Aramark (ARMK) 2014 Q1 法說會逐字稿

Good morning, and welcome to ARAMARK's first-quarter FY14 earnings results conference call. At this time, I would like to inform you that this conference is being recorded for rebroadcast, and all participants are in a listen-only mode.

We will open the conference call for questions at the conclusion of the Company's prepared remarks. In order to accommodate all participants in the question queue, the Company has requested that you limit yourself to one question and then re-queue if needed.

I will now turn the call over to Ian Bailey, Vice President of Investor Relations. Ian, please proceed.

Thank you, and welcome to ARAMARK's conference call to review the operating results for the first quarter of FY14. Today's call is a particularly gratifying event, as this is our first earnings update since returning to the public markets as an NYSE-listed Company.

Here with me today are Eric Foss, our President and Chief Executive Officer, who will detail our strategy for unlocking incremental shareholder value; and Fred Sutherland, our Executive Vice President and Chief Financial Officer, who will provide an overview of first-quarter results. I would like to remind you that any recording, use, or transmission of this audio may not be done without the prior written consent of ARAMARK.

In today's discussion of results, unless otherwise noted, we will be referencing ARAMARK's adjusted operating income, adjusted net income, adjusted corporate expenses, and adjusted EPS metrics, which are non-GAAP financial measures. These measures exclude the increased amortization and depreciation resulting from the Company's going-private transaction in 2007, share-based compensation expenses, acquisitions and divestitures, changes in currency translation rates, gains, losses, and settlements that impact period-over-period comparability, severance expenses related to our initial public offering, rebranding, and other transformation-related expenses.

We will also be referencing adjusted or organic sales, which exclude the impact of acquisitions, divestitures, and currency translation. A full reconciliation of these calculations is available in the press release we issued this morning, which has been posted to our website at www.ARAMARK.com, and our Form 10-Q which we anticipate filing this afternoon.

Additionally, 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, estimate, 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 SEC filings. We disclaim any duty to update or revise such forward-looking statements, whether as a result of future events or otherwise.

Lastly, I would like to reiterate our goal of addressing the full queue of questions during the Q&A session. Limiting yourself to one question and then re-queuing if needed will greatly help us in addressing all of the participant inquiries today.

With that, I will turn call over to Eric. Eric?

Thanks, Ian, and good morning. Thanks to everyone for joining us.

I'm very pleased to report that we delivered very solid performance in the first quarter. We are generating strong sales momentum through our focus on selling, service, and executional excellence, and we are reaping the productivity benefits related to our efforts around operational excellence. I think importantly this momentum is broad-based across our business, and is resulting in meaningful gains in both sales growth as well as margin expansion.

Fred and I are going to discuss these dynamics in greater detail throughout the call, but this being our inaugural update post the IPO transaction, I'd like to take a few moments to reiterate what we see as both the market- and the ARAMARK-specific opportunities that should unlock additional future value for our shareholders.

I have been at ARAMARK for nearly two years now, and at this juncture, I am even more convinced that the same strength that attracted me to this Company will be the catalyst that will drive growth in long-term shareholder value. I like to refer to these strengths as ARAMARK's three Ps. Proven, powerful, and promising.

ARAMARK has a long, storied, and proven track record as a leader in a large and growing market that is enjoying favorable outsourcing trends. ARAMARK has a powerful and resilient business model that is supported by a seasoned management team, and an impressive roster of blue-chip clients. This platform has served ARAMARK well by generating solid business performance, stable margins, and steady cash flows through even the most difficult economic times.

The ARAMARK strength that's of most interest, I think, to this audience, is the promising potential of this business. It really is built on ARAMARK's solid platform that we've spent the past two years overlaying a transformational strategy that we expect to unlock the Company's full potential and promise to deliver improved profitability by enhancing customers' experience through insights that translate to innovations that facilitate growth and improve profitability.

This strategy is based upon three A's; accelerating our growth, activating productivity, and attracting the best people. We are executing this strategy by establishing a [repeatable] business model that delivers selling and service excellence at that all-important moment of truth. That is the critical moment in which we provide service to our clients and consumers.

We call our model our excel model, and it incorporates four growth initiatives and one productivity initiative. The growth initiatives are comprised of selling excellence, which really helps us drive new client acquisitions; service excellence, which focuses on raising client retention; executional excellence, which drives against potential adjacencies and grows our base business; and marketing excellence, which is really focused on quality, innovation, and brand-building. The productivity initiative, operational excellence, is really focused on capturing and taking advantage of our scale and driving efficiency across the major cost buckets of food and merchandise, labor, and SG&A.

I'm happy to report that, while we are still in the early innings, applying this strategy to the powerful and proven ARAMARK platform is delivering very encouraging initial results. Through these efforts, our team has improved our organic sales growth trajectory from flattish several years ago to mid-single-digit growth in 2014, and again in Q1 -- excuse me, in full year 2013 and then again in Q1 of 2014.

We accelerated our annual new business growth over threefold since 2009, and we have improved our growth in adjusted operating income margins. Each of these metrics is now demonstrating solid momentum, and while I find this trajectory encouraging, I'd reiterate that our journey in accelerating our growth and transforming our profitability is really just getting started.

I'd also like to emphasize that these initiatives are being undertaken in conjunction with supporting the impressive client retention rates and customer service levels. We don't intend to grow simply for growth's sake, nor are we willing to jeopardize our client relationships in order to do so. So, as we look forward, while simultaneously investing in growth, technology, and people resources to secure our future, we remain committed to achieving our goal of annually growing our sales 3% to 5%, generating mid to high single-digit adjusted operating income growth, and generating low double-digit adjusted EPS growth.

I'd like to make just a few comments regarding our first-quarter results. As Fred will detail in a minute, Q1 was a very solid quarter and serves as another validation point in our transformational journey.

Organic sales growth in the quarter grew 7%, and I do want to point out that we estimate about 2% of this improvement resulted from the impact of the NHL lockout and Hurricane Sandy and the impact that had in 2013. Adjusted operating income was up 18%, again, with the lockout and Sandy estimated to have added about 6 points to the year-over-year comparison. Importantly, these improvements were achieved broadly across our businesses and all three of our reporting segments.

In North America, food and support services, our international food and support services, and uniforms all logged meaningful improvements in the quarter. Our North America business grew the top line by 7% and adjusted operating income by 16%, of which about 2% and 6%, respectively, is attributable to the NHL lockout and Hurricane Sandy.

Our international business generated solid results in the quarter as well, growing the top line 7% and adjusted operating income 23%. Our uniform segment also performed well with sales growth of 4% and adjusted operating income growth of 17%. We estimate about 2% of the uniforms' adjusted operating income growth relates to Hurricane Sandy.

Now, as you would expect, this momentum is having a positive impact on our adjusted operating income margins, which increased 60 basis points for the quarter and at the total Company level. We estimate about 20 basis points of that increase was related to the NHL lockout and Hurricane Sandy.

The margin improvement for the quarter is primarily the result of our operational excellence platform, which is driving efficiencies across food, merchandise, labor, as well as SG&A. In food, our progress really runs the gamut from improved sourcing, menu and SKU management, and a more effective production process. Our focus on labor is really on scheduling and headcount management and our delivering productivity and efficiencies. In addition, our SG&A initiatives to optimize the organization delivered solid improvement in the quarter.

Client retention rates in the first quarter were consistent with our mid-90% annual target, and we signed new business in the quarter, increasing net new business progress from a year ago. Some important key wins in renewals in the quarter included Dignity Health, additional remote-site businesses with [Encana] in Canada, Croke Park Stadium in Ireland, which is the fourth-largest stadium in Europe.

As I mentioned earlier, a key component of our repeatable business model, Excel, is marketing excellence. With this in mind, we are introducing the first rebranding for ARAMARK in over 20 years, which includes a refreshed logo, tag line, and advertising campaign that we launched last week.

We've conducted extensive research over the last 18 months and learned that branding and marketing does matter in our industry. Branding does, we think, deliver a competitive advantage by helping us attract and retain both customers, as well as the talent to serve them. Like the role of marketing in any dynamic business, it ultimately contributes to us winning in the marketplace, and our research showed that the ARAMARK brand does have equity that we can leverage and we certainly intend to do so to its fullest. We expect our marketing investment to strengthen our ability to grow by fueling our new business, as well as client retention efforts, as we build an even more powerful presence and profile.

And, finally, we were pleased to announce our first dividend declaration yesterday since going public. Our Board of Directors has declared a $0.075 quarterly dividend for holders of our shares of ARAMARK common stock, payable March 11, 2014, to holders of record on February 18, 2014.

And, with that, I will turn the call over to Fred.

Thanks, Eric.

As you can see from our release this morning and, as Eric stated, we are off to a solid start for the year. In the first quarter, we achieved sales of $3.8 billion and adjusted operating income of $259.6 million, up 7% and 18% with about 2% and 6% of the increases attributable to the NHL lockout and Hurricane Sandy.

Our adjusted net income for the quarter was $111.9 million, compared to $70.6 million in the first quarter of 2013. Adjusted earnings per share were $0.52 versus $0.34 in the first quarter of 2013. The combination of the NHL lockout and Hurricane Sandy are estimated to have reduced last year's net income by approximately $6 million and earnings per share by about $0.03.

The growth in both adjusted net income and adjusted earnings per share was also increased by a $30 million decline in pretax interest expense, as this year benefited from last year's refinancing activities, and last year's first quarter also included about $12 million of one-time refinancing costs. In the first quarter's diluted share count, the outstanding calculation, shares related to the IPO were outstanding for 16 days.

Looking at the first quarter in a bit more detail, our North American food and support services segment sales were $2.6 billion, with adjusted operating income of $197.4 million. Sales were up 7% organically and adjusted operating income was up 16% with the lockout and Sandy impacts estimated at about 2% and 6%, respectively. Sales growth was particularly solid in both the education and sports leisure and corrections sectors from higher new business.

In addition, our sports business benefited from strong performance during the major league baseball playoffs and the World Series in the first quarter. Profit growth in the segment was driven by our productivity initiatives.

In the international segment, first-quarter sales were $775.6 million, a 7% organic increase. This increase was led by continued strong growth in our key emerging market geographies and positive growth in Europe. First-quarter adjusted operating income increased 23% to $28.8 million from our food, labor, and SG&A productivity efforts.

In our uniform segment, sales in the first quarter increased 4% organically to $367.1 million. Adjusted operating income grew 17% to $46.3 million from a combination of solid sales growth in both merchandise and plant productivity initiatives. The impact of Sandy is estimated to have reduced first-quarter 2013 adjusted operating income by about 2%. Finally, corporate expenses adjusted for the items described in Ian's opening comments, were $13 million in the quarter, up modestly from the first quarter of last year.

As I mentioned during 2013, we refinanced a substantial portion of our debt, extending the maturities and decreasing the interest costs. Largely as a result of these efforts, we were able to reduce interest and other financing costs to $83.4 million in the first quarter of 2014 from $113.4 million in the first quarter of 2013 versus 2014. As I mentioned earlier, interest expense in the first quarter of last year included $12 million in refinancing-related expenses.

Additionally, the Company used the IPO proceeds in mid-December to repay $524 million of outstanding debt. Our total debt at September -- at December 31 was $5.6 billion, of which approximately 60% was fixed and 40% was floating. The average effective interest rate on the Company's debt portfolio, post-hedging activities, is about 5%. The Company's total debt-to-adjusted-EBITDA ratio, on a trailing-12-month basis, was 4.7 times as of the end of December, 2013, down from 5.6 times at December 28 of 2012.

As many of you know, our debt fluctuates seasonally, rising in the first two quarters of the year. Our total debt-to-adjusted-EBITDA ratio at fiscal year end, pro forma for the IPO, was 4.5 times. Our liquidity remains strong, and at quarter end, the Company had approximately $400 million of available borrowing capacity under its $605 million revolving credit facility. In an acknowledgment of the Company's improving credit metrics, our corporate debt rating was assigned a two-notch ratings upgrade to BB by S&P during the first quarter.

Now, as we look forward and with the caveat that acquisitions could affect this trajectory, we expect the combination of debt reductions and earnings growth to reduce our total debt-to-adjusted-EBITDA ratio to below 4 within the next 12 to 18 months. Longer term, we are targeting for this ratio to be in the range of 3 to 3.5, again, absent any significant acquisition opportunities.

While it is certainly gratifying to be reporting such a strong first quarter, individual quarters can be influenced by the seasonality of both our new business and our business mix, the timing of costs and benefits related to our reinvestment of productivity initiatives, and start-up costs related to new business. As we look to Q2, the winter weather so far has been quite a bit more challenging to our clients than is typical, which could translate into a modest headwind for the quarter. While we anticipate ramping up our reinvestment to support growth, technology, and people, particularly in the key North American market, we continue to expect adjusted operating income growth for the total Company to be in the mid- to high-single digits for Q2 and for the remainder of 2014.

So, overall, we also continue to expect full-year FY14 results, adjusted for the lockout and Sandy effect, to be consistent with our longer term framework. And, that is, we expect sales to grow organically between 3% and 5% on a 52-week basis. We expect adjusted operating income in Q2 and subsequent quarters to grow in the mid- to high-single digits, and we expect our adjusted EPS to be between $1.30 and $1.40 per share reflecting the impact of the 53rd week of the year.

Our EPS guidance is based on a projected diluted share count estimate of 236 million shares at the end of the year. I would point out that our diluted share count, as I think all of you understand, will vary pretty significantly over the next few quarters, as the shares from the offering affect the dilution calculation, which is weighted for the amount of time the shares were outstanding during the period.

Net capital expenditures for the quarter were $76.9 million, compared to $71.2 million in the prior-year quarter. As you know, our CapEx is influenced by the rate of new business wins and key account renewals, as well as reinvestment in IT and other systems to support a growth and productivity initiative.

Historically, the Company's CapEx has been around 3% of total sales, but can certainly trend higher in a period of higher growth, large accounts' retention activity, or reinvestment. Also, as expected and [consistent] with historical patterns, working capital was a use of cash during the first quarter of the fiscal year.

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

Thank you, Fred.

So, as you can see, we had a strong quarter. I think when you combine a clearly defined strategy, incorporate this repeatable business model that we've talked about, and lay on top of that a proven operating platform, it leads to great results. And, while we are pleased with our sales growth, we are pleased with our cost and productivity initiatives, and the progress we're making in reaping benefits, we have a long way to go. But, our margins, again, are headed in the right direction, and importantly, this momentum, I think, is broad-based across our businesses.

I would also be remiss if I didn't take a moment to thank the entire 270,000 members of the ARAMARK team and really applaud their efforts, as they truly are significant drivers of the momentum we're enjoying. We are only at the beginning of our journey, but I think I speak for the entire team when I say that we are committed to our focus on growth in margin improvement. We have a clear and concise strategy to facilitate ongoing momentum, and I look forward to providing quarterly updates on our progress.

With that, Kelly, we'd be happy to take any questions they have.

(Operator Instructions)

We will go ahead and take our first question from Andy Wittmann with Robert W. Baird.

Hi, guys. Good morning.

Good morning, Andy.

Just wanted to dig in a little bit to the guidance for the rest of the year. It sounds like -- obviously, you had some year-over-year comps that helped the growth rates here. But even excluding that, and looking at the margins that you put up in the quarter, which were pretty good, and ahead of I think most people's expectations, can you just talk about the rate of change in your business that is implicit in that guidance range? It seems like a fairly decent size beat here -- might be assuming some level of deceleration. I wanted to understand if we are seeing that the way you might be seeing that?

Well, thanks, Andy. Let me say -- again, I don't think anybody disputes that we are off to a good start. We're certainly encouraged by Q1. As Fred said, we remain comfortable with our full-year guidance.

Again, we are one quarter into the year. We will continue to monitor and watch as the year unfolds, but I think we are pleased with our progress. We will continue to look to invest in the Business, as we committed to, on the technology, on the growth, and on the capability side.

But, right now, again, it's very early in the year. We are encouraged by the start, but we are holding our full-year guidance, and, again, remain comfortable with that direction.

Okay, thank you.

We will take our next question from Michael Kelter with Goldman Sachs. Michael, your line is open. Please check your mute button.

Sorry. I fixed that.

In terms of margin expansion opportunities over the next, call it, 12, 24 months or so, there are a lot of different things you guys are working on. Can you talk about what the biggest buckets are, in terms of specific projects that will improve your profitability? And maybe put some context around magnitudes of those big ideas?

Sure. Let me take a cut at that, Michael. One of the things I want to emphasize here is that we take dollars to the bank, not percentages. Our focus continues to be two-fold: on making sure we continue to accelerate our growth in the marketplace, while also making sure we maximize the margin opportunities presented to us.

I think on the margin side, the way I would ask you to think about it is, if you think about our food costs, I think you can look broadly across the supply chain. Everything from how we source products, to how we manage the mix complexity both of the menu as well as SKUs, and then the third bucket would be just the food production process. Three discrete buckets within food. We have got plans and initiatives and strategies up against each of those three.

I think the second bucket is really in the bucket of labor. Labor is really focused in two primary areas. Making sure we get a handle on our headcount and drive headcount productivity, and also we schedule that headcount in a very productive way.

The third bucket is really SG&A. We focused a lot around eliminating duplication and redundancy. I think, as you are probably aware, we are in the process of standing up a shared service center in Nashville. As we look at that, we are also in the process of deploying some technology that will help us on the labor scheduling side with Kronos.

I think you can look at those three buckets of food and merchandise cost, bucket one; headcount and labor management, bucket two; and SG&A, bucket three. And assume that they are kind of equal contributors relative to opportunities as we think about the numbers in 2014.

Thank you very much.

Our next question comes from Andrew Steinerman, JPMorgan.

When thinking about the guidance for the year, the 3% to 5%, I assume we are starting with the 7% organic growth in the first quarter, even though the underlying growth might be more described as 5% for the first quarter. Could you remind us -- I believe the NHL strike, and maybe even Sandy, did roll into the comparables for the second quarter. Won't we have some effect even past the first quarter?

This is Fred. Let me take a stab at that, Andrew. There is very little, if any, effect of the NHL lockout or Sandy in Qs two, three, and four. There is a minor effect, but it's not really worth talking about.

Our overall guidance is, essentially, adjusting for the effect of Sandy and the NHL, which I think I mentioned in my remarks. So, I think, if you think of the 7% organic growth, you think of the 2% adjustment from those two items, which obviously is a big adjustment in the first quarter, you ought to think about those two numbers in the context of our 3% to 5% guidance.

Right. You're saying you count the first quarter as a 5% when you are thinking about 3% to 5% for the year?

Yes, essentially.

Perfect. Okay, thank you.

Our next question comes from Jeff Farmer with Wells Fargo.

Thanks. Good morning. You guys touched on this, but you made it clear that improving retention rates and capturing adjacencies are key areas of focus -- top-line focus for you guys. But can you provide some additional commentary on how you are going to pursue new business with entirely new customers? So again, understanding that retention rates are important, adjacencies are important, but what about going after that entirely new business? What's the game plan there in the near term?

Sure, Jeff. First of all, let me just maybe breakdown Q1 for you in terms of the math. That might be helpful.

We had strong retention numbers in the quarter, but if you really look at the composition of the growth, I think the way I would ask you to think about it is about half of that growth came from net new business in the quarter. And then, the other half came from us growing our base business. Both our ability to modestly price through -- take some moderate pricing to cover inflation, as well as capture those adjacency selling opportunities. So, pretty even split, 50/50 between new business and base business growth.

As we look at our new business, we came off a record net new business year in 2013. Actually, if you looked at our first quarter, our net new business was up high, high, high double digits at a very strong quarter. We would expect that to continue.

Obviously, this is a sector that is driven by favorable outsourcing trends. And if you look at our first quarter, we saw that fairly broadly. We picked up -- expanded our leadership position relative to the National Football League by picking up two teams -- the Chicago Bears and the Tampa Bay Bucs, year over year. We picked up one of the largest school systems in the country, Chicago public school system.

And had broad-based new business growth both in our business and industry, as well as in key healthcare accounts, as well as -- not just domestically, internationally. So, we are very encouraged by what we're seeing on the new business front, and certainly have plans to continue to compete effectively for that going forward.

Thank you.

Our next question comes from Suzi Stein with Morgan Stanley.

Hi, thanks for taking my question. There's been a lot of discussion about minimum wage, following the state of the union address last week, and I know any action is remote, but can you just discuss your exposure to a potential increase? And specifically, I know you've mentioned that the percent of employees at minimum wage is very small, but how significant is the exposure to employees in that $7.25 to the $10.10 range that was proposed?

Suzi, I think the way we would deal with this is, first of all, our orientation is really all around doing what's right for our employees. And so, as we look at the current minimum wage -- about 1% of our employees are paid the minimum wage. Our focus is on doing what is right for our employees, doing what's right for us as a Company, and then as a good corporate citizen, doing what's right for the broad economy. Again, I am not going to get into hypothetical or speculation.

Again, what is important to us is whatever, if anything would be done and whatever would be done, was to assess whatever that decision is, and its impact on employment and the broad economy, our employees, and our Company. And that's the way we will think about it. I think, as the thinking continues to unfold, we will deal with it accordingly. But I think at this point in time, it would be pure speculation and hypothetical to begin to throw numbers out and try to react to them.

So, you wouldn't be willing to give us a percentage that is in that range?

No, I think, as I have said, 1% is paid at the minimum wage. If the minimum wage would go up, if and when that happens, we would look at it and assess the financial impact.

Again, as we think about any kind of a -- I'm going to call it a reasonable increase. I think reasonable increases are very manageable for us. So, that is, I think, the way we would think about it.

Okay. Thank you.

Our next question comes from Gary Bisbee with RBC Capital Markets.

Good morning. During the lead-up to the IPO, you spent some time walking through how the use of better data at your customer sites and better merchandising also driving potential for improved same-store sales. We saw it live at the baseball game with you, but I don't have a great sense of how easy those types of progress that you have shown there will be to replicate into other verticals like corporate cafeterias, education, and other areas.

Can you give us a sense of, if you think you can do that? And maybe an example or two of some things you are doing in some of the other end markets to drive base business growth? Thank you.

Sure. Well, I think if you looked at our base business growth, first of all, Gary, I think our base business growth was fairly broad-based. So, the first thing we are doing everywhere is, as part of this repeatable business model, each of our lines of business have developed an executional framework that really is a way for our Organization to think about those new selling opportunities or adjacency selling opportunities that will help us build our base business.

So, that framework -- that tool is applicable to all of our businesses, and is one that is being embraced and is in the process of being rolled out. I think it's having positive impact as a result of the kind of base business growth that I talked about in Q1.

I think relative to insights, again, if you think about what you need to do to be great in this business, there are a couple things you've got to do. One is to the point around executional excellence. You've got to provide a great customer experience at the moment of truth. The executional framework really helps you do that.

The second thing is you have to innovate. Our ability as a Company to take meaningful insights that translate into meaningful innovation that can have a positive impact on our clients and our consumers is also something we think a lot about. And so, it really starts with: The marketplace sets the table, what consumer insights do we have that can help us drive that innovation?

There are, to maybe your point, there are certain of our businesses that you get that insight and that data more real-time, and they tend to be the ones that have the best point-of-sale systems. So, that would be, to name names, our education business and our sports business. But the opportunity for us to grow our base business is not isolated to strictly the data or the technology. There are other ways to do that more broadly.

Does that answer your question?

Yes. I guess, just maybe said slightly differently, do you see similar levels over time of potential in all of the various verticals you play in? But, yes, that does. Thank you.

Yes. I think the simple answer, if that is your pointed question, is yes, we do.

This is Fred. We are focused on improving POS across, essentially, all of our businesses. Sports, as Eric said, we are a little further ahead because it has been traditionally a more retail-focused business. But there are initiatives across all the businesses.

Great. Thank you.

Our next question comes from Brian Davis with Bank of America.

Hi, it's Sara Gubins from Bank of America. What flexibility do you have to pass through cost increases, be they labor or food, in your contract structure? And could you maybe talk about your historical experience with this, particularly historical experience when minimum wage has gone up?

This is Fred. Let me take a shot at that.

As you may remember, about 30% of our contracts are essentially cost-plus contracts. So, with respect to those contracts, increases in labor costs, increase in food costs are passed directly by the terms of the contract to our client. And our income is really based on the management fee and the structure, basically, incentive fees.

With respect to the other 70%, where we would be more like another, let's say, retailer, we typically increase prices in conjunction with discussions with our clients. But it is, really, essentially part of what we do. We have a pretty disciplined process on a periodic basis, at least annually. And then, if we see cost increases that are unusual, more frequently, so we think that is justified. To both look at the market and see what the market will support, and then to work with our clients to increase prices appropriately.

And have you found historically that, with things like wage increases, you have been able to eventually pass those on, although perhaps with a lag?

I think, as we think about pricing, I think all of our businesses, again, are starting with the marketplace. What is important here: I think any time you are looking to take pricing actions is to really start with the consumer, and make sure you understand how she is looking at value, and to make sure where you have opportunities to take that pricing.

Again, as an example, as we went through this in a couple of our lines of business, by doing that, it allows us to be very targeted, and to understand and sit down with the client to understand why it is important, not only for our Business but for their business, and ultimately how we can do it in a way that minimizes the impact ultimately on the consumer. So, I think what we would say is that as we deal with inflationary costs, at a large percentage, we have the ability, capability, insights, and analysis to pass that inflation on in an appropriate and reasonable way.

Okay. Thank you.

Our next question comes from Manav Patnaik with Barclays.

Thank you, good morning. Congratulations on the quarter, gentlemen.

You talked a lot about -- earlier on the new business momentum. Is it fair to say most of that, at least from the clients you mentioned, were mainly US-based? And, sort of tied to that, if you could just help provide a little more color around the positive growth that you mentioned in Europe?

Sure. Yes, our Europe business grew a couple percent. Again, we continue to have good growth in Europe. Obviously, our emerging-market business grew solid double digit.

Relative to our new business wins -- no, they weren't just isolated to North America. As I mentioned earlier, we had several wins, not only in just Europe but also our emerging-market business. And so, I think our historical progress on the new business front -- and certainly in Q1 on the new business front, we did see that was broad-based across not only our domestic business but our international business as well.

This is Fred. Typically, our new business in international is as good or better than our new business in North America. That was the case really in the first quarter.

And just a quick follow-up on that. The new business -- are you seeing that more as share gains from the fragmented side of the market? Or some of the larger players in there?

Well, I think, at the end of the day, if you look at our growth rates, I think you will see that we are growing ahead of the market. So, I think the conclusion that we are growing share is an accurate one. I think as we look at our new business wins, they come both at the expense of some of our primary competitors and some of the local competitors.

But again, there is a big piece of this new business that moves from self-operated into outsourced. So, it's a combination of all of those, where we end up facilitating the new business growth.

All right. Thanks a lot, guys.

Our next question comes from Hamzah Mazari with Credit Suisse.

Good morning. Thank you. Just a question on new contract wins. Could you talk about the length of time it takes for a contract to get through start-up phase, and then begin to normalize? I assume that there are start-up costs at the start of a contract, and then once you learn the system, the margin on the contract normalizes. Maybe give us a sense of how many of these new business wins are very complex contracts where we may see -- length of time, may take some time to normalize on the margin side?

Sure. I'd ask you to think about it as follows. Again, if you think about some of our recent big contract wins: two State Department of Corrections, in Ohio and Michigan; the two NFL teams that I've mentioned; along with the Chicago public schools. Those are big contracts. And with big contracts come complexity and certainly start-up costs.

I guess the way I would ask you to think about it is: The first quarter you start those businesses up. You want to get them started up right. You want to make sure you are focused on the right customer experience. In that instance, you are in a situation where your margins are not attractive.

As you go through the first year, while the margins improve, again -- the first year of these big start-ups, they are going to be low single-digit-type of -- in most cases -- kind of margin structures around it. And then, as you get into year two and beyond, they continue to ramp up and become profitable contracts for you.

So, the good news is: Our average length of client relationship's about 10 years, but there are start-up costs associated with it that will, in a given quarter, and even in a given year, put a little bit of pressure on our margins. The good news is that these are good business decisions, and over time, are definitely the right thing for our Business.

Very helpful. Thank you.

We will take our next question from Gary Bisbee with RBC Capital Markets.

Just one follow-up. The press release cited, for the international food and sports services business, that the efforts to streamline food and labor overhead costs were a driver of the margin. I thought that was a curious line, given that my understanding was much more of the focus of many of your initiatives as starting in North America with overseas being a longer-term potential. Is that accurate? Just any context on that? Thank you.

This is Fred. I guess I will start, Gary, by saying it is accurate. I think the point that you are making is that many of the enterprise-wide programs that are being developed really from the center with respect to food and labor, in particular, some of which need to be supported by technology. The initial focus is on the North American business because it is clearly the dominant business overall: 80% of the total.

Having said that, we are not standing still outside of the US. So, there are improvements that can be made in food and labor, and certainly in SG&A, in the international business, and we have particularly focused in Europe, given some of the challenges there with growth. We have made some pretty good progress, even in advance of rolling out some of the enterprise-wide systems. There are many things that can be done in parallel. Those are under way.

Are there legs to those type of strategies? Or should we think about this as something where the margin gains there could lag North America over the next 12 or 18 months if you delay the implementation to some of these bigger strategies there? Thanks.

Yes. I think, Gary, the way I would think about it is: As we think about margin improvement, I would ask you to think about the fact that we take a very holistic approach to margins. Not just in terms of where the opportunities are across the supply chain of food or across our labor opportunities or SG&A opportunities, but also a comprehensive and holistic approach across all lines of business. To Fred's point, it certainly includes international.

While there may be certain initiatives that are technology-enabled that may roll slightly slower to some of the international markets, I think the margin plan that we have certainly focuses on making sure we capture margin improvement through our productivity initiatives on the international front as well. So, I don't think what you saw is something that we wouldn't expect to see going forward from our international business, as well as our domestic business.

Great. Thanks.

Our next question comes from Greg Hessler with Bank of America.

Hi. Good morning.

Hi, Greg.

I had a question on the plans for the term loan -- the 2016 term loan. How do you guys plan to address that as we get closer and closer to maturity?

And then, the follow-up that I had was just: As we look at the capital structure, and you have pretty clearly stated leverage targets, how do you intend to reach those targets? Do you anticipate paying down debt, growing EBITDA, or is it a combination of the two? Thanks.

This is Fred. Let me take a shot at that.

The 2016 term loan, which is $2.7 billion, has a little bit over 2 years -- about 2.5 years to go. And actually, as we said during the IPO roadshow, we are quite focused on extending that out. So, we do consider that a priority that we would expect to deal with in the near term. If you've followed us at all over the last six or seven years, you'll see that we have a pretty successful track record of being able to do that. So, it does remain a priority, and it does remain a focus.

With respect to the debt-to-EBITDA ratio -- the answer really is: The reduction comes from a combination of both the normal EBITDA growth consistent with our model, the mid to high single-digit EBITDA growth, and debt reduction through the excess free cash flow. And when you put those two together, you get a reduction in that ratio that is on the order of 4/10 or 5/10 per year, really coming from both.

We will move on to our next question from Barbara Noverini with Morningstar.

Good morning, everyone.

Hi.

My question has to do with cross-selling opportunities. There's a trend in the industry to establish these master service contracts in which food service is supported by a number of ancillary services. How should we view your uniform segment as an ancillary service that can supplement these one-stop food service contracts going forward? Is there a target percentage of contracts you can share with us in which customers will have both food service and uniform?

So, I think there is a real opportunity for us to unlock what we call One ARAMARK, in terms of cross-selling opportunities. So, I will take your example on the uniform side. Certainly, there is overlap relative to some of the food service business we have. The healthcare business is another one that there's a lot of overlap.

But, to be honest with you, part of the opportunity and how we might think about it is: Where does the decision-making lie from a client perspective? In many instances, those are two different decision-makers. In that instance, some of the cross-selling synergies in many instances doesn't make as much sense or materialize.

While we have an effort up against it, obviously, as you think about our businesses, we have two direct-store-delivered businesses with similar go-to-market models -- our uniform business and our refreshment services business, within our business and industry sector on the food side. Those are two that have collaborated to try to unlock some cross-selling opportunities. Obviously, we will continue to push that.

I'd say there are opportunities, but the reason why, to me, our food service, our facilities, and our uniform business fits so well within the portfolio is we are actually not in the food service. We are not in the facilities. We are not in the uniform business. We are in the customer service and people business.

When you are in the customer service and people business, the core competency required is how you sell, serve, and execute at the point of sale. And so, that is really what weaves these businesses together. It's really about that model, and what really the core competency and the core success criteria are. That is why these businesses fit so well together.

Great color. Thanks for that.

We will take our next question from Carla Casella with JPMorgan.

Thanks. My questions have been answered. Thanks.

Thanks, Carla.

We will take our next question from Karen Eltrich with Mitsubishi Bank.

First off, what are you seeing from your corporate customers with regards to hiring practices? I know you had talked about earlier how you were seeing them adding more benefits in terms of corporate services, but are you actually seeing them at [ARILL] as well?

Can you maybe give an outlook for commodity costs? I know one area that always had been difficult for you was dairy pricing, which obviously is high. How are you expecting to manage through that?

Sure. I will take a cut, and then I will let Fred also take a cut on the commodity question.

I think relative to our corporate customers and hiring, I think you see the numbers just like we do. I think it's a pretty challenged environment right now relative to some of the labor statistics and employment statistics. I would expect that trend to continue. I think the fact is that the marketplace is pretty challenged right now.

One of the things we like about our business model is this is a business model that can not only work in great times, but can actually work in challenging times as well. Part of the reason for that is about half of our businesses are in industries that are far less economically sensitive, particularly the education and the healthcare business. Again, with mid-90%s client retention, coupled with an average client relationship of 10 years, it gives us a very steady and predictable look at our future revenue stream. And so, the model is fairly resilient, even in challenging times, I think like you saw in the quarter that we just announced.

Relative to commodities, again, I would start with the premise that we feel very comfortable. We feel very confident in our ability to deal with inflationary costs, whether that's on the commodity front or on the wage front -- to pass those along in an appropriate way through to the consumer.

And I will let Fred talk specifically about anything else related to commodities.

Right now, we are seeing very little inflation in our overall food costs as we look out for the balance of the year. We expect that to pretty much remain in place. As you'd expect, we have a centralized supply chain group, which is pretty good at managing our overall commodity and food costs.

I guess the final point I would make is that we have a lot of flexibility in terms of the menu. So, we are not tied to particular food concepts. We don't run steak restaurants or Japanese restaurants where you are really limited in how you can move from one menu item to another. We have gotten pretty good over the years in adjusting our menu appropriately, given what the consumer wants, to adjust for cost increases in any particular category.

Great. Thank you.

We will take our next question from Andrew Berg with Post Advisory Group.

Yes. I think you guys answered the question already. But just wanted to confirm organic growth in the three business lines? It sounded like you said half -- at least in North America, I thought you said half was net new business and half was organic. What about on international and on uniform?

Yes. I think if you look at it, Andrew, again, the 7% North America growth, 7% international growth, and 4% uniform growth -- I deal with that roughly 50/50, 40/60 split as one that is pretty applicable to all of those businesses. So, I wouldn't draw a tremendous difference between any of the lines of business. Probably a little more base growth from uniforms. But again, I wouldn't discriminate much between the numbers that I used in total.

Okay, perfect. Thank you very much.

And, Kelly, I think we probably have time for one more question.

We will take our last question from Karru Martinson with Deutsche Bank.

Good morning. Just wanted to see kind of any color on the proposed merger of US Food and Sysco, and any impact that that would have on you guys?

Sure. Well, obviously, Sysco -- we use them as one of our key distributors, and we've had a longstanding partnership with them, and continue to have a strong partnership with them.

One important note is, and I want to be clear on this, is that we actually buy directly, and negotiate product and price, et cetera, directly with the manufacturer. Certainly, in most cases. So, Sysco is really a distributor for us. Again, we use them as a key partner.

I think that is where I would leave it. We would expect them to continue to be a key partner. Obviously, the transaction right now is under review, so it probably wouldn't be appropriate for me to comment any further. Obviously, have been a key partner, and I would expect them to continue to be a key partner going forward.

Okay, and if I could just squeeze in a quick housekeeping question, in terms of the size of the [RP] basket that you guys have available today.

This is Fred. I'm going to take a stab at it. Certainly, Ian could follow up with you offline. I think it's a couple hundred million dollars. It's not something that we have found to be particularly restrictive.

Okay. Thank you very much, guys. Appreciate it.

Thank you. In closing, let me just make a brief statement. We are certainly encouraged by our Q1 results. We are optimistic about the future growth potential for this Business, and continued opportunities to enhance shareholder value.

Most importantly, I want to thank you for joining us today, and thank you for your interest in ARAMARK. Have a great day.

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