proceeds are intended to be used for accelerated debt repayment and we expect that monetizing this interest will further enhance operating focus, strengthen our balance sheet, and be accreted to EPS.

The sale to Mitsui, our partner in the joint venture since it was established decades ago, to provide food services in Japan is expected to close at the beginning of our third -- our fiscal third quarter subject to customary closing conditions and approvals. We will continue to identify these types of opportunities specifically in areas where we have a non-controlling interest to enhance our ongoing focus on delivering profitable growth and shareholder value. Operationally, we remain focused on managing our cost structure and maximizing unit efficiencies coupled with pricing to counter persistent inflation. We continue to work closely with clients to tailor solutions that meet their needs, leveraging our extensive supply chain network and are constantly monitoring evolving market conditions for opportunities to benefit from improving pricing and product availability trends.

Our results in the quarter built on both the top and bottom line momentum we've established over the past couple of years. Organic revenue grew 18% and adjusted operating income increased 47% on a constant currency basis, resulting in more than 100 basis points of improvement to AOI margin. Within the U.S. food and facilities segment, organic revenue also increased 18% compared to the first quarter last year, driven by strong performance from all sectors. Education experienced increased student enrollments and improved presence of staff and more events on campuses in collegiate hospitality, partially offset by the end of universal government-sponsored programs in K-12 student nutrition. Sports, Leisure &Corrections continued its strong growth trajectory again this quarter, primarily from increased event pricing and per capita spending, as well as a more robust event calendar.

Corrections particularly benefited from a significant level of new business growth. Workplace experience group growth levels led the way with a year-over-year increase of more than 40%, driven by client pricing, higher meal participation rates and greater in-person activity in addition to solid new business openings. Healthcare Plus continued its exceptional performance driven by ongoing base business growth from vertical sales and greater visitor presence that was complimented by a substantial step up in net new business compared to historical levels. And Facilities & Other grew as a result of expanded services and frequency, particularly from large client accounts, along with a strong level of new business start-ups. International organic revenue is higher by 28% year-over-year driven by consistent net new business performance, pricing and ongoing base business volume recovery, particularly within the B&I portfolio where we experienced greater lunchtime participation rates and a return of catering activity for special events, including holiday celebrations and work -- networking gatherings.

Organic revenue in our Uniform Services segment increased 7% compared to the first quarter last year, due to solid new business sales and retention rates, as well as the implementation of additional pricing strategies. Our U.S. and Canadian operations experienced strong recurring rentals and double-digit growth in adjacency services. We continue to make progress on the uniform spin and still expect completion in the second half of this fiscal year. Within the last few weeks, Kim added the final pieces to our executive team, complementing the leaders already in place, including a Chief Technology Officer. We have identified the individuals who we expect to serve as the Board of Directors for Uniform Services after the spin is complete and who will be available to act in an advisory capacity throughout the separation process.

We are extremely pleased with the skillset and industry expertise that we believe will make a significant strategic impact on the business. Last week, we released a comprehensive update on our ESG platform. The "Be Well. Do Well. Progress Report" is the latest chapter documenting our ESG journey. And in it, we highlight our ongoing commitment to diversity initiatives, community building, climate-related actions, crude and worker safety, and the progress we've made in responsible sourcing and waste reduction. MSCI recently gave us an A rating and Newsweek recognized this as one of America's most responsible companies. We continue to drive the importance of ESG metrics reflected by the inclusion of an ESG scorecard in our fiscal 2023 annual incentive plan for our senior leadership team.

I'm proud of those significant measures we've taken to make a positive impact on people and the planet and the efforts underway focused on making a lasting impact. Before turning it over to Tom, I would like to highlight the recent election of Kevin Wills to Aramark's Board of Directors at our annual meeting on Friday. Kevin's impressive background and accomplishments are an excellent addition to our Board and align with the company in strategic value -- in strategic vision. I also want to thank Board member Dan Heinrich for his numerous contributions and partnership. It is our intent that Dan will move over to serve on the Board of Directors for Uniform Services upon the spin. I will now pass it over to Tom for detailed financial review of the business.

Tom Ondrof: Thanks, John, and good morning, everyone. Our performance in the first quarter reflected continued momentum across the Aramark portfolio, as we delivered revenue and AOI results that demonstrated the team's growth mindset and commitment to deliver great service to our clients and increasing profitability for our shareholders. For the total company, organic revenue of $4.7 billion was 18% higher year-over-year, and consisted of more than 4% from net new business, roughly 6% of pricing and approximately 8% related to higher base business volume. Adjusted operating income was $242 million, constant currency increase of 47% compared to the first quarter last year. AOI margin increased just over a 100 basis points to 5.3%.

Improved profitability during the quarter compared to prior year was due to leveraging higher sales volume from broad-based net new business growth, pricing and base business recovery primarily within the B&I sector and sports and entertainment business, as well as disciplined operational and administrative cost management, all of which more than offset inflation, a tight labor market, and new account start-up costs. Generally, we've experienced an increase in the use of agency labor to support the rapidly growing level of operations, particularly in collegiate hospitality, which we expect to manage down over time. In addition, we are encouraged by the continued signs of stabilization within the global supply chain that have allowed us to begin to gradually transition back to preferred sourcing programs where possible and appropriate.

Diet, Food

Photo by Louis Hansel on Unsplash

This has helped partially mitigate rising food costs due to persistent inflation that we continue to experience during the quarter. Over the medium-term, we continue to see four key opportunities to drive improved profitability despite a tough economic backdrop. Continued supply chain stability, and ever-increasing purchasing power from growing our managed spend and GPO business. Second, the improving profit profile of past new business wins as they mature over the coming years, coupled with our ability to consistently maintain our higher level of net growth into the future. Third, continued tight management of above unit cost. And lastly, the potential to benefit from pricing actions already implemented as inflation mitigates. These opportunities, together with the ongoing option to create value through actions such as the AIM Services sale, give us confidence in our ability to continue to grow our bottom line over time.

Our results in the quarter led to adjusted EPS of $0.44 on a constant currency basis, nearly double the $0.23 reported in the first quarter fiscal 2022. FX impacted adjusted earnings by per share by $0.03 due to the stronger dollar relative to this time last year. On a GAAP basis, Aramark reported consolidated revenue of $4.6 billion, operating income of $200 million and diluted earnings per share of $0.28 for the first quarter. Now, turning to cash flow. In the quarter, net cash used in operating activities was $607 million, and free cash flow was a use of $706 million. As expected the first quarter experienced a cash outflow associated with Aramark's normal seasonal business cadence specifically in the collegiate hospitality business. In addition, accounts receivable increased due to strong year-over-year revenue growth in the quarter and accounts payable was a higher use of cash in the quarter largely from the timing of supplier disbursements.

Cash flow results also reflected the scheduled remaining deferred FICA payment of $64 million granted under the CARES Act that we highlighted during our last earnings call. At quarter end, Aramark had approximately $1.1 billion in cash availability. As John mentioned, and as you saw in our announcement last week, we reached an agreement to sell our equity stake in AIM Services and we plan to use the proceeds for debt repayment. Let me make a few quick comments on the P&L impact from the transaction. As a non-controlling interest revenue from AIM Services was not historically recorded as a part of our financials, so there will be no impact to future revenue. We did record our share of income, which contributed approximately $30 million to pre-COVID AOI in fiscal 2019 and was not expected to be fully recovered until next year.

But the planned debt repayment associated with the sale, we expect annualized interest savings of more than $30 million making it immediately accretive to EPS. So let me conclude with our outlook for fiscal 2023. We maintain our previously stated full-year outlook while updating certain measures associated with the sale of our interest in AIM Services. With that, we currently expect organic revenue growth between 11% and 13%, adjusted operating income growth of 32% to 37%, reflecting the effect of the AIM transaction. Free cash flow in the range of $475 million to $525 million before payment for the $64 million FICA payment just completed this quarter and the anticipated cash flow of approximately $100 million to $120 million related to restructuring charges and transactions fees associated with the uniform spend.

After these specific items, we expect our reported free cash flow to be in the range of $300 million to $350 million. And finally, as I just mentioned, we plan to use the proceeds from the AIM Services transaction toward debt repayment that is expected to bring our leverage ratio to approximately 4x by the end of this fiscal year. We begin the New Year as we finished the last resolute in our commitment to drive profitable growth. The new fiscal year is off to a solid start, and as we manage the business in the midst of the current ongoing macroeconomic challenges, we will continue to work to balance delivering short-term results without sacrificing our ability to sustainably grow the top and bottom line over the long-term. Thanks for your time this morning.

John?

John Zillmer: Thank you, Tom. We believe there are numerous opportunities for the business and that we are well on our way toward achieving them. We will continue to manage our portfolio to drive significant and sustained value through organic growth, margin progression and a strengthened balance sheet. Our new business pipeline is strong and we're highly motivated to continue winning. I'm immensely grateful for our teams across the globe who are the driving force behind our success now and in the future serving our clients, employees, and the communities we live in. I also want to take this opportunity to congratulate our clients the Philadelphia Eagles and Kansas City Chiefs will be competing in the Super Bowl this upcoming weekend. And operator, we'll now open the line for questions.

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