Aramark: Reports Q4 and Full Year 2019 Earnings

Philadelphia / PA. (arm) Aramark, the 15 billion USD, Fortune 200 global leader in food, facilities management and uniforms, reported fourth quarter and full-year fiscal 2019 results. «Aramark is an iconic company with a promising future. I am incredibly inspired by the many talented field leaders and valued client partners I have met in just 45 days back with the Company,» said John Zillmer, Chief Executive Officer, Aramark. «My immediate priority is to elevate the Company’s hospitality culture and drive the business forward in a way that unlocks meaningful value for all stakeholders.»

Fourth Quarter Results(*)

Consolidated revenue was USD 4.0 billion in the quarter, an increase of 1.0 percent over the prior year. Adjusted Revenue grew 4.9 percent compared to the prior year attributed to 3.0 percent growth in the legacy business and a 1.9 percent increase related to an accounting rule change. Legacy Revenue growth was driven by new business wins and base business growth across the segments:

• FSS United States increased 1.9 percent led by continued strong performance in stadiums and arenas as well as growth in national parks and healthcare, partially offset by education.
• FSS International grew 6.3 percent with continued strong performance in South America and China, as well as Europe despite the strategic exit of non-core custodial accounts in the region that occurred in the previous quarter.
• Uniform + Career Apparel increased 2.7 percent from pricing and volume as the business focuses on expanding adjacency products and services.

	Revenue			Q4/2019			Q4/2018			Change			Adjusted Revenue Change			Legacy Revenue Change
	FSS United States(1)			USD 2,408 Mio.			USD 2,481 Mio.			(2.9)%			1.1%			1.9%
	FSS International			898			888			1.2%			6.5%			6.3%
	Uniform + Career Apparel			646			545			18.4%			18.5%			2.7%
	Total Company			USD 3,951 Mio.			USD 3,914 Mio.			1.0%			4.9%			3.0%

Difference between GAAP Revenue and Adjusted Revenue reflects the elimination of currency translation and divestitures impact. Difference between Adjusted Revenue and Legacy Revenue reflects the accounting rule changes pursuant to ASC 606.

(1) Q4/2018 GAAP results include divested Healthcare Technologies revenue of USD 100 million. This has been excluded from the calculation of adjusted revenue change and legacy revenue change for comparison purposes.

Operating Income was USD 206 million and Adjusted Operating Income was USD 320 million in the fourth quarter. Operational results included higher total incentive-based compensation that had a particularly significant impact on the FSS United States segment compared to the prior year period. Excluding this consideration, the Company continued to benefit from overall operational improvements and acquisition synergies, as follows:

• FSS United States exhibited overall operational efficiencies from greater purchasing scale and business productivity improvement, despite lower volume in education.
• FSS International demonstrated broad-based growth with particular strength in Emerging Markets; the financial profile of the business in Europe has strengthened following the strategic exit of non-core custodial accounts.
• Uniform + Career Apparel captured synergies related to the AmeriPride acquisition and additional efficiencies from operational performance.

Total incentive-based compensation, referenced above, included both share-based and cash incentives for employees. The Corporate segment reflected lower share-based compensation with the other segments affected by higher cash compensation.

				Operating Income											Adjusted Operating Income
				Q4/2019			Q4/2018			Change					Q4/2019			Q4/2018			Constant- Currency Change
	FSS United States(2)			USD 156 Mio.			USD 229 Mio.			(32)%					USD 205 Mio.			USD 249 Mio.			(18)%
	FSS International			49			41			21%					56			44			31%
	Uniform + Career Apparel			47			50			(7)%					71			71			—%
	Corporate			(46)			(40)			(15%)					(13)			(35)			64%
	Total Company			USD 206 Mio.			USD 280 Mio.			(26)%					USD 320 Mio.			USD 330 Mio.			(2)%

(2) Q4/2018 GAAP results include divested Healthcare Technologies operating income of USD 8 million. This has been excluded from the calculation of Adjusted Operating Income constant-currency change for comparison purposes.

(*) May not total due to rounding.

Fourth Quarter GAAP Summary

On a GAAP basis, revenue was USD 4.0 billion, operating income was USD 206 million, net income attributable to Aramark stockholders was USD 86 million and diluted earnings per share were USD 0.34. This compared to the fourth quarter of 2018 where, on a GAAP basis, revenue was USD 3.9 billion, operating income was USD 280 million, net income attributable to Aramark stockholders was USD 175 million and diluted earnings per share were USD 0.69. Fourth quarter 2019 GAAP diluted earnings per share decreased (50.7) percent year-over-year. These results included the impact of costs associated with 1) higher incentive-based compensation; 2) legal settlements; 3) the retirement of the Company’s former Chief Executive Officer; and 4) Advisory Fees related to Shareholder Matters. EPS was further affected due to lapping the benefit from Effect of Tax Reform on Provision for Income Taxes in the prior year. A reconciliation of GAAP to Non-GAAP measures is included in the appendix. As of the end of the fourth quarter, net cash provided by operating activities was USD 984 million year-to-date compared to the prior year total of USD 1.1 billion.

Fiscal 2019 Summary

On a GAAP basis, revenue was USD 16.2 billion, operating income was USD 891 million, net income attributable to Aramark stockholders was USD 449 million and diluted earnings per share were USD 1.78. This compared to fiscal 2018 where revenue was USD 15.8 billion, operating income was USD 818 million, net income attributable to Aramark stockholders was USD 568 million and diluted earnings per share were USD 2.24. Full-year 2019 GAAP diluted earnings per share decreased (20.5) percent year-over-year, primarily as a result of employee reinvestments in fiscal 2019 and changes to the Provision (Benefit) for Income Taxes related to tax reform in fiscal 2018, offset by the gain from the sale of the Healthcare Technologies business in the current year.

Adjusted net income was USD 564 million, or USD 2.24 per share, versus adjusted net income of USD 534 million, or USD 2.11 per share, in fiscal 2018. A stronger U.S. Dollar decreased revenue by approximately USD 275 million, Adjusted Operating Income by USD 12 million, and Adjusted Earnings Per Share by three cents.

Capital Structure and Free Cash Flow

The Company realized strong cash flow performance in fiscal 2019, generating USD 499 million of Free Cash Flow which included USD 36 million in integration spending associated with the AmeriPride and Avendra and USD 47 million in divestiture closing costs from the sale of the Healthcare Technologies business. Free Cash Flow does not include USD 23 million of proceeds from governmental agencies related to property and equipment. The total trailing 12-month net debt to covenant adjusted Ebitda improved by 21 basis points versus the end of the fourth quarter of 2018 to 3.86x driven by USD 593 million of net debt reductions over the course of the year and a continued disciplined focus on working capital management. At year-end, the Company had approximately USD 1.1 billion in cash and availability on its revolving credit facility.

Dividend Declaration

The Company’s Board of Directors approved a quarterly dividend of 11 cents per share of common stock. The first quarter fiscal 2020 dividend will be payable on December 9, 2019, to stockholders of record at the close of business December 2, 2019.

Business Update

Aramark has made extensive progress improving profitability, increasing procurement scale, evolving its portfolio, and driving free cash flow to strengthen the balance sheet and enhance financial flexibility. The Company is well-positioned to accelerate revenue growth that will include consideration of select investment opportunities while maintaining a long-term balanced focus on margin progression, Adjusted EPS growth, return on capital improvement and strong cash flow generation.

«I am confident that now is the time to pursue a more accelerated revenue growth strategy, while appropriately balancing other important financial drivers. We expect to initiate targeted investments that will support new account sales efforts and client retention; enhanced product and service offerings; and value-added innovation and technology,» Zillmer added. «Our diverse portfolio affords us the financial flexibility to activate this strategic approach while simultaneously propelling business performance. I look forward to working with the Board as we chart our dynamic path forward.»

2020 Outlook

Aramark provides its expectations for organic revenue growth, full-year adjusted EPS and full-year free cash flow on a non-GAAP basis, and does not provide a reconciliation of such forward-looking non-GAAP measures to GAAP due to the inherent difficulty in forecasting and quantifying certain amounts that are necessary for such reconciliations, including adjustments that could be made for the impact of the change in fair value related to certain gasoline and diesel agreements, severance and other charges and the effect of currency translation.

Aramark’s 2020 Fiscal Year and fourth quarter results contain an extra, or 53rd, week, when compared to prior period results. The guidance provided below is based on 52 weeks for year-over-year comparability purposes.

• Organic Revenue Growth of approximately 3 percent that is expected to consistently improve as the year progresses.
• Adjusted EPS growth led by further synergy capture from the Avendra and AmeriPride integration; business operating improvements; and reduced interest expense, while considering select investment opportunities.
• Free Cash Flow generation of at least USD 600M.
• Net debt to covenant adjusted Ebitda approximately 3.5x to 3.6x by the end of the fiscal year.

Organic Revenue, Adjusted Operating Income, Adjusted Net Income and Adjusted Earnings Per Share Growth will be adjusted for the 53rd week. Prior to the adjustment, the 53rd week is expected to have a full year benefit of approximately 2 percent on these metrics. Due to certain outflows from the natural cadence of the business including interest and tax payments, employee and client payments and commissions, Free Cash Flow is expected to be modestly unfavorable in the 53rd week period, with the Company diligently managing offset opportunities over the course of the year.