Aramark (ARMK) 2015 Q3 法說會逐字稿

Good morning, and welcome to Aramark's third-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, Shannon. And welcome to Aramark's conference call to review operating results for the third 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.

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. It is also detailed on page 2 of our earnings slide deck, which is additionally available on our website in the investor relations tab. 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. A reconciliation of these items to US GAAP can be found in both this morning's 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. Recall that this shift has only a small negative impact for the full-year FY15, but it has a fairly significant impact on the cadence of 2015's quarterly results. In the third quarter of 2015, the calendar shift is estimated to have reduced third-quarter sales by approximately 2%, adjusted operating income by approximately 4%, and adjusted earnings per share by approximately $0.02. You may also recall the impact on our North America segment is more significant. You should be mindful of this shift, particularly when making comparisons to prior-year results.

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

Thanks, Ian. Good morning, and thanks to everyone for joining us. As we reported in this morning's news release, third-quarter results were solidly in line with our previously committed expectations. Adjusted earnings per share were $0.29, and excluding the calendar shift, we estimate total Company organic sales were up about 2%. We continue to make good progress against our transformation agenda, and we are reaffirming our earnings outlook for the fiscal year of $1.50 to $1.60 in adjusted EPS.

As you know, I like to anchor these calls in the three pillars of our transportation strategy, or what I refer to as our three As. Accelerating growth, activating productivity, and attracting the best talent. Looking at sales growth in the quarter, excluding the calendar impact, total Company sales were up about 2%. In our North America segment, our sports and entertainment business was impacted negatively by the previously disclosed large account nonrenewal, which resulted in a flattish net organic sales result in the quarter. As anticipated and previously communicated, in our largest sector education, as well as our health care hospitality business, we saw mid-single-digit growth. In both cases we continued to on board strong net new account wins, and our base business performed well as we saw strong retention rates broadly. In our International segment, we experienced another strong quarter. Revenue growth was up 6%. European sales grew in the mid-single digits, led by Germany. Emerging markets was up double digit, with strong double-digit performance in China. In our Uniform segment, organic sales increased another 4%, and the business remains on track for another year of solid growth.

Our selling strategy and efforts continue to meet with success in the marketplace, and resulted in some great new client additions in the quarter, including the recently awarded Yosemite contract from the National Park Service. This is the biggest client contract win in Aramark's history. Yosemite becomes the ninth park that we are serving for the National Park System. Under a 15-year contract, scheduled to begin in March of 2016, we will begin to manage all of Yosemite's hospitality programs, including lodging, food and beverage, retail, recreational, and transportation services. The addition of Yosemite reconfirms that our parks business is a core competency for us. As a matter of fact, in 2014, Aramark hosted over 22 million visitors at our 16 different national and state parks. In addition to Yosemite, other notable wins include the Archdiocese of Chicago, Floatel International in the UK, several higher ed self-op conversions, and a number of new facility and healthcare clients. On a nearer-term note, we have also been named the official provider of food and beverages as well as retail merchandise in conjunction with Pope Francis's visit to Philadelphia next month, which is expected to bring over 1 million visitors to the city. Aramark will also provide uniforms to the over 10,000 volunteers staffing this event.

As I have mentioned before, our mission at Aramark is all about dreaming and doing, to make sure we enrich and nourish lives. And at Aramark, dreaming is all about innovation. Innovation is important in retaining and winning clients by creating a superior and differentiated customer experience. Over the longer term, it's also a significant driver of shareholder value creation. And to these points, there are several important innovation developments worth mentioning in the areas of convenience, culinary, and the community. In the area of convenience, we know the value of convenience to enhance the overall consumer experience, and technology really affords us the greatest opportunity to deliver against that promise. We continue to expand the number of locations utilizing Apple Pay, and we'll have several hundred campuses using the system as the school year opens. We are also increasing the number of sports and entertainment venues featuring Apple Pay as the fall sports seasons begins to kick off. In the area of culinary, we have relied on consumer insights to set the table, and we are keeping pace with that ever-changing interest of consumers. That includes testing health and wellness concepts like Greens To Go, which are tossed to order salads, customized protein bowls, along with fast casual offerings like the Republic of Spice Indian fare that appeals to the growing variety need states of consumers.

In the community, our recently announced American Heart Association initiative really represents the most innovative alliance in Aramark's history. The initiative is titled Healthy For Life 20 by 20. And it's a five-year commitment aimed at improving American's diets and health by 20% by the year 2020. The initiative includes industry-leading menu commitments that will reduce calories, reduce saturated fats, and sodium levels 20%, while increasing fruits, vegetables, and whole grains 20%. And these changes will touch more than 2 billion meals that Aramark serves annually at thousands of schools, businesses, hospitals, and sports venues, with the expected impact of 10 billion meals by 2020. Our partnership with the American Heart Association reinforces both the alignment with our marketplace preferences and trends that ensures we are doing our part to contribute to the health and wellness of our consumers. Our commitment to innovation is a critical driver of both client retention and new business wins, and I'm convinced that these efforts are a meaningful contributor to new business wins year to date, as well as the healthy retention rates we are experiencing, which remain at a mid-90%s run rate for the year.

Now let me turn to the second pillar, activating productivity. I am pleased with the progress we are making with our initiatives in this area. In the third quarter and year to date, we estimate that we have achieved 40 and 50 basis points of margin expansion respectively, driven by these base productivity improvements. These improvements are being driven by one, in food costs, we continue to benchmark our supply chain across the value chain from procurement, to distribution, to preparation, while also making sure we improve our processes and tools to eliminate menu complexity, reduce waste, and leverage our scale. We focused on reducing our labor costs as we drive productivity through standardizing our end-unit labor model, which addresses staffing, scheduling, overtime, and agency expenses. As well as by lowering our SG&A costs, by optimizing the above unit spans and layers and implementing zero-based budgeting cost controls. As I have previously shared, investments in growth, capability, and technology are significant facilitators to unlock the productivity opportunity that lies before us, and we are currently reinvesting heavily in these areas. As expected, the timing of these reinvestments combined with the start-up costs on a few significant new accounts has been a headwind to margin expansion year to date. Also as expected, we will begin to lap these start-up costs and our reinvestment levels are lower in fourth quarter, which should result in meaningful margin expansion during the quarter. In fact, over the next few years, we expect this level of reinvestment to normalize at which point we anticipate more of the gross productivity savings will flow through to margin. And we continue to expect those savings to meaningfully close the margin gap to industry-leading peers. Ultimately, through these cost actions, additional purchasing initiatives, and improvement in our pricing strategies, we believe industry-leading margins are achievable. This is going to be more of a marathon than an overnight road race, but again, our quarterly results will vary, but ultimately we have the right strategy and a very good line of sight to our goals.

I will move on to our third pillar of our focus strategy, attracting the best talent. We continue to build our culture and provide tools to ensure that we attain and retain the best team capitalizing on new technology to help achieve that goal. During the third quarter, we introduced new tools that will accelerate the hiring process, reduce our time to fill open positions, and improve the candidate experience. This technology will also free our front line manager schedules, enabling them to spend more time on delivering great experiences for our key stake holders. The well-being of our employees also remains a top priority. And we continue to expand our health and wellness programs to educate, enable, and encourage our employees to lead healthier lifestyles. Our program has expanded beyond assessments and screening, and we have taken an outcomes-based approach that includes quarterly fitness challenges where employees earn incentives and rewards for participation and completion. We will also be leveraging our American Heart Association alliance to expand the health and wellness impact to our own employees and their families. Finally, I'm pleased to report that our efforts in this area have again earned us national recognition as a best employer for healthy lifestyles for the fifth consecutive year. In the area of recognition, which is an integral component of our employee engagement, we recently announced that our top front line associates who have earned our highest employee recognition, what we refer to as Aramark's Ring of Stars, and this annual recognition really aligns the entire Company with our front line first and focus strategy, and really spotlights our service stars who deliver exceptional experiences at the moment of truth for our consumers and clients every day. All of these efforts continue to serve to ensure that Aramark continues to be an employer of choice and a great place to work.

So overall, a solid quarter replete with great new account wins, productivity momentum, and an innovative partnership that will help shape our consumer offerings for the future. Despite the choppy earning seasons and the uncertain macro environment we are navigating, I'm pleased to reaffirm our earnings outlook for the year and look forward to a calendar shift free 2016 that will benefit from our multi-year sales and productivity framework.

With that, let me turn the call over to Steve.

Thanks, Eric. And good morning, everyone. I will start on slide 4 with the year-over-year third-quarter sales reconciliation. We achieved nearly $3.5 billion in sales during the third quarter of 2015 compared to $3.6 billion in the third quarter of the prior year. This is a decline of 4%. As you can see from the slide, adverse currency trends in the form of a stronger US dollar provided the largest single reconciling item compared to the prior year, and on a net basis, account for essentially all of the year-over-year change. In the third quarter, we were most impacted by the Canadian dollar and the euro, which strengthened by 11% and 21% respectively versus a year ago. The impact of M&A, year over year, was not material. The calendar shift impact was a negative 2% or almost $70 million of a headwind. These impacts have been discussed at great length previously and disclosed in our earnings materials, so I will not revisit the specifics other than to note that the calendar shift impact was completely consistent with our expectations. Adjusting for the aforementioned items, growth for the Company as a whole was a positive 2%. This includes an approximate 1% headwind due to the previously discussed loss of a large client account in our S&E business. Excluding this single account, the remainder of our business would have grown at approximately 3%, or more than $100 million in the quarter versus the prior year.

Let's now move to slide 5 for a discussion of our adjusted operating income year-over-year performance. Please note that we adjust our prior-year adjusted operating income figure for currency changes. Therefore, the 2014 adjusted operating income figure of $185 million has already been reduced by approximately $7.5 million versus the $192 million we reported a year ago for the impact of 4% due to currency translation. The calendar shift impact was approximately $7 million negative, or 4% in the quarter coming almost exclusively from our North American FSS segment. The underlying base business AOI performance was essentially flat on a year-over-year basis. In our North America FSS segment, we reported adjusted AOI of $107 million in the quarter. This is a 10% decline from our prior-year reported figure of $120 million. The calendar shift is most visible in this line item, accounting for approximately 6% of the 10% headwind, or approximately $7 million to $8 million of the $13 million change. The base business experienced a 4% decline and adjusted operating income of roughly $5 million.

As we disclosed previously, the timing of reinvestment in the business and account start-ups are the largest factors influencing the cadence of quarterly results this year. Additionally, in Q3, the large sports and entertainment account loss, as well as some modest deterioration in our Canadian oil and gas business, also impacted North America AOI in the quarter. As you would imagine, with oil back in the $40 per barrel range, we are receiving many inquiries regarding our exposure to the oil and gas sector. Our global exposure remains relatively small as we have approximately $400 million, depending on the exchange rates, or less than 3% of our total revenue being derived from this sector. While our North American FSS segment contains less than half of our global energy exposure, this business, especially the Canadian remote business, is more susceptible to short-term volatility due to its higher extraction costs. While we have experienced pressures in this area, we have been able to largely offset the volume declines with new business wins in other sectors outside of Canada thus far in 2015. While our energy-related businesses in Europe in general have held up better than in North America, we remain cautious and prudent in our global outlook, and will manage our cost base appropriately going forward. Our adjusted operating income in international FSS was $38 million, an increase of 9% versus the prior year. We achieved double digit improvements in AOI across most of our European businesses through the combination of new business margin drop-through and productivity initiatives. Our Chinese business also contributed a double-digit increase in AOI growth driven by both revenue and progress in productivity. The uniform segment was up 8% on a year-over-year basis to $49 million. New business wins, better efficiency in our plants, and overall progress on productivity initiatives have all contributed once again to a good quarter for this segment. Neither uniforms or international were materially impacted by the calendar shift. Unallocated corporate expense was up $2 million to $17 million. This increase is reflective of our ongoing investment programs in both capability and systems.

I'd like to spend a moment on slide 6, expanding on Eric's earlier comments regarding the productivity progress in our base business. While reiterating that these initiatives don't move in straight lines, we are very pleased with the productivity progress we are making across all of our businesses. As Eric mentioned, year to date, we estimate that on average margins in our base accounts have increased by about 50 basis points. We are becoming more efficient each and every day in the management of food, labor, and overhead, across all of our businesses and geographies. We have a long way to go relative to the opportunity in front of us, but the progress is real and it's tangible. As the slide illustrates, during the first 9 months of the year, we did continue to reinvest in the business through improvements in our systems and capabilities, which we refer to as transformation investments, as well as start-up accounts which include the ramping of several very large new accounts. As you know, over the last few years, the Company has accelerated its top-line growth, which has been achieved in part by securing many large notable new accounts. In general, we are quite pleased with the state of this new business and confident in its prospects. But not surprisingly, both the magnitude of the start-ups, as well as the speed of the ramp-up has influenced the rate of our margin flow through over the past three quarters. In the rare cases where we are not happy with some aspect of the new business and we are unable to find confidence in a path to achieve our expected returns on capital and margin levels, we will take action to protect our financial performance and preserve shareholder value. As an example, we have recently undertaken just such a step with respect to one account in our corrections line of business. The account at issue is a large contributor to the year-to-date investment in this category, and our exit from it over the next several months will have positive outcomes for us financially in FY16. As my last note on this slide, I would point out that the calendar shift is a 10 basis point headwind to margins for the 9-month period. This will reverse in Q4, which combined with the timing of reinvestments should lead to significant margin expansion in Q4. As we will discuss in a moment, our expectations for performance are unchanged for the year and remain consistent with our long-term financial algorithm.

On slide 7, I will touch on just a few aspects of our balance sheet and cash flow. Our liquidity remains quite strong. And in this seasonably low earnings quarter, our cash and revolver availability is good at over $600 million. We continue to retain quite a bit of flexibility to strategically manage our debt maturity profile, given the lack of any maturities of note for the next several years. For the year, our anticipated capital spending should be between 3 1/4% and 3 1/2% of sales. As we anticipated, we are well ahead of prior-year free cash flow given the impact of the 53rd week in 2014. We continue to expect to be significantly better than the prior year on a full-year basis on cash flow. We are pleased to have recently received a one notch upgrade from Moody's which we believe is reflective both of our improving overall leverage profile as well as our commitment to prudently manage the capital structure of the Company. We are committed to preserving the appropriate financial flexibility to ensuring we are optimizing our cost of capital, to investing in appropriate growth opportunities that meet our return expectations, and to allocating capital to create value by balancing dividends and deleveraging. Our total debt to EBITDA ratio of 4.4 times was a 30 basis point improvement from prior year. And we continue to expect improvement in this figure to around 4 to 4.1 times by year end.

On slide 8, we are reaffirming our views on the second half of the year, as well as the full year for FY15. These are all unchanged from our prior communications. In general, as it relates to Q4, I would remind you the calendar impact will positively affect our reported results, so both sales and adjusted operating income will likely be higher by 2% and 4% respectively for the Company, and more so within the North America FSS segment. In that segment specifically, we do continue to expect organic revenue to be down year over year for the second half. The revenue loss from the previously mentioned client account in S&E and the previously discussed nonrecurring facilities work that took place in the fourth quarter of 2014 will present 4% and 3% headwinds specifically. Again, in spite of the substantial revenue headwind, we continue to expect strong year-over-year adjusted operating income improvement, and FSS North America as our productivity initiatives accelerate. I would summarize our second half and thus fourth quarter expectations for international and uniform segments quite simply, should be more of the same, consistent revenue, operating income growth, as well as progress on productivity initiatives. For Aramark as a whole, the previously mentioned items in North America will prevent us from exceeding prior-year reported figures for second half revenue, though the Company's adjusted operating income and profitability levels will be better in 2014. Currency remains essentially unchanged from the time of our last call. And as Eric referenced, our currency adjusted EPS expectations for the whole year remain unchanged at $1.50 to $1.60, and at this point in time, we would expect to be around the midpoint of that range by the time the year closes.

Before I turn the call back to Shannon for Q&A, I did want to make the audience aware that the Company is planning to hold a market day event in the fourth quarter of the calendar year of 2015. More details will soon be forthcoming.

And with that, Shannon, I'd ask you to please start putting people into the queue for the question-and-answer session. Thank you.

(Operator Instructions)

The first question comes from Denny Galindo with Morgan Stanley.

Hi, good morning. Thanks for taking my question.

Hi, good morning.

I really like the new disclosure on the margin progress. I think that will be helpful going forward. That's a nice addition to the slide deck. I wanted to ask a question on Yosemite to start off. That win obviously sounds like a nice win, but usually it does take a while to become profitable on big contracts like that. If we're thinking about that start-up line item in your new disclosure, is this a pretty big margin headwind in like Q2 or maybe even Q3 before it starts helping margins? Or maybe you could give us a little idea about how that contract should ramp up.

Yes, Denny, it's Eric. Just a couple of comments. Again, we are extremely excited to be adding another large, or as I said, our largest client win ever. So Yosemite is about $140 million in revenue. We will start that up in March. So literally it will be a second half impact to our FY16. It's a business that has attractive margins. And I would say relative to some of our businesses, if you really think about the degree of difficulty of start-ups, think about the very heavy people intensive businesses. I would say, certainly our K through 12 business, our corrections business, are much higher degree of difficulty, our sports business, probably a little higher degree of difficulty. The parks business and therefore this account will be a much smoother transition than the typical start-up. So I think as we look at this, this is an account that will be accretive to the top line and accretive to the bottom line very, very early.

That's helpful. And then just turning a different direction, this is a big contract from the past, on Chicago, you have a big, I think $120 million contract out there. They're in the news for firing people, potentially going into bankruptcy, and I just wanted to get a feeling for how that might affect numbers over the next year. There is one piece that potentially if they were to declare bankruptcy, they could get out of any kind of capital investments you have made, and I think it is probably below the average, but I just want to get an idea of exactly how much that potential loss would be. And then of course, they have done the layoffs so like how much might that affect the top line if any? Maybe it's not a big impact.

Yes, Denny, we don't usually comment about specific clients, but let me just say the following. I think we are an industry leader in the K through 12 education sector. We've got about 500 schools nationally. We are actually the leader, I think, of the top 10 schools that are outsourced. We have all three of those top 10. There are only three that are outsourced and we have them all, one of which is Chicago Public Schools. We have both the food service and the facilities business, and we continue to be very pleased with our relationship with Chicago Public Schools.

Any idea on how much investment was tied up there? Like start-up investment?

Again, Denny, it has been our past practice that we are not going to talk about individual clients relative to that level.

Okay, and then just one last one. On energy, it sounds like that's potentially getting better. It was an 8 basis point impact to margins this quarter. Is this kind of the worst of it? Is it getting better from here on out? Maybe it's more of the same from here on?

I think it, to some extent, obviously is going to be driven by what is happening in the broader endogenous environment. We certainly have continued to see modest deterioration on a year-to-date basis over the first 9 months. And so the expectations we have for the remainder of the year assume that the markets do not get any better than they currently are, but also that they would not continue to get significantly worse. So we're essentially living right now in a $40-ish type of a barrel of oil world, and that's driving both of our projections, or expectations and how we're managing the business.

That's it for me, thanks.

Next question comes from Andrew Steinerman with JPMorgan.

Hi, just to clear up a few moving parts, I'd like to ask you about the implied margin expansion in the fourth quarter when Aramark says we're trending toward the middle of the full-year guide, given we only have one quarter left. And then the addendum to that question is, so we should think about 2015 as a 20 basis points or better year of margin expansion?

Yes, Andrew, it's Eric. I guess what I would say relative to the margin march again is what we have tried to do, and hopefully we are doing as a result of some of the charts we are showing you, is to try to give you a sense of what's happening in the area of base productivity improvement. And again, as we articulated on the call and have demonstrated in the slides, we're seeing strong base productivity gains, both in Q3, as well as year to date. And that's driven by everything we've talked about from food and labor, SG&A, et cetera.

As we get into the fourth quarter, just like as we signal to you at the end of second quarter, you will begin to see some of the start-up headwinds, as well as some of the investments begin to trail off. So if you looked at our investment bucket for the year, the majority of that has already been spent, and so as the start-ups in investments fall off, you will see increased margin growth in fourth quarter, and I think to answer your specific last question, yes, that 20 basis points is a number that I think you will see on a full-year basis.

Excellent. Thank you.

The next question comes from Manav Patnaik with Barclays.

Thank you. Good morning. I wanted you guys to remind us and refresh us, a lot of your -- the cost saving initiatives in the food and labor side, just update us on the number of locations you guys are testing all of these new initiatives and when you anticipate the rollout to continue, or even get to full rollout?

Manav, it's Eric. Again, I think the way we've tried to describe it is this is very much a journey and you have heard us use the term, we continue to be in the early innings. So I guess the best way to describe it is, if you think about what we have done to date, we've worked really hard on the SG&A side looking at spans and layers. We have worked really, really hard in the area of food this year, specifically in the area of waste. We have also, on the labor side, really begun to put in place a pilot across our lines of business, about a more standardized end-unit labor model, and so again, you'll continue to see this evolve. The heavy lifting to date has been largely in the area of managing overtime and agency on the labor side, managing on the food side waste, and then getting at the above unit SG&A. Going forward, we'll be far more holistic, particularly on the food and labor side, as we look to streamline activities across the value chain.

On the food side, everything from procurement through distribution through the food production process where the need for us to simplify that drives a lot of savings. So this is a multi-year journey. Again, very early innings. But the good news is, as is evidenced by the improvement in our base productivity, the initiatives are paying off. And what is relative to the timing and how many accounts, we will always be at various points on different initiatives from piloting in a couple of accounts to in process of the rollout to full implementation, so it's almost impossible to give you a sense of how many accounts are through these. It's really at various stages depending on the particular initiative.

Okay. That's helpful. And then just thoughts on M&A pipeline, just a general update there. Thank you.

Maybe I will make a comment on that. I mean, obviously we are always actively engaged in terms of thinking about the portfolio and thinking about what can we do in our various segments strategically that would enhance the competitive position or profile of any of our businesses, and so as anybody in this space knows, there is a lot more talk than there is action over any particular period of time. So I would say the Company continues to be engaged in this space. We continue to have active dialogue with the Board of Directors around where we think we would be best positioned from an augmentation point of view to help our current lines of business and that will continue going forward, obviously, when we have something specific to talk about in that space, we'll do that in an appropriate fashion.

All right. Thanks a lot, guys.

The next question comes from Flavio Campos with Credit Suisse.

Good morning. Thank you for taking my questions. Thank you again for that margin expansion detail with the gross expansion as well. I just wanted to dig in a little bit more here because we are seeing so much strength coming from the international and the uniform business, and I just wanted some more color on that, that expansion. How much of that is coming from the North America for the facility services segment, and how much of that was coming from the other divisions?

Well, again, if you look at history, we've seen significant -- I'd say the way I would describe it, our international business, literally across every indicator, from top line growth, to margin expansion, to bottom line profitability, has worked very, very well, and I would apply that to our Europe business. I'd apply that to our emerging markets business. I'd also apply it to our uniform business. So I'd say in that instance, we're actually clicking on all cylinders across each and every one of those businesses. I think as you look at our North America business, as Steve has highlighted and as we've talked about, again, we've had a variety of things. One is the calendar shift. The second is most of that investment bucket goes into North America. Most of that new business headwind goes into North America. I guess what I would say is, as we look to the full year, you will see us expand margins in North America.

Yes, I would reiterate that. The way I think about it is there's all three disclosed segments benefit to some extent pro rata from the progress on the productivity initiatives because many of the productivity initiatives, certainly on things like labor, are applicable to all of them. However, as Eric referenced, the reality is North America takes a disproportionate amount of the headwinds on both capability investment because a lot of that is system infrastructure, and where our probably most pressing system issues are, a little more North America-centric than anywhere, and certainly to start-up these. So everybody is getting the benefit of the progress but one of them is taking a lot of the weight associated with the investment side.

Thanks. Perfect. Thank you very much for that. That's great color. Just a quick follow-up now on working capital. There was a drag again on the quarter. I know that Q3 is usually a drag. But there was an outsized drag on Q1. But how is working capital looking for the full year? Is it still going to be a drag? Is it going to be flat? Or are we going to see some cash coming out of there?

We should have a better working capital outcome for the entire year. I'll take you back to the end of 2014 as a starting point. This is where the 53rd week really starts to come into play on the balance sheet. So by picking up an extra week, at the end of 2014, we had a significantly worse working capital outcome because of that just based on the timing of how we did payments, et cetera, associated with that. So the way the calendar will work, that will accrue to our benefit in 2015 in terms of going the other direction as a general rule. We also had some one-off items in the fourth quarter of last year that we referenced in some of our revenue comments earlier in North America that also impacted working capital as a general rule. So we should have a better working capital outcome which is part of the reason we are anticipating significantly better year-over-year performance on free cash flow as a general matter.

Perfect. Very helpful. Thank you, Steve, for taking my questions.

Thanks, Flavio.

The next question comes from Sara Gubins with Bank of America Merrill Lynch.

Hi, thank you. Just to start off on a couple quick margin questions. I want to make sure I understood you correctly. Did you just say that North America adjusted operating margins should be up for the full year in FY15?

Yes.

Okay. And then could you give us the comparable 4Q margin or adjusted operating income for last year for the Company as a whole? Sometimes given the adjustments that are you making, we don't necessarily have the right base.

Can you give me a little more specificity, specifically what you're looking for in that compare?

When you report the fourth quarter, you'll be basing your margin expansion comments and the actual dollar amount off of an adjusted number from last year. Do you have that adjusted number for 4Q 2014?

I'm a little bit reticent to provide that because of the currency impact on that, so the starting point would be the table where we disclosed the fourth quarter last year number, but that number will be precisely wrong because we are going to currency adjust it for sure, and given the magnitude of the currency adjustments we have seen each quarter, it could certainly move it by 10 to 20 basis points easily there. So I would start with that figure and know that you're immediately going to have a currency reconciliation, and then obviously you're going to have a calendar shift adjustment on top of that.

Okay. That makes sense. And then I'll echo that I thought slide 6 was really helpful. As you think about FY16, it sounds like the drag from start-ups should begin to fade, and transformation investments should also begin to fade. But I'm guessing that you don't want us to incorporate 50 basis points of margin expansion into our models next year, so maybe any comment that you might have to help us set expectations or other investments that might come up would be helpful.

Sure, Sarah. It's Eric. I'd say a couple of things. One, we'll talk about 2016 guidance later in the year. The reality is, is I think what I'd take you back to is our -- the long-term framework that we have talked to you about on multiple times. So if you look at that revenue growth number, the 3 to 5, if you look at that, it drives mid- to high-single-digit AOI, and that translates into double-digit EPS. I think that's the long-term algorithm you should continue to model. And then just to be clear, I want to make sure that I don't misrepresent or you don't misunderstand my point. We will continue to have investments.

So that, along with the start-ups, which create the lumpiness of the business, those two do not go away certainly. Again, we'll continue to win new business, hopefully. We're encouraged by the pipeline, and we will continue to invest in the areas of growth, capability, and technology as we have. So my point around it, falling off in fourth quarter is when we put the plan together for this year, 2015, we heavied up the annual investments into the first three quarters. That will fall off in fourth quarter. As we build the 2016 plan, we will calendarize it, calendarize those investments as needed from the business.

I would, Sara, I would characterize it as do not let the exit rate in the fourth quarter of this year deceive you in terms of setting an expectation around the entry rate for the year going into 2016, for all the reasons Eric mentioned. And then I would also refer you back to last year's fourth quarter where there were several one-time items that are essentially helping our comparability when we do quarter-over-quarter comparisons modestly in the fourth quarter of this year, but will certainly impact the exit rate. So you want to check those as well.

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

Hello, guys. Good morning.

Good morning, Gary.

You can give us a sense, how should we think about net new business for FY15 or year to date, if you want to talk about that, including both walking away from Michigan, and the Live Nation loss? Are we likely to be flattish with last year, up, down? And I'm really thinking about how this gets you to thinking about towards thinking the 3% to 5% revenues for next year. Thanks.

Yes, I think, Gary, if you look at year to date, I think we are kind of in line from a net new business with what you've seen the last two years. Now, again that's adjusted for Live Nation. So I think from a run rate standpoint, we, the last couple of years, have been $300 million. We had the one year of $500 million. And I think as we go forward, based on the pipeline, a run rate of net new business somewhere in around that $300 million to $350 million is a number that we would expect to be to deliver against that long-term framework.

So that's enough to get there? Then I guess that assumes some base business growth. Any updates on how we should think about that? Is it price? Is it the merchandising initiatives you've talked about in the past?

Yes, I think that again, the simplest way I'd have you think about it, in terms of the math is if you take a 3% or 4% growth rate, as we look forward, that will be built by the following math. Roughly maintaining a mid-90s retention rate, and then about half of that growth will come from net new business, and about half of that growth will come from base business with a portion of that base business being pricing.

Okay. And then just to follow up on that, I know since the IPO, we've all been disproportionately focused on the margin story, but you've also had top-line growth that has moderately trailed Compass for years. How do you think about the potential to narrow that gap as well? Or are you much more focused at this point on delivering on the margin? Thank you.

No, I think as we said at the beginning, Gary, you heard me use the term dribble with both hands, I think the encouraging thing for us is we actually were the industry leader last year, if you looked at our growth in 2014, I think we actually did lead the pack, so I think we successfully closed that gap that we had talked about as we went through the IPO. This year, obviously, with the loss of Live Nation, it's created a pretty stiff headwind for us to overcome. But having said that, I mean, we certainly want to be out there growing in line and preferably ahead of the industry therefore picking up share while also expanding the margin and hence the point that I've made several times that this is an organization where we are attempting to dribble with both hands. Therefore, trading off some margin to achieve growth is something that is in many instances the right thing to do for us, but having said that, rest assured that we are very focused on closing that margin gap.

Great. Thank you.

Next question comes from Andy Whitman with Robert W. Baird.

Good morning. It's actually Justin Hauke on for Andy this morning.

Good morning.

Good morning. Just wanted to ask, so international, the growth rate has been really good, and I think you mentioned again double digit on the emerging markets piece. I'm just curious how sustainable that is, and what you're seeing out of China given some of the commentary from some of the restaurant chains and what not this earnings season about the weakness there?

A couple of things, Gary. I think again, we had a great third quarter of double digit revenue, solid margin expansion, and our China momentum is very strong. It's strong at the top line again. We saw very good growth in the quarter, and we'll post very good growth for the year. So if you look at our third quarter, our China business was up about 18% at the top line. So at this point in time, and maybe just a reminder, just so you understand, the actual composition of our China business, it actually is more heavily skewed to facilitates than it is food. But we have a very good business there. We've got a great local leadership team on the ground. And so they have over the last several years, and will continue with their results this year be a strong, strong contributor to Aramark's overall growth and profitability.

Thanks. That's helpful. I guess my second question in margins, has already been addressed ad nauseam here, but maybe one question to the extent that it does benefit you. Food inflation was an issue earlier this year and I know you guys had some initiatives to offset some of that. I'm wondering as those costs have kind of moderated, is there any margin benefit that some of the prior actions, cost actions would give you for maybe the fourth quarter or into 2016? Thanks.

Let me take a shot at that. I mean overall, clearly, food inflation for the year to date has been relatively modest. I mean we had it; we are not in a deflationary environment for sure, however. It's very low-single-digit inflation, and so is there some benefit for us as we make progress on the food side of our productivity initiatives because we have less of a headwind year over year on food inflation than we might otherwise have had for sure and that's helping us. But it also, we had to think of the nature of our contracts. So food inflation does directly impact how much pricing we're able to achieve in a portion of our contracts that are essentially cost-plus type of contracts, so to the extent there is lower inflation, there is actually lower revenue associated with some of those contracts as well. But by and large, clearly low inflation is a good thing for us and it is obviously helping us on food in general, and we don't see any reason that that's going to radically change here within the remainder of the fiscal year right now.

Thank you very much.

Next question comes Stephen Grambling with Goldman Sachs.

Good morning. Thanks for taking the question.

Good morning.

One quick follow-up, just on the tools and system implementation. The fact that these are all at various stages, are you already able to start rationalizing SKUs and suppliers or do you need to kind of get further down the road to really start having those discussions and really using your buying power in a bigger way?

Yes, Stephen, it's Eric. I'd say what we've done on the food largely to date is really focus on waste reduction. The good news is, is that that's paying off for us, but to your question, getting to a point where we address the holistic value chain, from procurement, to distribution, to the food production process, to streamline those activities and to really simplify that, that's one that as you've seen us invest in systems and technology, we need to stand that up before we can largely address that opportunity. So I would say almost none of our progress on the food side, which we have shown really good progress in the quarter and year to date, is driven by that. So that work is still ahead of us. We have invested in the technology, but until we get that system stood up, our ability to get control of a lot of that complexity remains very, very challenging. So we'll stand up to technology before we address that.

That's helpful. Thanks so much. And best of luck.

Thanks, Stephen.

And next question comes from Carla Casella with JPMorgan.

Hi, I was wondering on the -- your Yosemite contract sounds really exciting, and I'm wondering what percentage of your contracts today do you do a full suite of services like you'll be doing as Yosemite as opposed to just the food side of the business?

Well, that is a complicated question when you say the full suite of activities. So depending on the line of business you're talking about, we could have facilities. As you get into some of the sports business, we have an opportunity to have the retail business. So I would say for the most part, the majority of our clients that have food service would not necessarily have facilities bundled with it. It would be a low percentage. On the sports side, it would be a higher percentage where we might have retail connected to the food service business. So because of the parks, the dynamic in that segment, they bid all of those services as one. That's different from the go-to-market model in the other channels where again, if you look at our two big businesses, food service and facilities, those tend to be bid separately in each and every client whether that's an education client, healthcare client, sports and entertainment client, et cetera. So a very small percentage would be the answer.

Okay. And then so that sounds like you've got more opportunity there, but would your customers be using other third parties for that or are they probably only outsourcing food service and not transportation, logistics, lodging, anything else like that?

Yes, it's tough to answer. It's certainly not a one size fits all. I guess the best way to describe it and maybe articulate it is, the self-op opportunity in food service is very similar. It's actually a little higher on the facilities side than it is on the food service side, but both of them with a lot of opportunity. Again, you look at the big sectors like education and healthcare, over half of the business is still self operated. That would be applicable to both on the food service and the facilities side.

Okay, great. That's helpful, thank you.

Thank you.

Ladies and gentlemen, that does conclude today's question-and-answer session. I would now like to turn the conference back to Mr. Foss for closing remarks.

Thanks, Shannon. I just want to thank everybody again for joining us. We appreciate your continued time and interest in Aramark. And we look forward to seeing you, as Steve referenced, at our market day later in fourth quarter. Have a great day.

Ladies and gentlemen, thank you for participating, and have a nice day. All parties may now disconnect.