Aramark (ARMK) 2012 Q4 法說會逐字稿

Good afternoon, and welcome, ladies and gentlemen, to the ARAMARK Corporation fourth-quarter 2012 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 for questions after the presentation.

I will now turn the call over to Karen Wallace, Vice President and Treasurer.

Thanks, Danielle; and welcome, everyone, to ARAMARK Corporation's conference call to review the results of our operations for the fourth quarter and full year fiscal 2012. Here with me, today, is Fred Sutherland, our Executive Vice President and Chief Financial Officer. Fred and I will present an overview of our fourth-quarter and full-year 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 the results, you may want to refer to the Form 8-K we filed earlier today, which contains our fourth-quarter and full-year results for fiscal '12. This Form 8-K can be found on our website at www.aramark.com. In today's discussion of results, we mention certain non-GAAP financial measures, and as required by SEC rules, reconciliations of these non-GAAP financial measures to the most comparable GAAP measures are available on our website. Our discussion of operating income during today's call will, in each instance, exclude the incremental intangible amortization and property and equipment depreciation expense, resulting from the going-private transaction, the impact of stock-option expense, and the impact on the change in fair value related to our gasoline and diesel-fuel agreements. All of these items are detailed in the schedules posted to our website before this call.

In addition, the prior-year period results have been restated to present the results of the Galls business as a discontinued operation, as we sold it in the fourth quarter of fiscal 2011. Various remarks that we 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 Form 10-Q. We disclaim any duty to update or revise such forward-looking statements, whether as a result of future events and otherwise.

I will now turn the program over to Fred.

Good afternoon, everybody, and thanks for joining us as we review our fiscal 2012 fourth-quarter and our full-year results. As in prior quarters, I'd like to review our business and operating results, and then ask Karen to cover a few additional details on our performance. Overall, our results for fiscal 2012 were in line with the economic conditions in the countries in which we operate. Our operations in China and South America are continuing to grow at significantly higher rates than our total portfolio of businesses. We are excited about the opportunities that lie ahead for these regions.

As you would expect, Continental Europe results were more mixed, as our operations in Spain and Belgium struggled, while Germany continued to deliver solid performance. Our UK and Ireland operations realized the benefit of substantial cost reduction efforts in prior years. In North America, our Higher Education business continues to lead our overall growth. 2012 was a record year for us in terms of new sales across our food, facilities, and uniform businesses, with the new sales contract that are installed up over 30% over the prior year, providing us with a strong carry-in rate of business for 2013. As you've seen in the financial statements that were released earlier today, our free cash flow for the year was also very strong, led by our continued emphasis on working capital and earnings growth for the year.

One of our proudest accomplishments this year with our success as the exclusive catering provider to more than 15,000 athletes, officials and staff in the Athletes' Village over the duration of the Olympic and Paralympic Games in London this summer. During the games, our staff of over 3,500, on the ground in London, served over 1.5 million meals, peaking at 65,000 meals per day. London was ARAMARK's 16th Olympic Games. We were also proud to have hosted delegates and other attendees at the Republican National Convention in Tampa Bay in September, serving nearly 15,000 meals over the span of five days. And earlier in the summer, we served baseball fans attending the Major League Baseball All-Star Game in Kansas City. We deeply appreciate the trust our clients place in us to serve at these very important events.

Now, turning to the details of our results for the year, I would like to first take you through our overall financial performance, and then I will discuss our business segments. We reported fiscal 2012 fourth-quarter sales of $3.4 billion, up 3% from the prior-year quarter. Organic sales growth, which as you know excludes the impact of currency translation and acquisitions and divestitures, was 4% in the quarter. Adjusted operating income was $206 million, up 5% versus the prior year. For the full fiscal year 2012, sales were $13.5 billion, up 3% over the prior period on a reported basis and 4% on an organic-growth basis. Our adjusted operating income of $750 million was up 4% for the prior year.

Now, turning to our North America Food and Support Services segment, fourth-quarter reported sales were up 3% to $2.4 billion, led primarily by growth in the Higher Education business and our Business & Industry sector. Organic sales growth was 3% in the quarter. For the full year 2012, reported sales were up 4% to $9.4 billion, with organic growth of 3%. Year-to-date performance was led by solid growth in all sectors and particularly strong growth in our Higher Education sector.

Now, taking a closer look at the sectors within North America, our Business & Industry sector had a high single-digit sales increase for the quarter and for the full year, reflecting the positive impact from the Filterfresh acquisition, which as you may recall closed in early October of 2011 -- so, the very beginning of this of fiscal year 2012. Growth in the quarter was supported by improved base business growth in our refreshment services business, while our B&I facilities business also contributed to the increase in both the quarter and for the full year, primarily due to strong growth in our remote-services operations in Canada. Our Business operation's Dining Divisions experienced a slight sales decline, versus the prior year, for both the quarter and the full fiscal year. The Education sector had low single-digit sales growth for the quarter and mid-single digit sales growth for the fiscal year, primarily driven by higher growth than average in our Higher Education Food business, resulting from a combination of base business growth and very solid new sales from contract wins in prior periods.

In our Healthcare sector, we experienced low-single digit sales growth for the quarter and for the full year. The sales growth in the quarter was the result of base business growth in our healthcare technologies business as well as new business growth in healthcare hospitality. The growth for the full year fiscal 2012 was primarily a result of base business growth and the acquisition in March of 2011 of Masterplan within our healthcare technologies business. Our Sports & Entertainment sector had a low-single digit sales increase for the quarter and for the full year. For the quarter, we reported good growth in our amphitheater business, somewhat offset by timing of Major League Baseball games and the early effects of the NHL lockout, which did affect September. Our growth for fiscal 2012 was negatively affected by the NBA strike earlier in the year, but that impact was offset by solid results during the NHL season last year and the strength in Major League Baseball.

Adjusted operating income in the North American Food and Support Services segment increased by 7% in the quarter to $153 million, led by profit growth in our Business & Industry and Sports & Entertainment sectors. Profit for the fourth quarter included recognition of approximately $7 million of income related to a compensation agreement signed with the National Park Service under which they pay down a portion of our possessory interest at one of our terminated client locations. For fiscal 2012, segment adjusted operating income grew 5% to $541 million, led by strong profit growth in our Higher Education business and the Healthcare sector. Results for fiscal 2011 included the recognition of approximately $8 million of income in the first quarter, also related similarly to a compensation agreement signed with the National Park Service under which they pay down a portion of our possessory interest of one of our concession contracts.

Turning to the International Food and Support Services segment, fourth-quarter reported sales of $699 million were up 3% on a reported basis and 11% on an organic basis. Sales growth for the quarter was due to positive growth in Ireland, South America, and China, as well as the sales impact from our role as the exclusive food-service provider in the Athletes' Village for the London Olympic Games. This growth was partially offset by sales decline in the UK base business in Spain. For the fiscal year 2012, our reported sales of $2.7 billion were flat, compared to the prior year on a reported basis, primarily due to the impact of a stronger dollar. Organic growth was 6%, again led primarily by the Olympic Games, but also due to growth in Germany, Ireland, South America, and China, which more than offset a sales decline in the UK base business in Spain and in Belgium. Fourth-quarter adjusted operating income was $27 million, which was down about 3% when compared to the prior-year quarter, with currency translation negatively affecting profit growth by approximately 4 percentage points. Results in the quarter primarily reflect improving profit performance in the UK and in Ireland -- which I think is particularly admirable in the very difficult economic environment -- which was offset by profit decline in Continental Europe.

For the full fiscal year 2012, adjusted operating income was $100 million, up from $91 million in the prior year. Growth was driven by the UK, Ireland, Germany, Chile, and China, and partially offset by Belgium and our AIM joint venture in Japan. Currency translation also negatively affected profit growth by about 4 percentage points. In our Uniform and Career Apparel segment, fourth-quarter sales of $342 million were up 3% from the year-ago quarter on both a reported and an organic basis. Improving organic growth rates in the uniform rental business, which in the fourth quarter were in the mid-single digits, were offset by softness in our direct sale business.

For the fiscal year 2012, segment sales of $1.4 billion were up 2% from the prior year on both a reported and an organic basis. We are continuing to invest in additional rental sales personnel resources to support accelerated new sales growth. We are gaining improved traction in our new sales efforts, as wear counts continue to grow. Our new business installed in 2012 was up over 20% for the full year, as a result of both a larger sales force and increased sales productivity. And of course, we are paying the price of that a bit on both our sales expense and our merchandise amortization. The segment's fourth-quarter adjusted operating income was $38 million, this compares to fourth-quarter 2011 adjusted operating income of $34 million. Results from 2011 include restructuring expenses following our divestiture of our Galls subsidiary in September of 2011. Excluding these costs from the prior year, adjusted operating income in the fourth quarter of 2012 would have been up in the mid-single digits, which is an improvement from recent quarters.

For the full fiscal year, adjusted operating income was $145 million, down slightly from $146 million in the prior year. And as I mentioned, increased sales costs for the expansion of the sales force and a significant increase in our merchandise amortization costs associated with the substantially higher levels of new business have had a negative impact on profit growth in the year. But, we firmly believe that over the intermediate term these efforts are leading to both improving rental sales and profit growth as we look further into 2013. Corporate expenses, which exclude the items Karen mentioned earlier, were $11.5 million in the quarter, compared to $8.5 million one year ago. For the fiscal year 2012, expenses were $36.4 million, compared to $32.2 million the prior year.

Now, let me turn it back over to Karen for some additional details on the quarter and the fiscal year.

Thanks, Fred.

I would like to comment on our financing, capital structure, and cash flow. Our adjusted EBITDA for the trailing 12-months ending September 28 was $1.136 billion, equal to the figure we reported as of June 29, 2012 and up from the $1.1 billion as of September 30, 2011. Interest and other financing costs were $87 million for the fourth quarter, compared to $111 million in the prior year. Our interest expense in the quarter was lower, primarily as a result of a number of interest-rate swaps that matured at the end of March 2012. For the fiscal year 2012, interest and other financing costs were $402 million, down from the prior year's expense of $426 million. In the second quarter of 2012, we recorded approximately $11 million of expenses related to the term-loan extension we completed during the quarter. In 2011, we had interest income of approximately $14 million recorded that was related to the settlement of UK VAT claims from prior periods. Including the impact of interest-rate hedges, approximately 50% of our total debt portfolio is at fixed interest rates and our overall weighted-average cost of debt is approximately 5.1%.

Total reported debt at the end of fiscal year 2012 was $5.413 billion. Our secured debt, as defined in our credit agreement, totaled $3.602 billion, including a term-loan balance of $3.289 billion and a revolver balance that was $0. In June 2012, we amended our accounts receivable securitization facility, increasing the maximum amount from $250 million to $300 million and extending the maturity date to January of 2015. That facility had $264 million utilized at year end. We also had approximately $649 million of available capacity under our revolving credit facility as of year end.

Based on our trailing adjusted EBITDA, our secured debt ratio was 3.11 times as of September 28, which is down from the 3.41 times we reported as of June 29, 2012 and the 3.17 times we reported at the end of September 30, 2011. During 2012, we utilized $250 million of free cash flow to fund the repayment of our 5% notes. Without this maturity, we would have utilized free cash flow to pay down secured debt, and we would have seen a more substantial improvement in our secured debt ratio, consistent with our strong cash flow performance for the year. Our ratio of total debt to adjusted EBITDA at the end of fiscal 2012 was 4.76 times, and this compares to 5.09 times at the end of the third quarter and 5.13 times as of the end of fiscal 2011. Overall, we are pleased with our EBITDA growth and our ratio momentum, and we anticipate further ratio improvements over time.

Net capital expenditures for the quarter were $124 million, compared to $92 million in the prior-year quarter. For the fiscal year, net capital expenditures totaled $343 million, compared to $272 million in the same period last year. This higher level of spending reflects planned investments in our infrastructure as well as our sales-growth objectives. Consistent with our expectations and historical patterns, working capital was a significant source of cash for us during the fourth quarter. We ended the year with working capital as a relatively moderate source of cash overall for the year. We would anticipate that we will return to a more typical pattern in fiscal 2013, with working capital requiring a modest level of investment. For the year, we are very pleased with our free cash flow performance before acquisitions and divestitures, as we generated approximately $403 million of free cash flow in fiscal 2012. A total that exceeded our plan and reflects our growth in operating income and continued strong focus on working capital discipline.

For the fiscal year we spent a total of $152 million on acquisitions, compared to $157 million in the prior-year period. This year's spending related primarily to the acquisition of Filterfresh in our North American Refreshment Services business, which closed in October of 2011. We continue to evaluate and seek to make strategic investments in certain sectors and geographies, but we plan to be prudent and disciplined in the pursuit of these opportunities.

Now, let me turn the call back over to Fred.

Thanks, Karen.

Summing up our performance for this fiscal year, our global Food and Support Services businesses delivered solid organic growth, with slightly stronger profit growth. Our uniform rental business is gaining traction from the significant investment we have made over the past several quarters and accelerating new sales. As we look forward, we have strengths that we need to leverage. We have strong positions and attractive sectors; great people with pride and passion, strong values, and a desire to do the right thing; and a focus on client service. We believe there are many attractive growth opportunities in front of us, despite the economic climate, as many of our sectors remain significantly underpenetrated. We remain excited about pursuing those opportunities. We need to create growth for leading positions as we strive to become the most valued partner to our clients and consumers.

On the cost side, we see additional opportunities to improve our performance. In late 2011, we embarked on a number of internal initiatives aimed at delivering improved organic growth and continued margin improvement in the coming years. These activities have already delivered benefits in 2012, but we are committed to continue to improve our standards, processes, and systems, bringing efficiencies and improved effectiveness to how we serve our clients and customers every day around the world. During 2013, we are planning to further accelerate this process standardization, which we believe will help us drive ongoing margin improvement.

Thank you, again, for your time this afternoon and for your support of ARAMARK. We would be, now, happy to take your questions.

(Operator Instructions)

Bryan Hunt, Wells Fargo.

Good afternoon, Fred and Karen, this is Kevin standing in for Bryan.

Fred, you mentioned NHL impacted the Sports & Entertainment business segment. Can you remind us how many stadiums you service, and what the potential impact of season-long strike would have on your business?

We provide service at 9- NHL arenas. The full-season impact on us on the top line would be somewhere in the range of $100 million, and this would be the full-season plus our budget for the playoffs because we do budget some playoff games. And, the drop through on that would be somewhere in the range of 20%. So, it is certainly not zero, but it is not material in the overall scheme of things.

Got it, thank you. Pivoting to -- looking at your mix of part-time versus full-time employees, with the election behind us and the coming implementation of the Affordable Care Act, can you give us any insight into your discussions about any -- how you would plan to implement that legislation, whether that means changing the mix of employees, changing your benefits offerings, what type of -- can you quantify the impact of this legislation on your business at this time?

It's difficult to totally quantify the impact. We were -- as we looked at the legislation as it stood, one of our concerns was whether the requirement of at least 30 hours a week to qualify for healthcare benefits, how that would apply to seasonal workers. Because we have, particularly let's say in Sports & Entertainment and our Higher Education operations, we have lots and lots of seasonal workers. So, we had some concern about that on average that they work less than 30 hours a week, but they don't work less than 30 hours a week every week. There's some new regulations that have just come out on that, and it appears that our concern about having a huge increase in eligibility as a result of seasonal workers who average below 30 hours a week being eligible is not founded, so we are heartened by that. And as a result, the impact on us is less significant than we feared that it might be.

We are still working through all the details, as you know, there are still regulations, clarifications coming out as we speak. There are, clearly, other actions that we can take. Some other companies have started to do, or have talked about, which is changing the mix between part-time and full-time workers. So, it's difficult to quantify the impact. I guess I would say it's not insignificant, but it doesn't rise to the level of potentially a major EBIT impact as we had been a little bit concerned about as we looked at it one year ago.

Got it, that's helpful --

We're looking at something that's in the tens of millions before mitigation.

Got it, okay. On the other hand, with the potential for increased hospital visits from the expansion of coverage, do you see an opportunity to gain incremental business with hospital systems as a result of this legislation?

We are not really sure that the legislation itself would drive incremental growth in Healthcare. It certainly puts a lot of additional strains on the system and some of those fall on contract-service providers to hospitals. Having said that, our view is that healthcare is clearly a growth market. As you know, it is one that is relatively underpenetrated by contractors. We have a very full offering there across the food service traditional facilities and clinical equipment maintenance spectrums, so we have a very full offering in that market. And, we view that as a very attractive growth market and expect that, over time, that business will grow higher than the average for us.

Great. One last final question from us, and I will hand it off. Are you still content with your current capital structure? Or, are you in active discussions to possibly refinance the bonds that are callable and push out maturities even further? How do you think about your capital structure in the new year? Also, as an addition to that question, are you happy with the way your business looks today? Are there any other incremental acquisitions that you could pursue or businesses that you may consider non-core -- just trying to get a sense of how your business will look like over the next two quarters?

I will handle your questions with respect to the capital structure. I think, generally speaking, we're always looking at the markets. Clearly, the leveraged-finance markets are extremely strong right now, which does provide plenty of opportunities to look at different refinancing alternatives, and we continue to look at those. Historically, I think we've always been very prudent and conservative, in terms of aggressively refinancing our debt well in advance of maturity. We have pushed a lot of our debt already, and I'm sure as we get into early 2013, we will be continuing to look at the market and look for opportunities to further push out some of those maturities.

Yes, on the M&A front, I think it's fair to say that there are no businesses we are in that we are not pleased with and think have potential, over time. As you know, over the last two years, we repositioned our uniform business. I think we are very comfortable with that. On the acquisition side, I think we will continue to look for bolt-on acquisitions. Those could be to expand our services -- not way off of where we are right now, but in some adjacent areas in either food service or facility services. And, the other opportunity for acquisitions is to look at some of the faster growing economies in the world. As I mentioned when we started out, we are growing at mid-teens to high-teens rates in certain markets in Asia and South America. And certainly, we don't have full coverage in those regions of the world, so I think we will selectively look there as well.

Great. Thank you for your time.

Carla Casella, JPMorgan.

One housekeeping -- I missed the availability that you said on the revolver?

Yes, we had --

While Karen is looking at that, what's your second question?

Yes, I was just going to say, should I go on, okay. Can you talk about overall -- you mentioned in some of your segment comments, contract wins and losses; but in general, how are you tracking on contract wins and losses versus last year?

The annualized -- the way we look at it at the forefront of how we are doing is the annualized value of contracts that we signed up and the annualized value of contracts that we have lost. Now, those are not -- those are reflected in our P&L over time, as the contracts are actually come out, or as contracts are added, and we start to operate them. For 2012, as I mentioned briefly in my opening remarks, we had a pretty strong performance overall -- and this is both the North American food service business -- food and facilities business, the international business, and the uniform business. The annualized value -- the annualized sales value of new contracts that we were awarded sometime during the year was up around 20% or so. And that, of course, is something that we will roll into the financial statements as those contracts are started off. And, our -- the dollar value of the contracts that we lost during year was down, I think about, between 5% and 10%.

The net new business, as a result -- since the new business was up, lost business was down, the net new business was up a fair amount, so we were fairly pleased on that. We have been more so -- focused, particularly, on adding new business. We have been adding sales resources, standardizing some of our sales processes, and we're pretty encouraged by the results we saw in 2012. Client-retention rate --

That's great --

Sorry -- our client-retention rate in 2012, I think, was right around 95%.

Okay, great. Then, on the organic -- did you give an organic number? Organic sales, excluding kind of the wins and losses?

Yes, we did. The organic sales number for the full year was 3%, and -- yes, the top-line growth for the full-year organic growth was 3%.

Okay, and then --?

I'm sorry, Carla, the number -- Carla, the number for the revolver availability at year end was $649 million.

Okay, perfect. Thanks. Then, one question on Hurricane Sandy. How much of your business-services customers had closures? And, would you say they are back up to pre-closure levels now?

This is the businesses that were closed?

Yes.

No --

I know we were one of them, and then it was a few days before our ARAMARK facility was back up --

That's right, and we also have operations Downtown. As you know, Downtown was out of power longer than -- you're located Midtown right?

Exactly, we're midtown, so we didn't have much --

Yes, you are at the office in Midtown. The Downtown operations suffered even more, so we did feel an impact from Sandy. Some of those operations are still not open or still not fully operational. We had some impact our uniform services business. We have -- our uniform services plant that services the New York metropolitan area is located in Newark, and we have a depot in Long Island, and we have another satellite in Union, New Jersey, and those were -- the Newark plant was without power, I think, for five or six days. We also lost power in Cherry Hill and Reading, Pennsylvania. So we anticipate, clearly, that there will be some impact on the first quarter of Sandy. It's not -- I think the revenue was in the tens of millions of dollars, and I think the EBIT is in the, maybe, $10 million or less range, as we see it right now. And hopefully, beyond the first quarter, there won't be any lingering impact.

I guess on the upside, we are -- although this is a very small offset, we are feeding -- at Citi Field, that's one of the staging areas for utility crews from outside of the area, and we are feeding them because we have the contract at Citi Field.

Our risk management group, as well, in the process, obviously, of going through location by location, seeing what business-interruption claims might be out there for us as well.

Okay, great. Do you typically have loss of sales [that are] loss of business claims? Or, are they typically just if the facilities are damaged?

No, we have business-interruption insurance. We have property insurance, and we have business-interruption insurance. And often, when it -- whether it was Katrina or other disasters, often our claim on the business-interruption side is higher than our claim on the asset side because -- at JPMorgan, for example, we don't really have any assets other than -- if there would be inventory spoilage, then we would have that, but often it's business interruption.

Okay. Great, thanks.

Reza Vahabzadeh, Barclays.

On the Europe business, you seem to indicate a little weaker trends in Spain, but seemingly, roughly, unchanged trends in the other countries in your European operations, is that about accurate?

I guess I would expand on that, we are clearly struggling in Spain, and that's pretty much the economy. Now having said that, as I think you know or as we have said before, our mix of business in Spain is more favorable. We have a relatively low percentage of our business in Spain that's Business & Industry focused -- business clients. So, we are focused mostly in Healthcare, which is frankly not without some challenges, just in terms of being paid because many of them are connected with the government. But, we also have a pretty good position in the education market there. So, there -- in those markets it is not so much demand problem, it's just being sure that you are going to get paid for the service you provide.

Spain is a challenge. Belgium, we have relatively small operations in Belgium, and that's been a challenge. Germany, as you picked up from the prepared remarks, in the fourth quarter, did okay. The economy has cooled off in Germany, so it's a difficult environment, going forward. In the UK, as I mentioned, we did actually quite well on the profit side because the management there has been pretty aggressive in repositioning the business, given some of the economic issues, but we're not growing in the UK. And in Ireland, where we have a very good position and a very balanced mix of food and facilities, we have actually come back pretty well. We are fortunate that we're not -- we don't have a significant amount of either our European business, or our total business, along the southern -- in the southern part of Europe.

Got it. Then, as it relates to the US business -- the US FS business, your organic sales growth was fairly close to what you have posted in last two quarters. Is the business, roughly, sequentially stable? Or, have you seen any change in the tone of business, whether it's in terms of traffic or mix?

I think if you break the -- we're pretty consistent between the third quarter and the fourth quarter, so over that period we haven't seen much. If you look at the first half of 2012 versus the second half, our growth is a bit lower. And, I would say we are cautious about 2013, given the impact -- the unemployment rate doesn't seem to be going down. Obviously, the fiscal cliff is an issue -- the various projections, being bandied about, about the potential impact -- how many dollars -- it is going to suck $600 billion out of the economy, increase unemployment by 1 percentage point; so hopefully, the government will muddle their way through that. I guess I would just summarize by saying the business -- as we look into '13, the business is certainly not stronger going into '13 than it was going into '12. If anything, it's a little bit weaker. So, while we think we're in a good position for 2013, we're cautious.

Right. Then, as far as productivity and other cost savings, do you have initiatives to generate some cost savings in general to improve margins, but also to offset potential labor-cost headwinds, perhaps, in 2014?

We do. Most of those initiatives are centered around two big buckets of cost -- food cost and unit-labor cost. And, we have programs in both areas. In the food side, it's around standardizing menus, standardizing the products -- the items that we have in our stable, providing our front line with better and more automated tools to manage food production and minimize waste. In labor, it's providing our front line with better tools to appropriately schedule labor and manage labor to a schedule to become more efficient.

Those are multi-year programs. It takes quite a while to roll these programs out, literally, to thousands of individual units that operate in non-standard physical locations. So, we have very specific programs that are in roll out, benefits are identified by location, and are built into our expectations and are in there, really -- certainly, to try to improve the overall profitability of the business, but also to make sure that, to the extent that we see some drop in base business growth, which is possible, that we've got some contingencies.

Got it. Karen, did you mention what the CapEx outlook looks like in 2013?

I did not mention the outlook. I think what we would generally say is in 2013, we will continue to be, probably, spending at a slightly higher rate in '13 versus what we did in '12, kind of similar to what we saw from '11 to '12. I think there's a fair bit of new business growth in 2013 that's going to require some capital spending, along with some additional infrastructure spending.

Got it. Thank you, both.

(Operator Instructions)

Pat DiMeglio, Deutsche Bank.

Most of my questions were answered, but just on the cost saves that you mentioned, can you give any more color around a target you have for the year and going forward? And then, how much spending you are going to have around that? So, is it going to be a large upfront cost, or is it going to be spread out over the next year or so, as far as implementing the cost saves?

We typically haven't expressed a target on food and labor savings, but there is a multi-year benefit. Our food costs generally run in the low 30% of our sales. Our labor costs run in the 40% range of our sales. And, we're looking to, over time over a multi-year period, have a meaningful impact on those costs. So, we view it as something that's meaningful in the context of our overall P&L, given that we're essentially in a 5.5% to 6% margin business. The costs associated with it -- they're really two buckets of cost. One is we're, as Karen alluded to, we need to increase our IT and infrastructure spending. So, some of it is systems, it's got -- there's a capital expenditure that's got some P&L implications and depreciation. It's not something that just drastically changes our overall capital budget, so it's not of that order of magnitude.

There's an ongoing P&L component as well, as we standardize and centralize some of these processes, you just need people to be able to execute that and roll that out across, literally, thousands of units. So, there are period costs associated with that. It's a net positive. It's meaningful for 2013, and we expect to continue to reap benefit from it, year after year, for at least the next two to three years.

Okay, great. Then, lastly do you have a target leverage number for the Business? I know you said, kind of comfortable with the capital structure, you'd look to take advantage of the market maybe early next year, but do you have a target ratio in mind?

We don't have a target. We finished the year at just over 5 times, as Karen mentioned, I think 5.3 times. We started at 6.5 times, 6.6 times. As you saw in a normal year, where we make some modest acquisitions, our debt ratio tends to go down by 0.3 or 0.4, as a function of growth in EBITDA both and free cash flow, which reduces debt. So, absent any higher-than-normal acquisitions, I think it's reasonable to expect that, that's what would happen. We don't target a particular debt ratio, but we look to improve our debt ratio over time. We have also been very clear that if we have the right acquisition that we think strategically is important, either move into a fast-growing region of the world, or to expand our service capability to make a stronger player in the market, we will do that. But, as you have seen over the last five or six years, we have done that in the context of maintaining a sound capital structure.

Okay, so basically your flexible if you see an acquisition that you think makes sense?

That's right --

Great --

Again, within the context of making sure we don't -- that we maintain a capital structure that's -- it is going to be leveraged, but we want to make sure that it's reasonable. The management here -- we have got a broad group of management that owns a lot of stock, so this company has to live with high leverage for decades, but we are prudent about it.

Okay, great. That's it for me. Thank you, that was helpful.

With no further questions in queue, I will turn the call back to Karen and Fred for any additional and closing remarks.

Just wanted to say thank you to everyone for joining us on the call, and we look forward to speaking with you next year when we release our first-quarter results in February. Thanks.

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