Aramark (ARMK) 2015 Q2 法說會逐字稿

Good morning, and welcome to Aramark's second-quarter 2015 earnings results conference call. At this time, I would like to inform you that this conference is being recorded for rebroadcast.

(Operator Instructions)

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

Thank you, Hannah. Welcome to Aramark's conference call to review operating results for the second quarter of 2015. Here with me today are Eric Foss, our Chairman, President, and Chief Executive Officer; and Steve Bramlage, our Executive Vice President and Chief Financial Officer.

You may have noticed from the earnings advisory that we published last week, we have begun supplementing this quarterly call with slides. If you are listening via webcast, this information should appear automatically on your desk top. If you have dialed into the call, these slides are available on our website on the investor relations tab.

I would like to remind you that our notice regarding forward-looking statements, which is included in our press release this morning, can also be found on our website, aramark.com, and is detailed on page 2 of the earnings slide deck. During the 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 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. A reconciliation of these items to US GAAP can be found both in this morning's press release and on our website. With that, I'll turn the call over to Eric. Eric?

Thanks, Ian. Good morning. Thanks to everyone for joining us. As you can see from our release this morning, we delivered another quarter of strong performance as evidenced by meaningful growth in sales, margins, and earnings. Adjusted earnings per share were $0.37, an increase of 28% versus prior year. Our underlying business fundamentals are solid, and our outlook remains unchanged for the year on a constant currency basis.

This quarter serves as yet another validation that our balanced strategy, sales growth, coupled with operating income growth, is both attainable and is the right path forward for long-term shareholder value creation. The second quarter was another quarter of strong performance against all pillars of our three-A strategy: accelerating growth, activating productivity, and attracting the best talent. Looking at the growth component, total Company organic sales increased 6% with FSS north America up 7%, FSS international up 6%, and uniforms up 4% in the quarter.

The calendar shift increased total company and FSS north America by approximately 2 and 3 points respectively. This growth was broad based across geography and across business sectors. In North America, our growth was led by our education and health care hospitality businesses.

In international, we achieved solid growth in Europe. While in emerging markets, we saw an increase of 9% led by strong growth in China. These gains were driven by a combination of new business wins coupled with good performance on our base business.

Significant new business wins year to date reach across our businesses and include emerging market clients like Tedelco, and AngloAmerica in South America, parks and destination clients like The Bolger Center, medical centers such as Vanderbilt University and Thomas Jefferson University Hospital, and education clients like the University of Calgary and Carnegie Mellon. A recent win worth noting is our sports and entertainment team being named the NFL's retail partner at the NFL experience for the 50th anniversary Super Bowl next year.

We served the NFL successfully in that role at this year's Super Bowl for the first time and had already earned the full retail rights for Super Bowl LI in 2017. We're very proud of the work we do for the NFL and our business partnerships with 17 of the NFL's 32 teams, and we value their business. As these comments indicate, our new business pipeline remains encouraging. Our retention rates are strong and are tracking consistently with our mid-90% target for the year and we remain bullish on the strong self-op conversion opportunity that exists in the marketplace.

As I have emphasized previously, innovation continues to be a key component to retaining and winning new clients. It's also imperative that throughout the transformation, we continue to provide exceptional customer service that our clients have come to expect from us as well as deserve. In support of this imperative and consistent with our desire to drive innovation, we recently rolled out our voice of the consumer program. This is a web enabled feedback tool that allows direct consumer impact regarding consumer service levels and product offerings.

In accounts where we have rolled out this tool, including where we have implemented standardized menus, we have seen meaningful increases in our satisfaction scores. We all know that strong satisfaction scores lead to improved retention, higher per cap spending, and stronger pricing power with the consumer.

In addition to driving innovation by capitalizing on insights, we continue to invest in building the Aramark brand. Yesterday, we launched an entirely new Aramark website as the latest stop on our branding campaign. And it goes without saying that digital tools like corporate websites have become one of the most effective ways for companies to communicate with constituents and harness the value of the brand. We look to this investment to aid in the selling process again of acquiring new clients and more broadly just expand the awareness of the Aramark brand.

Looking at our second pillar, activating productivity to reinvest in growth and expand margins, productivity gains were a real point of encouragement in the quarter. Adjusted operating income for the total company increased 11% in the quarter, and as with sales, this profitability improvement was broad based. In our FSS north America, saw a 9% improvement in profit. FSS International increased 25%, and our uniform adjusted operating income increased double digit at 11%.

The calendar shift contributed approximately 4% and 5% to the total company and FSS North America AOI respectively. In the quarter, we saw significant savings across food, labor, and SG&A costs. All in, that generated a 20 basis point improvement in margins, net of reinvestment in people and technology, as well as investments we made in new account start-up costs.

We remain focused on these labor cost reductions through the management of both overtime and agency labor, and our food cost focus is on effective management of waste. Again, technology is a meaningful facilitator of these gains, and the benefits of our technology investments I think are evident in our results. Reinvestment in growth, people capabilities, and technology will remain priorities as we continue along this journey.

We continue to focus on balancing this investment dynamic on an annual basis so, that while we continue to invest in the business, we also maintain momentum in our profitability improvement. You may recall in the first quarter, we saw a bit of lumpiness around adjusted operating income expansion, particularly in north America which was primarily related to start-up costs and transformation related investments.

As we've talked previously, the phasing of these programs will skew heavier in the first several quarters of this year. North America adjusted operating income and margins started to accelerate in the second quarter, and we expect further improvement as the year progresses, particularly in the fourth quarter as we lap certain new account cost openings.

Moving to the third pillar of our focus strategy, let me share a few updates on attracting the best talent. Attracting talent is all about creating the right culture. We continue to make progress by building a company with shared values that focus on developing a committed, engaged, and trained workforce that people are proud to be part of. We recently completed our third annual employee appreciation day celebrations.

We also continue to focus on diversity, and recently we were recognized and awarded a top spot on DiversityInc's prestigious 25 Noteworthy Diversity Companies list. We also recently launched a major commitment to recruit veterans and military personnel. In addition to dedicated recruiting initiatives focused on veterans, we have also entered into a partnership with the veterans recruiting organization where we will participate in this leading support groups, career fairs, and events for people who have served in our armed services.

Now, these are just a few examples of our ongoing commitment to advance our people and invest in the development of their skills. These continued investments drive higher client and consumer satisfaction levels and improve employee engagement which lowers turnover costs, all very important factors in creating shareholder value.

So overall, a very good quarter and first half of the year, coupled with an unchanged and encouraging outlook. We will contend with some well-known revenue headwinds in the back half of this year, but our productivity results are strong and our commitment to addressing the margin opportunity that lies before us has never been stronger.

On a final and more personal note, as many of you know, Fred Sutherland announced his retirement as CFO last month. Although Fred has agreed to stay on as an advisor through the end of the year, I'd like to thank Fred for his many years of contributions to the Company. Over the course of three decades, 17 of which he served as CFO, Fred has been an invaluable member of our management team that's built a great Company.

Over the past three years, I've personally looked to Fred for his advice, been the benefactor of his counsel, and enjoyed both his partnership and his friendship. And along with the entire Aramark family, I wish Fred and his family all the best in his hard earned and well deserved retirement. At the same time, we're fortunate to have a very strong successor to Fred with Steve Bramlage's appointment as Executive Vice President and Chief Financial Officer.

Steve joins us with an excellent reputation as a seasoned leader with broad experience that includes being a public company CFO, operating across global markets, and transforming complex businesses. Steve has been actively engaged since the moment he joined about a month ago, and I'm highly confident of the positive impact he is already making and will continue to make. I look forward to partnering with Steve on this transformation journey we have underway to unlock even greater shareholder value here at Aramark. And with that, let me introduce you to Steve Bramlage. Steve?

Thank you, Eric, and good morning. Let me start by expressing how excited I am to be able to join Eric and the broader team here at Aramark. I look forward to contributing to an organization that has so much positive momentum and opportunity in front of it. I also want to take a moment and acknowledge Fred Sutherland. I cannot imagine someone in his position being more generous with his time and his counsel during my first month with the Company.

I am grateful and I can see how his passion for this business and his competence have served this Company so well over the past several decades. He leaves a deep legacy on this organization, and the entire finance team will do our best to uphold and to advance it.

Turning to the numbers for the quarter, I want to start on slide 4 with the topic that I must admit, I have needed to spend some time familiarizing myself with since I have arrived, which is how the Company's closing calendar is impacting comparable results for the year. As most of you realize, the Company follows a fiscal calendar ending on the Friday closest to September 30 each year. As a result of this, every five or six years we report a 53rd week of business in the fiscal year.

2014 was such a year, and thus, two things happened as a result relative to 2015. The first is that since 2015 will have 52 weeks in it, as you would expect, we will report one less week of revenue and earnings in the fourth quarter and for the full year. We will adjust the prior year for this week when we will compare 2015 fourth quarter and full year to 2014 organic results. However, on a US GAAP basis, the lack of the extra week in 2015 is an approximate 7% and 2% sales and adjusted operating income reduction for the fourth quarter and the full year respectively.

The second, less intuitive (technical difficulty) impact is on the phasing of results between the quarters. Because of the 53rd week in 2014, each quarter in 2015 will begin one week later than normal, which means especially in north America, certain businesses will have a strong week of business move between quarters due to professional sports schedules and higher education holiday periods. That means in the second quarter, our reported numbers look a little bit better versus the prior-year period, which is the exact opposite of what we experienced in the first quarter.

All of the figures that we discuss today will not be adjusted for this calendar impact. Where it's appropriate, we will highlight the estimated impact from this one-week shift. But in general, I would note it does not have any significant impact on our trends or on our conclusions as to what is happening or what we expect to happen in the underlying business now or in the future. As you can see from the slide, the first half and the second half net impacts are not expected to be remarkable in total. And for the year, this phenomena will create an approximate 1% net headwind and adjusted operating income.

So with that, let's transition to Q2 results and our outlook in a bit more detail. On slide 5, we provided a revenue bridge. In the prior year, we reported revenues of $3.5 billion. Our current year reported revenues are nearly $3.6 billion, an increase of approximately 2.5%. The stronger US dollar reduced our reported revenue by $125 million in the quarter, or 4%.

The two largest contributors to the negative translation we experienced were the euro and the Canadian dollar, which were 13% and 10% weaker respectively on a year-over-year basis. The impact for merger and acquisition activity was not significant in the quarterly reconciliation. Organic sales growth in the quarter was 6%. And the estimated revenue benefit from the calendar shift during the quarter was approximately 2%, essentially all of which was in north America.

Retention levels, which are included in our organic growth line here are, as Eric mentioned, strong and consistent with our mid-90%s target for the year. On slide 6, we used the same format to walk through adjusted operating income for AOI. In the prior year, we reported $191 million of adjusted operating income. AOI increased to $213 million in the second quarter this year. Growth of 11%, of which approximately 4% was related to the calendar shift.

Our prior year AOI figure is already adjusted for currency as shown in the reconciling tables of the press release. But for your benefit, it includes an approximately $7 million reduction due to the stronger US dollar, again led by the euro and the Canadian dollar. As you saw in our press release, adjusted net income was $91 million or $0.37 per share versus adjusted net income of $71 million or $0.29 per share in the second quarter of 2014.

The calendar shift is estimated to have increased adjusted EPS by approximately $0.02 a share and adjusted net income by approximately $5 million in the quarter. The diluted share count average in the second quarter of FY15 was 246 million shares, which is a modest increase from the prior year's 243 million shares.

I would like to make a comment specifically on the non-GAAP reconciliation that's contained in the supporting schedules of our press release. The significant reconciling items consist of incremental amortization related to the 2007 leveraged buyout transaction, non-cash share-based compensation, as well as transformation related restructuring expenses, all of which are completely consistent with our prior adjustments to our US GAAP earnings numbers.

On slide 7, we'll provide a little bit more detail on the second-quarter segment results. In our north America food and support services segment, organic sales were $2.5 billion with an increase of 7%. The north American segment was the most significantly affected by the calendar shift in the quarter, which is estimated to have increased the reported sales by approximately 3%. Sales growth in healthcare, education, and sports leisure and correction sectors were strong as 2014 client wins continued to come on stream, and 2015 second-quarter wins remained solid.

As we have mentioned previously, we have experienced continued pressure in our Canadian remote services business, which, from a reporting standpoint, falls under the North American business and industry sector. Remote sales are likely to continue to remain under pressure in the second half of the year given the ongoing dynamics in the broader energy markets.

Organic sales in the international segment were $699 million with growth of 6%. Organic sales growth in Europe was in the low single digits and was quite encouraging given the ongoing macro-economic challenges in that geography. Our team on the ground is doing a great job there of moving our business forward, especially in light of those conditions. We continue to generate nearly double-digit organic growth in our emerging markets businesses.

Our emerging market teams are also doing a very good job navigating volatile economic environments, particularly in South America in the face of weakening commodity markets. In our uniform and career apparel segment, organic sales increased to $375 million with growth of 4%, an improvement over the first quarter. The investments that we're making in capacity expansion and automation are beginning to show traction.

Looking at our business segment adjusted operating income on the right-hand side of the slide in a bit more detail, in our North America FSS segment, adjusted operating income was $154 million, an increase of 9% versus the prior year. As we have previously noted, this segment was the largest beneficiary of the calendar shift in the quarter, which is estimated to have increased the AOI by approximately 5%. Productivity gains associated with labor efficiency and food waste initiatives partially offset by re-investments and the onboarding of new accounts, drove clear improvements in base costs in the quarter.

In the international segment, adjusted operating income increased 25%. And in our uniform and career apparel segment, adjusted operating income for the segment was up 11%. Neither of these segments were materially impacted by the calendar shift. Productivity initiatives continue to improve both segments' respective operating results along with the drop-through from the higher volumes that we discussed a few minutes ago.

Slide 8 provides some salient points regarding the Company's balance sheet and capital structure. Our liquidity remains very strong. And as of quarter's end, we had $690 million available through a combination of cash on hand and undrawn committed revolver capacity. Having already addressed both rates and tenure through two large refinancings which occurred in 2013 and 2014, we are very well positioned from a debt profile standpoint with no significant maturities until 2019.

As of quarter end, the total debt was $5.6 billion. The Company's trailing 12 month total debt to adjusted EBITDA ratio was 4.3 times, which is an improvement of 30 basis points versus prior year. This improvement resulted from a combination of both adjusted EBITDA growth as well as lower average debt levels. Our year-to-date free cash flow, which we define as cash from operating activities less purchases of PP&E and client investments, while negative at an approximately $142 million use of cash, is running nicely ahead of the prior year first half primarily due to much better working capital performance.

Working capital for the business is seasonal with the first quarter generally being a fairly significant use of cash. Second and third quarters tend to be more modest uses. And then the fourth quarter is a strong source of cash as room and board plan deposits in education and seasonal cash flows from the sports and the leisure businesses are collected.

Year-to-date net capital expenditures and client investments were $221 million, which is up from $160 million at the same point in FY14, mainly a result of several large client account wins and (technical difficulty) renewals that we have (technical difficulty) previously discussed. The Company continues to expect capital expenditures for the fiscal year to total between 3% and 3.5% of total sales. As for capital allocation, we will apply the free cash flow that we generate first, of course, to servicing the dividend and then take the surplus and reduce debt as we have previously committed to do.

Financial flexibility remains important to the Company and certainly to me personally. We will continue to move the balance sheet in the direction of the 3.5 to 3 times leverage ratio through a combination of both EBITDA growth and absolute deleveraging while always ensuring that we have adequate liquidity and market access to pursue the necessary strategic growth opportunities that we have in front of us.

On slide 9, we summarize our outlook for the second half of the year. For organic sales, we're anticipating a slightly negative back half of the year in North America, driven by a large client loss and a significant non-recurring facilities project that occurred in 2014 at another major client site, each of which we have previously discussed in some detail. Because both of these items fall fully in the second half, together they comprise nearly 5% of North America and about 3% of the total Company for that period.

The uniform segment is expected to maintain its current sales momentum. The international segment is expected to continue to show solid but likely more volatile growth in the second half. At the total Company level, sales are expected to remain roughly flat, largely influenced by the relative size of north America. As Eric alluded to earlier, we expect sequential improvement in year-over-year adjusted operating income growth from the third to the fourth quarter. This is similar to the pattern that we saw in the first half of the year where the second quarter was stronger than the first. There are three primary contributors to this.

First, also similar to the first half, the calendar shift will penalize the third quarter year-over-year performance comparisons and benefit the fourth quarter. Furthermore, the year over year AOI performance will be stronger in the fourth quarter than in the third due to the timing of our reinvestment phasing and the fact that we will not be lapping certain start-up accounts until the fourth quarter. Therefore we expect in total, fourth quarter AOI year-on-year growth to be significantly better than the low-single-digit increase that we're expecting in the third quarter.

Slide 10 recaps our adjusted EPS outlook for the year, which as we stated earlier, remained unchanged on a constant currency basis. The Company's initial FY15 constant currency guidance of $1.60 to $1.70 and adjusted EPS was provided in November 2014. In February of 2015, the strengthening of the US dollar was expected to have an approximately $0.07 per share headwind to EPS for the year. The USD has continued to modestly strengthen since that time, and therefore, we're currently estimating about a $0.10 impact on a year-over-year basis.

The $0.10 impact equates to an approximately 4% headwind, both on an as reported sales and as reported operating income basis for the year. So as a reminder, our international segment sales are about $3 billion annually, with approximately 60% of that in Europe and 40% in emerging markets. Of the European exposure, about one-third is in the UK with sterling exposure and two-thirds comes from the euro zone. Most of the emerging markets currency exposure comes from south America with Chile being the largest single exposure in that region.

Our sales of Canada are contained within our north America business and they represent somewhat less than 10% of that total segment sales. Taking all of these factors into account, along with the averaging that we use within the quarters and based on the current exchange rates, we expect full-year adjusted earnings per share to fall within the range of $1.50 to $1.60 per share, which again equates to an unchanged, constant currency outlook for the year. With that, I want to turn the call back to Eric for some closing remarks. Eric?

Great. Thanks, Steve. In summary, we had obviously a very strong second quarter. Again, momentum on both the top line and bottom line. And I think encouragingly those momentum and gains were balanced across our portfolio.

The business fundamentals are strong, and we've got the right strategy in place to leverage opportunities in the marketplace. And this strategy is going to allow us to capture that margin opportunity that we've talked to you about and sits before us. So as we look to the future, we remain encouraged.

I think the fundamental strength of the business, as well as the depth of the marketplace opportunity, particularly that outsourcing opportunity, gives us confidence in our opportunity to continue to create shareholder value over time as we go forward. And with that, Hannah, I'd like to turn it back over to you and we can begin the question-and-answer session.

(Operator Instructions)

Our first comes from Manav Patnaik with Barclays.

(technical difficulty) -- North America growth in the second half of the year. Just to clarify, you said it would be negative on an organic basis. So what I wanted to clarify, is that excluding the impact of the 53rd week, or does that include that?

Manav, Can you do me a favor? We only got your question halfway through on our side. Can you please ask one more time to make sure we have it?

Yes. Okay.

So the question was just around the North America. You said organic growth declined in the second half of the year. What I was trying to just clarify was -- does that include the 53rd week impacts on those quarters, or are you backing that out when you say organic?

Yes. We've already adjusted out the 53rd week. So our comments are on a 52 week to 52 week organic basis.

All right. And then without those two, the one contract loss and the recurring, what would underlying growth be if you were to, you know, back those two out?

Well, if you think of the magnitude of the change we're talking about, the significance individual client account that we referenced is a couple of percent by itself in the second half of the year. And then the one-time facilities work that we did on another client is also about a percent.

So those two items, if they're roughly 3% or so of negative headwind in the second half of the year and we expect the whole thing to be about flat, the rest of the business is going to be growing by a comparable couple percent, 3% to 4% basis to offset it.

Our next question comes from Flavio Campos with Credit Suisse.

Good morning. Thank you for taking my questions. I just wanted today focus on the international and the uniform margins. First half of this year versus first half of last year, we have seen a very nice pick-up in margins in those two businesses. Can you elaborate a little bit on what has been the driver of that, and how sustainable that is and if we should be looking at first half margins as guidance going forward?

Sure, Flavio. It's Eric. Good morning.

A couple of things. As you mentioned, our international margins in the first half of the year showed strong performance, as well as the top-line revenue growth. If you looked at it, it was, again, very broad based. So it was strong in Europe. It was strong across the emerging markets. Strong in South America. Strong in China.

So we continue to be focused on this. As we said I think a while ago, if you look at our margin structure as we think about these emerging market businesses, it's not just about driving the top-line growth, but it's also about making sure we make progress on the margin side as well. We think like all of the geographies, including North America, while we have made a lot of progress on margins, there's a long runway ahead of us.

Again, what's driving it is similar to what's driving it in North America, which is, you know, we continue to focus on managing food, labor, and SG&A. And the initiatives that we have in place, you know, really focus on managing waste in the area of food. It's focused on managing overtime and agency labor in the in-unit labor model, and it's focused on the above unit SG&A cost.

So I think both on the international side and on the uniform side, we would expect that to continue. Again, uniforms had in 2014, and will again have in full-year 2015, a significant ramp-up in our margins. And the reality is you didn't ask about North America, but I think as Steve highlighted, as we look to the second half of the year, you will also see an acceleration of the margins in North America, as well.

Perfect. Perfect. Very helpful.

And I think on the same theme, the unallocated corporate expenses were a little higher year on year, but a significant decline from Q4 and Q1 rates. Should we be looking at that to continue at the current levels for the rest the year? I know that Q2 is significantly a little bit lower, but if this new $13 million roughly number is what we should be expecting?

Yes. I'll comment and then Steve can add on. I think as you look at our investment sequencing, you will continue in third quarter to see us invest. Again, the three big buckets are technology, capability, and selling resources. And as we look ago the calendarization of that investment cycle, it will continue in third quarter, similar, I think to what you've seen.

As we get into fourth quarter, that will -- we're going to pull back on that a little bit. And then I also think as we mentioned you will see some of the start-up costs that we lap in fourth quarter begin to help as well and fall off. So, I think you will continue to see a similar pattern in third quarter, and then based on the investment sequencing, as well as the start-up costs, you will see a change in the fourth quarter trajectory.

I would agree with that.

Thanks, Flavio.

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

Hello. Good morning.

Good morning, Gary.

I wanted to ask about the investments on a slightly longer-term basis. I know over the last few quarters, you've talked about the technology systems you are implementing and obviously selling and other things that you're investing in. When do we get to the tipping point where a lot of that technology investment has been done, the new systems are online, and maybe we'd see a deceleration of pace of growth of investment?

As part of that, are there other incremental areas, you know, outside of the system's investment which is pretty heavy that you would anticipate bringing on over the next few years, or is it a reasonable thesis that we might see the pace of profitability improve over time once that spending ramps down? Thanks.

Gary, let me talk about the investments. Again, I think what you could begin to see if you think about those three buckets is, you know, I think across most of our lines of business we feel pretty comfortable that the last couple of years the incremental selling resources and feet on the street, that we have deployed that appropriately and are reaching a point where we can -- we can look at whether or not we need additional resources on that front.

I do believe on the other two buckets, both capability and technology, you will continue to see us over the foreseeable future invest in that area. As you mentioned, we've talked about some of the technology investments in the area of Kronos to help us schedule labor or salesforce.com to help on the revenue generation front and a variety of others.

We are really playing catch-up on the technology front. Because of that, you will continue to see us invest. My short answer is a continuation on both capability and technology. Probably a little bit of a backing off on that portion of selling resources that you have seen us invest the last few years.

Great, and then the follow-up would be just specific to the North America food business. You talked last quarter about some timing issues as there was the initial expense to broaden out some of the pilot programs. Can you give us a sense where you are in that?

Should we think that that continues? In other words, did you go from 20 to 1,000, but you got a several more thousand sites, or where are we in the life cycle of rolling out these labor standardization and other programs? Thank you.

Sure. Again, I guess the best way to characterize it is in the early innings. Again, if you think about, Gary, there's a fairly holistic approach relative to how we think about productivity and margins. Let me define how we think about that on the food side and tell you where you are, and talk about on the labor side and tell you where we are.

So our holistic approach on the food deals with a couple of big buckets: everything from strategic sourcing and how we manage suppliers and SKUs to second, menu optimization to third, the whole food production process to fourth, the management of waste. To a large extent, our efforts in food to date in terms of broad application of those initiatives only rest in the bucket of waste. And while we have some pilot initiatives in those other buckets, those have yet to be rolled out and deployed.

On the labor side, again, the way we think about managing our labor is making sure that we get an effective handle on headcount, schedule that headcount appropriately, make sure we're managing turnover and other costs. And if you think about the broad bucket of how we manage labor, most of what we've deployed to this point solely focuses on managing overtime and agency labor.

As we begin in the foreseeable future to stand up a standardized in-unit labor model, our ability to manage that headcount and making sure we're driving headcount productivity and scheduling that headcount and flexing it appropriately, our initiatives that again, while we've got some pilots in motion, that also has yet to be deployed. So that's why I characterize if you really look at where we're driving savings, and we did in the quarter and we have year to date across food and labor, it's largely in the area of waste, overtime, and agency labor.

Our next question comes from Andrew Steinerman with JPMorgan.

I wanted to look at slide 6 a little bit, which has the operating income adjusted the year ago for FX. I understand from this slide that you're looking at the 20 basis points of margin expansion in the second quarter coming on a constant currency basis.

Could you give us the year-to-date equivalent number? And does the guidance imply at least 20 basis points of margin expansion for the year, and is that on a constant currency or reported basis?

Yes. Let me start with that one, Andrew. So your premise is correct. This is on a constant currency basis on this slide in general. And I would refer you on the first part of the question back to -- there's a table, one of the reconciling tables in the back of the press release.

On a first half year basis, it's about a 10-basis point improvement for the entire entity for the first half of the year versus the 20 that we showed in the second quarter, which is consistent to our comments earlier around this acceleration of momentum generally speaking within the productivity side. And then could you please repeat the second part of that question for me, or let Eric.

I think I have it, Andrew. I think relative to the full year, I think what I would say is we have a high degree of conviction and a high degree of confidence.

As I mentioned earlier, we would expect to see margin expansion accelerate in the second half of the year, particularly in fourth quarter. To your question on the full year, I think you will see our full-year margin improvement, you know, certainly be very much within the long-term framework that we have laid out for you.

Thank you.

Our next question is with Andy Whitman with Baird.

Thank you for taking my questions. Eric, I wanted to get a sense of the sales productivity that you experienced in the quarter. Can you talk about the annualized revenue that your folks brought in?

Or maybe if you can't give that, which we'd prefer, can you give maybe a sense about how the trend in sales force productivity has been over the last year? Maybe this year versus last year, maybe even sequentially to give us some flavor there would be helpful.

Sure. So again, if you look at the growth number broadly, 4% in second quarter and about 3.5% year to date, it's really driven, Andy, by two key components. It is driven by our base business performance, combination of incremental volume and pricing to cover inflation, coupled with strong new business.

Again, if you take out the large account loss that we've referenced earlier, if you look at this year's new business results, they are very much in line year to date with the past two record years. So we continue to see very good sales productivity and a payoff of the resources that we're deploying. I would say in addition to that, you know, as we look at the pipeline of selling opportunities and the pending selling opportunities, we continue to be very encouraged by what we see.

And, again, one of the things that's also playing out for us is really strong retention rates broadly across our businesses. Does that answer your productivity?

That does. I wanted to ask a follow-up on that. Thank you. In terms of your close rates, are you seeing any improvement in your close rates on the pipeline that you're chasing?

Well, I think it's fairly steady, is probably the best way that I would characterize it. I think what we do see, you know, a continuing momentum is in the pipeline. And -- but I think our close rates are probably, you know, similar on a percentage basis. And, again, as we manage that productivity on a per head basis, also very consistent with what we have seen the last really two and a half years, very consistent.

Our next question comes from Stephen Grambling with Goldman Sachs.

Good morning.

From a high level standpoint, you mentioned brand building, you mentioned online more specifically. It sounds like Compass was doing some similar things that relates to social media. Can you just talk to us a little bit about how you think about Aramark's brand currently as you go into these negotiations; how it's viewed, and what you want it to be viewed as going forward?

Sure. Thanks.

You know, I think as we think about the whole branding opportunity, as you're aware, we ended up, you know, rebranding, came out with a new logo and a new tag line, we dream, we do. And I think that brand message really resonates in terms of what it is we would like the brand to stand for. We dream is really all about innovating, and we do is really all about that consistent customer experience.

So as we have gone through the asset conversion across our vehicles and uniforms and a print ad campaign and the things that we've done on social media, I think we're seeing a very good initial response. It's been well received by consumers and clients. It's also part of our employment brand.

And, again, as we look at brand equity and other awareness type scores over time, we'll continue to monitor the return we're seeing on that investment as well as the linkage to the new business results. But overall, you know, our brand really should stand over time for two things, innovation and that great customer experience, which are two things that matter most in terms of winning or retaining business.

Okay. Thanks. That's helpful.

And then changing gears a little bit, on the uniform business, how do you think about the relevance of this business to the core food services platform longer term? Is there ever a desire to monetize it in some way, or is it even from a logistic standpoint possible to split out?

Sure. Well, we looked at it before we went public. Again, one of the things that was important to me was, if you really think about the business we're in, a lot of people might classify us as you're a food service company or you're a facilities company or a uniform company. At the end of the day, what we do across all of those businesses and across all of those geographies is we're really in the people and the customer service business.

And when you're in the customer service business, regardless of whether it's uniforms or food service, it's all about that repeatable model and how you sell, serve, and execute at that moment of truth. So the business models are actually quite similar. After we answered that question, we also then looked at what was the value creation opportunity.

And again, as we looked at that, we defined it both in terms of the growth potential of business and the margin expansion potential, and as you've have seen us play out over the last couple of years, there's a real opportunity. You know, that business has really attractive margins. And, again, has performed steadily both in terms of top-line increases and actually the margin improvement has been even ahead of what we have seen on the food side.

I think we're pleased with what we see from that business. And, again, the team has done an excellent job focusing on the strategy and what matters. And I think it's a relevant business for us at Aramark is really what -- where we stand at this point.

Our next question comes from Denny Galindo with Morgan Stanley.

Hi there. Just wanted to delve into a little bit on the Canadian impact that you mentioned. Could you clarify how much that might have affected the top line in Q2? And I guess I'm talking about the remote services impact more than the currency impact.

And then is that impact getting worse or better as we look at the rest of the year? And at what point will this drag from the remote services be completely behind us? Is it 4Q this year? First Q next year? When will it be in the past?

Good morning, Denny. This is Steve.

We probably incurred $10 million-ish of headwind on the top line in the quarter, specifically from the Canadian side of that remote business. And that was relatively consistent with what we would have experienced in the first quarter, as well.

So, you know, call it $20 million-ish for the first half of the year. You know, we currently don't see any signs, given what's happening in the market that that is going to significantly improve in the very near term. But we really from a lapping standpoint, I think it will run its course in terms of showing negative comps at the current levels, certainly through the second half of this year.

We really started feeling the pain in the first half. And then on the EBIT side, that business has a relatively high drop-through for us. So in absolute terms, it's not terribly significant. But that's good business that is no longer dropping through, so we certainly notice it.

And the only thing that I would emphasize again, we mentioned it in our prepared comments, it is a small percentage of our Business: low-single-digit percentage of our Business.

Okay. And then on CapEx, CapEx was down, which is good. It ultimately should help margins. But there is also sometimes a connection between CapEx and new wins.

Should we read into this that the new wins declined a little bit last quarter, or is 3% more of a steady run rate for what you guys are doing or maybe the recent wins have been less capital intensive than some of the previous wins?

Maybe let me start with that and then I'll let Eric give you some context. I wouldn't read anything into the percentage in the quarter. I would attribute it largely to timing.

You know, we continue to expect, as I think we indicated earlier, our full-year investment is going to be in that 3% to 3.5% range. The fact second quarter was a little bit higher or lower than it may have been earlier or versus expectations is really just purely timing.

Okay.

I'd just emphasize again and to my point earlier, continued strong new business results, consistent with what we have seen the last couple of years, ex the one client that we have talked about. And I think it has as much to do with anything as just the decision making process and how that gets calendarized.

I think we've mentioned many times that the new business both in terms of the decisions, as well as the onboarding of that can be somewhat lumpy. I don't think there's anything on the new business front that we don't see that's quite encouraging.

Our next question comes from Carla Casella with JPMorgan.

Hi. Just given how strong the cash flow is here and the bonds callable this year, are you considering potentially reducing some of your long-term debt with some of your cash flow?

Hi, good morning. This is Steve. We're always going to look at it. We're always paying attention to it, for sure. Clearly, the cash flow has been better than the first half of the year. I would remind you, it's still quite negative at this point in time.

Yes, there's a 4% premium on those bonds. We are well aware of that, which is not an insignificant cash outflow for us, but obviously there is potentially some benefit associated with it. We will continue to monitor it.

And if it works out to be the right thing for us to do, given the way the rest of the year and beyond unfolds, we certainly would not be averse to calling them if we feel it's the right thing. At this point, it's a watch and wait.

Okay. Great. Thanks a lot.

And we'll take our next question from Denny Galindo.

Hello. I just had one more follow-up. We've seen some increases in wages at some of the other retail and restaurant businesses. I know you pay well over minimum wage. Can you give us some color about how you think about changes in wages?

What metrics would lead you to increase wages? Do you monitor things like turnover or how long it takes to fill open positions? And maybe, how have those metrics been trending, since some of these wage increases have been announced in the industry?

Denny, it's Eric. One, I don't think we've seen any change relative to the turnover number. Again, I think -- I would say the following. Number one, we're very committed to paying, you know, a fair and competitive wage for all of our employees. As you mentioned, 99% of ours are paid above minimum wage.

There has been a lot of activity on this topic at the state level. I think roughly 30 states are -- have either acted or are considering acting on the minimum wage question. A number of those that have acted have been, you know, pretty modest. So, again, for us, I think, you know, any change as we look it, you know, has to be weighed hopefully as the decision gets made on the broad economic impact.

I think, you know, think change that's out there that has been implemented affects all competitors, including self operated accounts, the same way. So as we think about this, I think, you know, we'll continue to monitor it and look at it. And, again, I think as we think about it as you're talking about $1 or $2 relative to minimum wage impact, that's very manageable, well within what guidance we've provided.

And, again, remember one point that should be remembered is if you think about the composition of our business, you've got about 20% outside North America. Second, you've got about 30% of those contracts that are cost plus. So that would get passed through immediately. And then we'd have a variety of other mechanisms to offset it. We feel comfortable with our ability to manage through the minimum wage question effectively.

And just, is turnover or how long it takes to fill an open position? Are those the types of things that you would look at as a leading indicator to make your decision on wages, or is there something else?

Yes. I think those two would be variables. I think there's a variety of variable that we would look at. But certainly, those two variables, if you can either reduce your turnover, or if your turnover you saw a spike in turnover attributable to this, that's certainly something that you would look at. We monitor those on a regular basis. And again, we feel like from where we sit right now, this is very manageable for us through the planning process.

Okay. Thanks. That's very helpful.

That concludes today's question-and-answer session. I'd like it turn it back over to Eric Foss at this time for any additional or closing remarks.

Thanks, Hannah, and thanks for everyone. We appreciate your time, we appreciate your ongoing interest in Aramark, and we very much look forward to speaking with you in a few months on our third quarter call. Thanks again.

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