Aramark (ARMK) 2015 Q1 法說會逐字稿

Good morning and welcome to Aramark's first-quarter 2015 earnings results 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.

We will open the conference call for questions at the conclusion of today's 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. Mr. Bailey, you may proceed.

Thank you and welcome to Aramark's conference call to review operating results for the first quarter of 2015.

Here with me today are Eric Foss, our Chairman, President and Chief Executive Officer, and Fred Sutherland, our Executive Vice President and Chief Financial Officer. 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. I would also like to remind you about our notice regarding forward-looking statements, which is included in our press release this morning, can be found on our website, www.Aramark.com, and is included in our other SEC filings.

During this call, we will be making comments that are forward-looking. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties, and important factors including those discussed in the risk factors, MD&A, and other sections of our SEC filings. We disclaim any duty to update or revise such forward-looking statements, whether as a result of future events or otherwise.

Additionally, we will be discussing certain non-GAAP financial measures, including adjusted operating income, adjusted net income, adjusted corporate expenses, and adjusted EPS, which are adjusted as defined. A reconciliation of these items can be found both in this morning's press release and on our website as well.

Before I turn the call over to Eric, I did want to provide a brief reminder regarding the 53rd-week calendar shift. As many of you are aware in the fourth-quarter of FY14, we recorded a 53rd week in our financials. While it only has a small negative impact for the full-year FY15, the 53rd week in 2014 actually has a fairly significant impact on the cadence of 2015 quarterly results as each quarter in 2015 starts and ends roughly a week later than the comparable quarter in 2014.

In the first quarter of 2015, the calendar shift is estimated to have reduced first-quarter sales by approximately 3%. Adjusted operating income was reduced by approximately 5%, and adjusted net earnings per share were reduced by approximately $0.03. As Fred will detail in a moment, the impact on our North America segment was more significant. You should be mindful of this shift, particularly when making comparisons to prior-year results.

With that, I'll turn the call over it Eric. Eric?

Thanks, Ian, and good morning and thanks to everybody for joining us.

I'm pleased to report another quarter of positive momentum and continued progress on our transformation journey. Keeping in mind the calendar shift that Ian mentioned, our underlying business fundamentals are solid and unchanged from our last update.

Our new business wins in the quarter were encouraging, and we recorded double-digit earnings growth before the impact of the calendar shift. We remain optimistic about our growth prospects and confident in our long-term framework, and we are clearly focused on continuing to create sustainable long-term shareholder value.

In Q1, we saw organic growth of 1%, we estimate the calendar shift reduced this growth rate by about 3%. Taking this adjustment into account, first-quarter growth was well aligned with our 3% to 5% sales growth expectations, an integral part of our long-term financial framework. Adjusted operating income in the quarter declined 1%, with the calendar shift estimated to have reduced AOI by about 5%.

That being said, the adjusted operating income growth in the first quarter is a bit below the run rate we've posted over the past several quarters. This relates primarily to the time of our transformation initiatives, particularly as we move into Phase II of the transformation, where we are beginning to implement significant front-line operational changes.

We also incurred start-up costs on several significant education and healthcare accounts that came online in the back half of 2014. We've previously described the timing of large account integration and the transformation investment and initiatives as potentially resulting in some quarterly lumpiness, and you are seeing a little bit of that in our first quarter. Adjusted EPS in first quarter was $0.47 on adjusted net income of $116 million. Taking the calendar shift into account, adjusted net income rose double digit over the first quarter of last year.

As we've discussed before, our strategy is really built around what I call the principle of three As -- accelerating growth, activating productivity, and attracting the best talent. And, let me share with you on our progress and results on each of these three strategic imperatives. First, we remain pleased with our progress around our accelerating growth strategy. Our top line growth in the quarter was fueled by moderate price increases, solid retention rates, and strong new sales, which were consistent with the last two record years. Significant wins in the quarter reached across businesses and include new healthcare, education, and business and industry clients such as Thomas Jefferson University Hospital, Carnegie Mellon University, and the US postal service.

As we look forward, we also remain encouraged by our new business pipeline and the opportunities ahead of us. In Q1, our retention rate remained strong and tracked consistently with our mid-90% target for the year. On one note related to retention, our client, Live Nation, has informed us that they intend to switch to an alternative provider. Under our contract with Live Nation, we provide food and beverage services to their amphitheaters across the nation, which totaled about 1% of our total annual sales and were mostly concentrated in our third and fourth fiscal quarters.

While we have had a long, productive, and positive relationship with Live Nation, they were looking for a different economic and relationship arrangement which didn't make sense for us. One of the many strengths of Aramark's business model is our diversity and resilience of our business base, and we've already put contingencies in motion to minimize this impact.

A recent highlight that reflects the strength of our Company and our brand was our execution of the recently completed Super Bowl. Many of you know Aramark as a food facility and uniform Company, but we also have a long history managing retail merchandise programs for 16 professional sports teams and many preeminent sporting events.

This year for the first time, the NFL selected us to operate all merchandise for the league's NFL experience shop at the Super Bowl. Our work for the NFL is yet another proof point of the scale and exceptional quality of service that Aramark team members strive to deliver each and every day. In fact, a recent sports industry survey rated Aramark as the strongest food service brand in sports.

Our second strategic imperative is to activate productivity saving to reinvest in growth and expand our margins. We kicked off the second phase of our transformation efforts in earnest during the first quarter. In this phase, we'll begin the full, front-line implementation of many of the food and labor tools, both process and technology-based, that will allow us to unlock margin opportunities.

As you would expect, the end unit change process is one of the more complicated undertakings in our transformation roadmap. It's imperative that we don't disrupt our existing high levels of customer service. That caveat aside, we made some great progress in the first quarter with our implementations and were encouraged by our initial results.

Let me give you a couple of examples of these rollouts to provide some color where our efforts are focused. On the labor front, we are in the early stages of our rollout of a standard, end unit organizational structure, which we expect to reduce labor costs by 1% to 2%. We also continue to install new scheduling technology that will enable us to better manage overtime and agency costs.

On the food side, we are improving our processes to control waste, starting with a more effective ordering and receiving system, more efficient production in the food prep process, and proper portioning. Initial locations have reduced waste by approximately 10% to 20%, and we are also implementing a more formal set of standard SKUs that will eliminate SKUs while improving quality.

At the same time, we remain focused on consumer insights and trends. For example, we continue to develop our healthy for life initiative, which I've referenced on earlier calls. Aramark chefs have now created over 1,000 recipes that are under 500 calories and over 600 recipes that are vegetarian or vegan-free offerings. So, as you can see, innovation remains an important priority for our consumers and our clients and therefore our Company.

We continue to see growth in the convenience retailing sector as well, especially across our higher education portfolio. We now operate about 450 convenience stores on college campuses across North America. And, we have a plan to add an additional 100 express stores within the next 12 months. The express stores are located in high traffic areas on campuses, often in academic buildings that allow students to fuel on the go with convenient and healthy meals, snacks, and beverages. As I have also mentioned previously, we continue to ramp up our technology investments across our portfolio with the goal of engaging our clients and consumers in realtime and using those insights and analytics to drive business performance.

In our healthcare business, we are now using a mobile technology platform called patient connect, that allows us to survey patients in order to improve service, food quality, cleanliness, and other critical indicators before the patient leaves the hospital. The platform includes robust data analytics that allow our team to benchmark patient satisfaction scores and interview responses by the type of patient care, patient diet type, duration of stay, and other variables. This technology is adding value to our hospital partners because patient satisfaction is a key component of the health system's reimbursement rate. In the locations where Patient Connect is in place, we've seen a 5-point increase in patient satisfaction.

Our third strategic pillar is about attracting the best talent and making sure we create the right culture to enable our employees to build great careers. Engagement, recognition, diversity, and training all continue to be center stage on our leading our people agenda. I lead our newly establish Aramark diversity advisory board to ensure our workforce, workplace, and marketplace reflect a culture that values and leverages differences. Recent accomplishments in this area include earning a perfect score on the 2015 corporate equality index, being named one of the 2015 top 40 best companies for diversity by black enterprise magazine, and achieving a top 50 ranking by careers in the disabled for providing a positive work environment for people with disabilities.

We also just learned that Aramark was once again recognized as one of the world's most ethical companies as determined by Ethisphere Institute, a leading international think tank dedicated to best practices and business ethics, corporate social responsibility, and sustainability. This is the fifth time Aramark has received this honor, and it is truly a testament to our 270,000 associates around the world who live our core values to act with integrity and respect always. So, all in, a good start to the year. We continue to see solid progress in strengthening the foundation of this Company and continue on our transformation journey.

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

Thanks, Eric.

Quickly recapping the quarter, as Eric mentioned, sales were $3.7 billion with organic growth of 1%, and adjusted operating income in the quarter was $252 million, a 1% decline. Now, the calendar shift is estimated to have reduced sales by approximately 3% and adjusted operating income by approximately 5%.

Adjusted net income was $116 million, or $0.47 a share, versus adjusted net income of $109 million, or $0.51 per share for the first quarter of 2014. The calendar shift is estimated to have reduced adjusted EPS by approximately $0.03 per share and adjusted net income by approximately $8 million. The diluted share count average in the first quarter of FY15 was 244.7 million shares, up from 215.3 million shares in FY14, primarily as everyone knows as a result of the Company's IPO in December of 2013.

Now, looking at our business segments in a little more detail, in our North America food and support services segment, sales were $2.6 billion with an organic sales decline of 1% and adjusted operating income was $186 million, a decline of 4% versus the prior year. The North American segment was by far the most significantly affected by the calendar shift in the quarter, which is estimated to have reduced sales by approximately 4% and adjusted operating income by approximately 6%. Additionally, the timing of transformation initiatives and some key new account start-up costs, particularly in healthcare and education, as well as some softness in our Canadian remote services business, influenced the quarter.

Sales growth in healthcare hospitality and sports, leisure, and correction sectors were strong as 2014 client wins continued to onboard. 2015 first-quarter wins remained good.

Sales in the international segment reached $759 million with organic growth of 4%. Adjusted operating income for the segment was up 18%. The international segment was modestly affected by the calendar shift in the quarter, which is estimated to have reduced sales by approximately 1% and operating income also by approximately 1%.

Organic growth in Europe remains positive, and both the European and emerging markets businesses made significant progress with productivity initiatives during the quarter.

We have received a number of inquiries regarding our exposure to oil and gas clients over the past few months. Generally speaking, our exposure is principally through our remote services operations and is relatively small, with less than 5% of Aramark's sales being generated from remote-located, energy-related clients, although these contracts are typically more profitable than average. Our portfolio is also fairly diversified across the North Sea, the Gulf of Mexico, and Canada.

Now, having said that, in the first quarter, we have experienced some disruptions in our Canadian remote services sites that we service, including several camp shutdowns and headcount reductions, which will continue into the spring, which is the completion of the exploratory drilling season. Our teams are responding to minimize the impact, and we will continue to monitor our oil and gas client base closely.

In our uniform and career apparel segment, sales increased to $379 million with organic growth of 3%. Adjusted operating income for the segment was up 11% from the continued success of our productivity initiatives. Our sales growth in the quarter was affected somewhat by recent changes in our sales and service organizations and by weaker direct sales resulting from a West Coast dock worker slow down that affected inbound product. We experienced a record level of new installed sales in the quarter and expect growth to increase throughout the year. The calendar shift did not materially impact our uniform segment.

Turning to the balance sheet, total debt at quarter-end was $5.8 billion. The Company's total debt-to-adjusted EBITDA ratio on a trailing 12-month basis was 4.6 times in the first quarter, up modestly from Q4 as a result of the normal seasonal cash flow timing, and liquidity remains strong. The Company had about $400 million of availability on its revolving credit facility at quarter-end. We expect continued debt ratio reduction year over year, prior to the effect of any acquisitions, from a combination of higher EBITDA and lower debt.

Net CapEx for the quarter was $126 million, up from $77 million in FY14, largely as a result of several large account wins and key client renewals that were previously discussed, as well as increased spending for capacity expansion in our uniform sector.

As I'm sure everybody knows, the US dollar has strengthened significantly over the past few months with the euro and Canadian dollar each down over 10% and Sterling down over 5% since our last earnings report. Although we have currency translation on our non-US sales, fortunately almost all of our non-US sales and corresponding costs are in the local currency of the country. So, we have very limited currency transaction exposure. As you know, our non-GAAP schedules adjust for currency translation from the relative strength or weakness of the US dollar, but remember that the relative movement will affect the absolute level of our results.

Our international sales are about $3 billion annually with approximately 60% in Europe and 40% in emerging markets. Of the European exposure, about one-third is in the UK with the remainder coming from the euro zone countries, and the majority of the emerging markets exposure comes from South America. Our sales in Canada, as you know, are contained within our North American business and represent somewhat less than 10% of segment sales. If currency rates were to remain at current levels, we estimate that the full-year impact on our adjusted EPS to be a decrease of approximately $0.07.

As Eric has already mentioned, absent currency translation, our general business outlook is essentially unchanged for the year. With that, I'll turn the call back to Eric.

Thanks, Fred. In closing, just let me reiterate our confidence in the ongoing transformation underway here at Aramark. In 2015, you can expect us to continue to drive positive growth momentum, make steady progress against our transformation journey, continue to execute against the focused strategy we've put in place, and continue to deliver the sustainable long-term shareholder value that we've committed to.

So, with that, let me turn the call back over to Randy. Randy?

Andrew Steinerman, JPMorgan.

Good morning, gentlemen. I know you are saying on a constant currency basis your guidance for the year is unchanged. Could you tell us what the underlying margin expansion is in the guidance on a constant currency basis? And, given the start to the year in terms of margins in the just reported first quarter, how does that give you confidence for the outpaced margin expansion to come in the balance of the year?

Andrew, it's Eric. Good morning. Thanks for your question. Let me talk a little bit about how we look at the financial framework, and then I'll talk to our confidence level relative to margins.

Again, I think what we've said before is the framework in which we run this Company for the long-term is 3% to 5% top-line growth. That delivers, with some margin expansion, mid- to high-single digit adjusted operating income, which translates into double-digit EPS.

That's the framework we're going to stay with. We've stuck with it since the IPO, and we will continue to stick with it. We have a lot of confidence in our ability to deliver against that.

Relative to margin, here would be my specific comments. I think, first of all, we've made a lot of progress on the margin front, as we talked about in 2014. Our phase 1 journey was completed in 2014, which was a year early.

We are now in the midst of some very detailed planning and a very comprehensive development approach to Phase II. I can tell you we've got a very high degree of conviction and confidence in delivering against that program. That program will continue to address food, labor, above unit costs.

Again, you'll continue to see us invest to get more visibility against the key metrics that will allow us to operate more efficiently and compete more effectively in the marketplace. And, again, as we look at 2015 -- well, let me talk a little bit about first quarter.

As we talked about in first quarter, we did have some start-up cost that impacted that. Again, as we win some of this new business and in this instance both in our education sector and our healthcare sector, there was some headwind.

I think the good news is that business continues to evolve. This is good business as it matures, but you do have to be willing if you want to win new business to deal with that new business headwind. So, at the end of the day, we continue to remain highly convicted and highly confident in our ability to continue to drive margin expansion. As we have said before, you can expect that in 2015 as well.

I still don't understand what is implied in the 2015 guidance. How much margin expansion is implied in the 2015 guidance when you clean up for FX and you clean up for the calendar adjustment?

This is Fred, Andrew. The calendar adjustment doesn't really have a major impact on the full year. It's more of a quarter-to-quarter shift. The impact of currency is pretty much the same on our top line and on our operating income.

So, we don't give margin guidance. But, we would expect that, for the full year, as Eric said, we are targeting to have the 3% to 5% top-line growth and mid- to high-single digit AOI growth. Again, calendar shifts -- drops out minor negative effect for the full year, and FX does not -- has an effect on the absolute level of sales and operating profit. But, not any material impact on the margin.

One more clarification.

(Operator Instructions) Flavio Campos, Credit Suisse.

Good morning. Thank you for taking my questions. Just focusing a little bit on North America for a second. Why was there such negative operating leverage from that 4% drop from the 53rd week that led to a 6% drop on other on operating margins and then operating income.

And then, if you can also help us understand if it's going to come in -- from that guidance you gave from the impact on the 53rd week for the next few quarters. If we should be looking for the high-end of that guidance since we came in the high-end this quarter?

Well, I think the impact on North America -- the calendar shift is by far, it is 90% of the impact on the Company. And, that's driven particularly by our education businesses, and outside of the US, education is a much smaller percentage of the overall business.

And, when we lose a good week and trade it for a closed week, obviously, it affects our sales. But, the drop-through on those sales are higher than our average margin. Because during that week, we have all of our overhead in place, all of our fixed costs. But, the unit level margin, essentially is gone on those sales.

So, the impact on -- the calendar shift on our operating income is clearly more significant than the impact on our sales. You might remember in our fourth-quarter earnings report, we had a table at the end that estimated the impact on the top line and the bottom line, and you remember for every quarter, the impact on the bottom line was more significant. So, that clearly -- before looking at the calendar shift, that clearly has a negative impact on our overall margin. But, adjusted for the calendar shift, that margin impact essentially is reversed.

Gary Bisbee, RBC Capital Markets.

Yes. Thanks. So, I guess just sticking with the theme of the margins. How should we -- two-part question. How do we think about the longevity of start-up losses, if it has been two quarters since a number of those big contracts you've announced. Is that the window where the losses happen, and then you're driving revenue? And also, should we think about it some of the big ones you announced last year? Or, is there an impact from continued new business wins over the last quarter or two?

Sure, Gary. It's Eric. Let me just say the following. Again, when we announced some of these new business wins, that doesn't necessarily mean we are starting that account up on that given day or given quarter. So, when we talk about that we've announced in the second half of 2014, many of those end up starting up in first quarter of 2015.

I think as we've talked in the past, the way we'd ask you to think about our start-up costs is really start up costs impact, I would say, the first 12 months of that business. Particularly in the large start-up.

So, if we are talking about some of the larger client wins, in most instances, you're going to have start-up costs connected to that business for the first year, associated with that particular client. And so, that tends to then change as we get into year two where you are break even and above, and I think as we've said in the past as we get into year three and four, you end up in a more normalized average margin rate for the particular sector. And then, it accretes going forward with an average contract tenure or client tenure of something like a decade. Does that answer your question?

Yes, yes that does. Thank you.

Denny Galindo, Morgan Stanley.

Good morning. I had a question on competition. You mentioned that the live contract was expiring, or was lost. First, did that impact Q1 at all? Or, would it only affect the rest of the year? And then, secondly, was that loss to a large international player or smaller player?

And then, if you could elaborate on -- you said they were offering a different value proposition. Does that mean the type of services you provide? Or, the way the contract is structured, or something else? If you could give a little bit more color on that.

Sure. As we talked -- I'm not going to give a lot of specificity. But, the fact is that the reason why we lost it was the -- I'm going to say the contract structure. So, it had to do with a variety of things. The booking of revenue, how the contract was structured, and certain things that we were not willing to do to retain the business. It was not to one of the global players, it was to a smaller player in the S&E world.

And, did that affect Q1?

No. Not -- as I mentioned I think in my comments, the majority of that impact will be in Q3 and Q4. I would also add that while it is about 1% of our revenues, its margin structure was below our average margin. So, just order of magnitude in terms of the level of profitability, it's a little more de minimis.

And, just to add to that. As Eric said, the sales are pretty much all in the back half of the year. And, split between the third and fourth quarters. Roughly one-third of the sales are in the third quarter, and about two-thirds of the sales would normally be recognized in our fourth fiscal quarter.

Andy Whitman, Baird.

Hi. Thanks for taking my question. I wanted to dig into the productivity initiatives, Eric. Specifically, I wanted to understand the comments in the press release and from your prepared remarks on how the timing of these productivity initiatives affected the profitability in the quarter? And then, just digging into some of the specific initiatives that you mentioned -- you talked about labor, scheduling, the organizational chart at the unit level, and the food waste. These are all areas coming out of the IPO that were I'd say in the crosshairs of things that you identified as the opportunities. Frankly, those are obviously the big cost areas of the business.

But, at that time, coming out of the IPO, you had announced or talked about that you tested a lot of these -- a lot of these initiatives. Can you just talk about where we are on that rollout? It was testing then, and is it being more broadly rolled out now?

What is this window for -- or cadence of rolling out these initiatives? How long is that going to take? And, how should we be thinking about that?

So, I think we have been pretty consistent. Let me give you my point of view on where we are. I think we've said consistently, we are very much in the early innings of the rollout of these productivity plans. I think what we said is really up through the end of 2014, the majority of our focus on cost savings was focused on SG&A, and that we had a variety of span-and-layer work and a variety of things we were doing to try to consolidate some of the shared services into Nashville. And, that was the majority of the cost savings as we came out of 2013, and obviously, 2014 as well.

As we go forward, and I think as I said in my prepared remarks, we are now starting to pilot a lot more of the food and labor initiatives. And, again the majority of our focus, right now, from a labor standpoint, is really focused on overtime and agency labor and making sure we can schedule labor properly.

And then, the second dimension of that is on the food side. And, again, the majority of our focus on the food side is to make sure we are focused on managing waste.

So, as I talked about some of the pilots that we have in place in Q1, those have not been rolled out broadly. They will, as we come out of pilot, be rolled out. But, to a large extent, you're going to see our 2015 focus be in the area of overtime and agency labor management as well as waste on the food side. And, obviously, continuing on SG&A.

So, early, early innings. We are not addressing the holistic opportunity yet. Again, as we get into the end unit dynamic, we want to make sure we are not disrupting the customer service experience. So, we'll be very planful, but again, we remain with a very high degree of confidence and conviction in our ability to continue to drive margin improvement into 2015.

Steven Grambling, Goldman Sachs.

Thanks and good morning. My first question is for Eric, and then I have a follow-up for Fred. To piggyback on the questions on margins, is there any reason you can't converge the margin gap longer term with Compass? Whether it is in North America or international from a structural standpoint?

And, the second for Fred, is there an opportunity to actually refinance any of the debt? Particularly the $1 billion callable this year? And, what rates do you think you could get, if so?

Sure, this is Eric. Let me take the first one. There is no reason for us not to set our sights on achieving industry-leading margins. That is as simple as I can state it. We are in the early innings, and we have every intention to continue to drive margin improvements so that we have got industry-leading margins overtime.

On the $1 billion, I assume you were referring to the $1 billion at 5.75%?

Correct.

There is a -- it is callable. The premium is pretty steep right now. I think it's 4% -- 4.5%. So, there's no question at this point that we could refinance it at a somewhat lower rate. But, the pay back, if you will, on that call premium is a number of years. So, at this stage, we are not -- it is not something that we are actively pursuing, but we are watching it.

Manav Patnaik, Barclays.

Hi. This is actually Greg calling on -- for Manav. I just wanted to ask about the uniform business where some of your competitors are showing some nice growth. Just wanted to hear what you are seeing in the competitive environment, and when you expect those investments in plant capacity to start driving growth acceleration?

Sure, Greg. It's Eric. We were happy with our uniform business. Again, it was a quarter that showed 3% top-line and double-digit profit improvement. We've continued to focus on the margin opportunity there, and again, a very strong and significant margin expansion that we showed as a result of our productivity gains in Q1. That comes off a year in 2014 where we showed 70 basis points of margin improvement. So, expect us to continue to dribble with both hands, both in terms of the top-line growth and the margin expansion.

I think as we look forward, as Fred mentioned, one of the things that has impacted our growth a little bit was some of the strikes on the West Coast and in the ports. Hopefully, that will alleviate itself, and we continue to feel like from a uniform perspective, this is a mid-single-digit growth business for us. So, that continues to be how we view that business.

Sara Gubins, Bank of America.

Two quick questions. First, could you talk about the pricing environment? And, second, when we think about margins and margin expansion, is this phase of transformation harder to implement than the one that you've already completed? Thanks.

Sure, relative to your last question, I think there are more moving parts. But, again, I think the reason why I'd say it's not more difficult is our planful approach to this. So, the fact is from an SG&A standpoint, you don't have to do a lot of piloting as you get into food and labor. It is important that you pilot and you understand and have those learnings before you enter rollout mode.

But, I think, again, there is just a high degree of confidence in our ability to do that. I don't know how else to state it. I'll probably keep stating we have a very high degree of confidence in that.

From a pricing standpoint, again, we think the pricing environment is pretty stable. We did see our base business grow in Q1. We did see pricing. So, our whole approach to pricing is to make sure we've got the right quality and convenience offering. So, let's call it value beyond price.

Again, it's critical for us to make sure that we don't eat margin and make sure that we've got pricing to offset any inflationary pressures. And, again, it's very important for us to make sure we use these consumer insights that we talk about with our clients to make sure we are helping them make the right decisions for our ultimate consumer.

So, you'll see us continue to talk about pricing. It's a skill and capability that we think the industry has opportunity, and we certainly, as a Company, have opportunity to ramp up our skills in this area. But, overall the pricing environment continues to be very stable.

Imran Ali, Wells Fargo.

Just in terms of margin seasonality across the three segments, how representative have the last couple of years been? In other words, is the margin seasonality in 2013 and 2014 what we should expect to see for the business going forward?

The seasonality isn't really all that different, year to year. Margins tend to be somewhat higher in the beginning of the year because education margins is higher than sports and entertainment margin. But, the quarter-to-quarter pace compared one year to the other isn't all that different.

We do, as I pointed out earlier though, we do have this negative impact on margin of the calendarization. But, I think we've given enough information on the adjustment to the top line and the bottom line to allow you to adjust for that.

And, I think the other thing we have said repeatedly is where you will see some quarter-to-quarter changes is as we on-board the new business. So, again, there is some dimension of the new business and how that cycles on to Gary's question earlier that can impact the quarter-to-quarter margin impact.

Great. Thanks very much.

Gary Bisbee, RBC Capital Markets.

Hi Gary.

The SG&A expense was up quite a bit. Is that a new level adding in the new business one? Or, is there some of the IT and other investments to prepare for Phase II of the margin that maybe is in there that doesn't persist?

Are you looking at the -- when you say SG&A, are you looking at the full as reported P&L? Or, are you looking at the -- ?

Yes, I was looking more at the P&L. Maybe that's also just the timing shift in there as well. But, it was up in dollar terms almost $20 million, I think, versus last quarter and versus the run rate -- $15 million or $20 million versus the run rate throughout all of last year?

Yes. The P&L -- the full, as-reported P&L, I believe that the SG&A is actually down. Right? And, the segments -- what we call corporate is up a bit -- a few million dollars and that's due to the timing of IT spend.

Okay. All right. I guess I had backed out from it -- if you back out the nonrecurring items, it looks like it's up quite a bit.

The challenge, I think, Gary, is that some of those nonrecurring items on the non-GAAP schedule, some of them fall into SG&A and some of them fall into cost of services provided. For example, we had a loss last year on the McKinley divestiture. That was in cost of services provided, it is not in SG&A. So, I think that's a hard conclusion to draw.

Gary, I don't know if this helps. Let me just try to dimensionalize maybe a little bit of the margin build, if you will. I think as we looked at our margins in the quarter, I think where we saw favorability to prior year was in the area of food, as well as the SG&A bucket. And then, where there was more pressure, again, because of these start-ups was on the labor line.

So, I think if you want to think of those three buckets -- think of SG&A favorably, think of food favorably, and think of labor as a result of some of those start-ups is unfavorable. Does that help?

Yes, that is good. Thank you.

Flavio Campos, Credit Suisse.

Thank you for taking the follow-up. I just wanted to ask a little bit about the international business that saw very strong growth on the first quarter. If you can, just give some detail on the breakdown regionally, or by end market where you are seeing the greatest growth here? I know business is the biggest category here, just some color on the geographic split?

Sure. Well, as you said, we were very pleased and saw our international results were very, very strong. I think the good news is you can look at almost all geographies. Our Europe business had a very good first quarter showing organic growth of about 3%.

When you step beyond Europe, you can look at both our South America business, and our emerging markets business broadly growing high single digit. You can look at our business in China, that was up double digit. So, I think our international business, in total, not only showed great revenue growth, but also showed consistent, double-digit profit growth across geographies as well. We were very pleased with our international results and continue to see strong momentum both across Europe and emerging markets.

Denny Galindo, Morgan Stanley.

I had a couple of quick follow-ups on energy. Number one, just to make sure I understood you correctly, the 5% -- or less than 5% exposure, you said was to remote customers? Does that include the corporate offices of energy majors? Or, companies like Schlumberger, Baker Hughes, Halliburton? Or, is that just the people out there in the field doing the drilling? And, the second question is -- was -- ?

Sorry. Go ahead.

Secondly, just did lower fuel prices contribute to the margin improvement in uniform?

Okay. So, to answer your first question, the amounts that we referred to are essentially sales in our remote services business. It would not include sales -- what we would call business dining sales -- let's say, if we were doing the corporate headquarters. And, that's not a huge part of our business overall. We do have some uniform clients -- we do business in Texas and West Texas. So, we certainly have some uniform clients, as well, that are energy-related. But, the numbers that I have talked about are remote business.

Okay, thank you.

Andy Whitman, Baird.

Hi. With the Live Nation headwind and the oil and gas headwind on the top line, and the outlook being substantially unchanged. Eric, I was just curious as to what the offsets were on the top line? Was it better sales in the first quarter? Or, other growing businesses? Some thoughts about the what the offsets might be on the top line because those other ones are new.

Sure. A couple of things. One, again, we start with the position that we are encouraged by the new business pipeline that continues to look very attractive to us. The difficulty there is predicting how that business will ultimately make the ultimate conversion decision. So, we don't control the timing while the pipeline is encouraging. But, that is one dimension.

I think the other dimension is for us to put some pricing contingencies in place. And then, again, to -- those would be the primary two, I think. Pricing and as well as how we anticipate some of the new business coming to market.

And, remember, when we talk about our organic growth outlook, we don't talk about it as a point estimate. We talk about it as a range.

(Operator Instructions)

Andrew Steinerman, JPMorgan.

Hi. I just wanted to go over the effect in the March quarter of the timing of the calendar of revenue and profitability basis?

Okay. It's pretty much as we laid out in our -- in the fourth-quarter press release. So, it's 1% to 2% on the top line and 2% to 3% on the operating income line.

Positive?

Yes.

Okay. Thank you.

Gary Bisbee, RBC Capital Markets.

I promise this will be the last one. But, it dawned on me one thing we haven't heard a lot since the IPO was -- you've talked about the opportunity over the longer term to leverage the consumer preference research you are doing to find opportunities to grow the base business, whether that is better merchandising or other. Can you give us an update how that opportunity is playing out? And, if that is still more ahead of you than stuff you've achieved to date. Thank you.

Sure. I think to your point, Gary, we really were starting, I'm going to say from a standstill position on this topic. So, one of the first things we did and continue to do is to add insights capability. That is everything from clearly defining our right to win and how we compete.

Second thing we are trying to do is create an opportunity and really create a process by which we bring innovation to market. So, you've seen us partner with some of our key brand partners -- Starbucks, Panera, and others as well as some of the things we've done on our own. We're early innings still, relative to the brand, and what we're trying to do there. And, while we've seen early improvements in our brand equity, this is something that relative to investing behind any brand and building any brand takes time.

And so, I think you'll continue to see us -- again we were encouraged by the brand recognition we received in sports and entertainment. But, the fact is that this is a multi-year run. This isn't something you flip the light switch and immediately the next quarter or even the next year begin to see tangible payoffs.

The other dimension I would mention, relative to marketing and branding is, we think there is a real opportunity in this whole area of pricing. And so, I think the combination of brand-building, innovation, pricing, and consumer insights are things that we're, again, all in the process of starting up over the last six months, really. And, we'll continue to talk more about it. But, right now, we are just in the start-up mode period.

Great, thank you.

Stephen Grambling, Goldman Sachs.

Thanks for the follow-up. You talked -- I think, Fred, you talked about a reduction in the debt ratio prior to acquisitions. Can you just provide any color on how you think about acquisitions, and maybe even where private multiples are now?

Sure. Our acquisitions are really opportunistic, as you know. We don't look first and foremost to acquisitions to drive overall growth. It's not part of our organic growth equation and not part of the 3% to 5% target.

Having said that, we continue to be interested in expanding selectively through acquisition in a few target countries in the emerging markets area where we think there's opportunity. We are always interested in expanding our uniform business. As you know, there are very many -- lots and lots of small players in that business. And, I think also expanding our facilities business which is part of the big North America food and facilities business. So, I would say those are the general areas of focus.

I would say the multiples are pretty stable from a year or so ago. It's not unusual to see even multiples in the high single digits. Perhaps in an emerging market that is a fast-growing market maybe higher than that. Obviously, you also have to look at the synergies and what sort of multiple you can turn that into as you affect the synergies.

Great. That is helpful. Thanks so much.

With no further questions, I would now like to turn the call back over to management for any closing comments.

Great. Thanks, Randy. And, again, thanks everybody for your time and energy. We look forward to talking to you at the end of Q2. Thanks very much.