Aramark (ARMK) 2015 Q4 法說會逐字稿

Good morning, and welcome to Aramark's fourth-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, Kelly, and welcome to Aramark's conference call to review operating results for the fourth-quarter and full-year 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 of our notice regarding forward-looking statements, which is included in our press release, can be found on our website and is detailed on page 2 of the earnings slide deck. 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.

Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these items to US GAAP can be found in this morning's press release, and on our website as well.

Before I turn the call over to Eric, I did want to provide a brief and, thankfully, final reminder regarding the 53rd week calendar shift. Recall that this calendar shift has only a small negative impact for full-year FY15, but it has had a fairly significant impact on the cadence of 2015 quarterly results.

In the fourth quarter of 2015, the calendar shift is estimated to have increased sales by approximately 2%, adjusted operating income by approximately 3%, and adjusted earnings per share by approximately $0.02. As we look to our 2016 disclosures, we will have fully lapped the 53-week calendar shift impact, and 2016's quarters will be comparable to 2015's, without these calendar adjustments. With that, I'll turn the call over to Eric.

Thanks, Ian, and good morning, and thanks to everyone for joining us. As you saw in this morning's release, we reported a strong quarter and a record-setting year, with record-setting revenue and the highest adjusted operating income and margins in the Company's history.

It's gratifying to see the crisp execution of our clear and focused strategy translate into double-digit comparable adjusted EPS growth, while also driving significant improvements in cash flow and meaningful strengthening of the balance sheet. I'm very proud of what the Company and our 270,000 team members accomplished this year, and feel that the Board's recent decision to increase our quarterly common dividend by 10% validates both our progress as well as the confidence and the opportunity that lies before us.

Turning to the numbers, I'm going to review our full-year results, Steve will then go deeper into a detailed reconciliation for last year's 53rd week and the calendar shift. But to keep it simple, my comments are based on our estimate of the comparable 52-week periods.

Adjusted earnings per share for the year were $1.57, a 10% increase from last year on a comparable basis. Total Company organic sales were up 2%, which meant our underlying sales growth remained consistent with our multi-year framework.

Meaningful food, labor and SG&A productivity gains were achieved during the year, which supported those re-investments, and concurrent expansion in total Company AOI margins to 6.2%, which was a 30-basis point improvement. It also drove an increase in adjusted operating income to $881 million.

Solid balance sheet improvement was seen through an almost $300 million improvement in year-over-year cash flow, which facilitated approximately $150 million in net debt repayments, and approximately a 25-basis point reduction in our debt-to-EBITDA leverage ratio to 4.2 times.

Broadly speaking, our performance for the year was strong any way you slice it. Looking at the year versus our strategic priorities -- which were accelerating growth, activating productivity and attracting the best talent -- we demonstrated progress across every category. You can see on slide 4, our progress was broad-based and consistent across our businesses.

Our ability to accelerate growth was driven by strong retention rates at 94% for the year. Our principal to ensure we cover inflationary increases through pricing was effective. And our base business -- we not only captured price, but also saw a slight volume improvement.

We also achieved new business sales of $1.2 billion in the year, a level consistent with our multi-year framework. 2015 also saw us win our largest client ever in the Company's history, Yosemite National Park, which will come online in March of 2016.

North America organic sales were flattish for the year. Recall that our biggest impact was from the non-recurring events in the Canadian remote services that occurred in this segment.

We did see strong growth performance in our education, healthcare, and parks and destinations business. And our international business saw organic sales growth of 5%, driven by continued expansion in Europe -- up 2% -- mid-single growth in South America, and strong double-digit growth of 18% in China.

Uniforms continued to benefit from our investments in capacity expansion, which resulted in organic sales growth of 5% in the fourth quarter and 4% on a full-year basis. Our selling efforts continued to yield results, where we signed a number of new accounts, including the University of Akron, a self-op higher ed conversion, several new business and industry clients, and a number of new healthcare clients, including Kennedy Health Systems. As we look forward, the pipeline of new business remains healthy which bodes well for continued execution along our framework.

As I mentioned earlier, innovation is a critical component of Aramark's right to win new clients and our ability to maintain healthy retention rates. Recent successes on the innovation front include the area of mobile technology, which is really fundamental to our growth, which builds consumer engagement and streamlines our operations.

And we are currently testing a first-in-class tool at stadiums that allow fans to place and pay for their orders using an iPad at the concession stand. They receive a text as soon as their order is ready, and are back in their seats without missing any game time. In higher ed, we've partnered with the app Tapingo to offer students mobile food ordering, and have plans to roll that out at more universities in the coming months.

In the area of product innovation, we've launched a micro-market concept called Vibe that brings fresh health-and-go foods to businesses, hospitals and schools that don't have cafeterias, or have variable hours outside of normal operations. And we are also piloting a pop-up kitchen in sports and entertainment which will feature rotating menus centered on the latest food trends and the hottest chefs. The kitchen is outfitted with state-of-the-art equipment which enables us to rotate the food and beverage concept throughout the season at the flip of a switch.

Progress is also being made on our health and wellness initiative which we announced with the American Heart Association. Our culinary teams are taking a three-pronged approach to impact the two billion meals that we serve annually by changing our menus towards healthier offerings; re-engineering recipes to reduce calories, fat, and sodium; and working with suppliers to source healthier ingredients.

And starting next year, you're going to see these improvements, along with our health education programs that we're launching with American Heart Association, in underserved communities. And we look forward to keeping you posted on this important initiative.

Another area of substantial progress for the Company is our second strategic initiative, activating productivity. We saw increased productivity and savings across food, labor and SG&A which facilitated a 30-basis point margin expansion. Our base productivity was very strong, which allowed us to reinvest into growth and capability. Importantly, these margin gains were broad-based across our segments, with margins improving 50 basis points in uniforms, 40 basis points in our international food and facilities business, and a 20-basis point improvement in North America. I would point out that North America's strong performance in the fourth quarter, as we saw the timing of our reinvestment and the lapping of start-ups, came in exactly as we expected and had communicated earlier.

Our focus on driving a cultural mindset around efficiency and cost improvement remains vigilant. In the area of food, we're driving meaningful reductions through our waste initiatives, and continue to see good future opportunities in reducing menu complexity and leveraging our scale across the supply chain. Labor costs are being lowered through active management of overtime and agency labor and our continued rollout of our standard in-unit labor model, which provides a lot of runway for further efficiency capture.

And we're also driving further reductions in SG&A by ensuring we simplify and streamline our above-unit structure to ensure we have clear roles and accountabilities. And we'll use our Investor Day on December 1 for a deeper dive on this productivity pillar.

Now I'd like to move to the third pillar of our focused strategy: attracting the best talent -- where we're continuing to invest in the capability of our people. Because to us, an engaged workforce helps us reduce turnover, increases productivity and improves service levels that we provide to our clients -- all of which is accretive to shareholder value.

Q4 saw a continued action on our part to engage and reward our employees, and we continue to garner external recognition for these efforts. Last month, to honor those who deliver outstanding service to our customers, the Company recognized 200 front-line employees, as part of our inaugural Ring of Stars program.

Winners were nominated by co-workers, managers and business leaders, and were selected for demonstrating excellence in living Aramark's core values, delivering greatness at the moment of truth, and innovating the every-day, while demonstrating a high degree of involvement in the communities that we serve.

As I just mentioned, our engagement efforts are not going unnoticed. Over the past two weeks, we were named a Top 40 Company for Diversity by Black Enterprise. And we received a perfect score on the 2016 Corporate Quality Index, a national benchmarking study and report on corporate policies, administered by the Human Rights Campaign Foundation.

So overall, we're extremely encouraged with the progress we made in 2015 along our transformation journey. We posted strong broad-based financial results, while balancing the need to reinvest in the business, and also expand margins.

And with that said, we also see a lot of runway to look forward to. This feels like a good set-up for 2016, and our productivity momentum should allow us to be on our multi-year framework for the year. I look forward to digging deeper into our future prospects on our December 1 I-Day webcast.

And with that, let me turn the call over to Steve.

Thanks, Eric, and good morning, everyone. Now that we're able to discuss full-year results, much of the noise associated with our quarterly numbers from the calendar shift and the extra week, dissipates. I would point out that in the appendix to the slides, you will find sales and adjusted operating income reconciliations for the fourth quarter. And my commentary on the mechanics of the annual roll-forwards applies equally to the fourth quarter as well.

Quickly commenting on the fourth quarter, our results are completely consistent with our prior expectations, a somewhat noisy top line due to comparables, and a very strong bottom-line improvement, driven by productivity gains in our North America FSS segment. We did book approximately $44 million of transformation and restructuring charges in the quarter, a portion of which relates to severance, as we continue to look for ways to become more efficient with overhead spending. This number also includes a charge of $6 million for oil and gas asset impairment in Canada related to the macros in the energy sector. And $14 million for exiting certain emerging market operations that were not meeting, and are not likely to meet, our return expectations.

In the interest of time, the remainder of my comments will focus on full-year FY15, and I will start on slide 5 with the year-over-year sales reconciliation. We achieved $14.3 billion in sales on a GAAP basis during 2015 compared to $14.8 billion last year. This is a decline of 3%.

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. We were most impacted by the Canadian dollar and the euro, which weakened by 12% and 15%, respectively, on average, over our fiscal year.

The impact of M&A on a year-over-year basis was not material. Recall that we reported a 53rd week in the fourth quarter of 2014, which accounts for about $260 million of the year-over-year change. While the calendar shift in 2015 related to the extra week was meaningful on a quarterly basis, it is fairly negligible for the year, only about $31 million.

The previously disclosed non-recurring revenue from prior periods -- which is the combination of the large account in non-renewal and the non-recurring facilities work in the fourth quarter of last year, totaled about $200 million, or roughly 1% of the change. Adjusting for these items, organic sales growth for the Company was a positive 2%. Absent the previously disclosed revenue items, the remainder of our business grew at over 3% or more than $450 million versus the prior year. I think I can speak for all of us that we look forward to a simpler roll-forward in 2016.

Let's now move to slide 6 for a discussion of our adjusted operating income year-over-year performance. Please note that we currently adjust our prior-year adjusted operating income figure for currency changes. Therefore, the 2014 adjusted operating income figure of $852 million has already been reduced by approximately $28 million versus the $878 million that we reported a year ago for the impact of currency translation, or approximately 3%.

Unlike the organic sales calculation, which adjusted the 53rd week out, the $852 million in AOI that we generated in 2014 contained a $14 million estimated benefit from the 53rd week. We did not break this number out separately in the prior year; hence, we are trying to be clear regarding this magnitude, in our annual figures.

As with sales, the calendar shift is not significant on a full-year basis, and represented only about a $7 million headwind. Taking all of these factors into account, we generated about $50 million or a 5% improvement in AOI, year over year, on a comparable apples-to-apples basis. Margins improved 30 basis points.

Slide 7 provides a roll-forward to help bridge our adjusted EPS year over year. As with AOI, the 53rd week was included in the $1.51 per share we reported last year.

As indicated, the extra week impact was approximately $0.02 per share, and currency was an approximately $0.06-a-share headwind. Share dilution is a notable factor in the bridge, but this relates primarily to legacy pre-IPO grants, which will not be as relevant in the future. It was also impacted favorably by a 1.5 million share repurchase in the quarter, executed in conjunction with our former private equity sponsors, completing their exit from their ownership positions. Taking all of these factors into account, adjusted EPS was therefore up 10% for the year.

On slide 8, I will touch on our balance sheet and cash flow. The strong results that we have been discussing throughout this call facilitated meaningful balance sheet improvement. Our year-end liquidity remains strong, and our cash and revolver availability was just over $765 million when we closed out the year.

Free cash flow improved by $297 million year over year, partially due to improved working capital management, higher earnings and the lack of a 53rd week. This measurement includes an approximate $45 million voluntary contribution we made to fully fund our largest defined benefit pension obligations in Canada and the United Kingdom.

Excess free cash flow was used to prepay almost $160 million in debt obligations, and to repurchase the aforementioned 1.5 million shares. Our total debt-to-EBITDA ratio was reduced by approximately 25 basis points to 4.15 times. And net capital expenditures for the year were $505 million, in line with our prior guidance of 3.25% to 3.5% of sales.

You should expect more of the same from us regarding capital allocation in 2016. We will continue to allocate the majority of our free cash flow to deleveraging, as we continue to enhance our financial flexibility. I would expect total debt to EBITDA to end 2016 under four times.

Slide 9 details our current expectations for 2016. A few full-year comments first. Adjusted EPS should be between $1.65 and $1.75 per share. Based on current exchange rates, which we have listed in the appendix for your benefit, we would have around $0.03 of currency headwind year over year, primarily in the first quarter, as we lap the mid-teens decline of the Canadian dollar and the euro that occurred since the first quarter of 2015.

CapEx is expected to be consistent with the last few years, within a range of 3.25% to 3.5% of sales. And free cash flow should increase with earnings, and therefore, should exceed $200 million for the year. I will spend more time on the 2016 specifics at the Investor Day in a few weeks.

Regarding segment expectations in the first half of 2016, for the Company as a whole, we expect higher year-over-year revenues and earnings. The major pieces within our segments are as follows. In FSS North America, both revenues and earnings will be up versus the prior year, though not by as much as they will be in the second half. This is partially due to our first-half investments, specifically in the Yosemite account, which does not substantially come online until the second half of the year.

In FSS International, we expect some incremental pressure in revenues from the offshore North Sea business in the United Kingdom due to oil prices, as well as from the aforementioned decision to wind down several small businesses that are not meeting our return expectations. Uniforms is adding a new laundry facility in the first half, and as a result, will have some duplicative costs as we start up the new location but continue to operate at the current site.

In summary, we expect to be up on prior year for the Company, on both revenue and earnings, in both the first half and the second half. However, the stronger year-over-year performance will be in the second half, due to timing of both comparables in energy and currency, and our investment schedule.

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

Thanks, Steve. Well, in summary, 2015 was a solid year of gains along our transformation journey. And while I'm encouraged and pleased with our progress, I'm even more excited, and I think our teams are focused on the value creation that really lies ahead of us.

Not only are we operating a resilient and predictable business model, but by overlaying a clear strategy and investing in technology and talent, we have the opportunity to continue to grow, improve profitability and create meaningful shareholder value.

And with that, let me turn the call back to Kelly, and we can begin our question-and-answer session.

(Operator Instructions)

Manav Patnaik.

Yes, thank you. Hi, gentlemen.

Good morning.

The first question is, I was wondering if you could talk a little bit about the implied margin expansion that you're baking into your guidance for next year? And also just some of the moving parts? So what I'm trying to get at is, it looks like the commodity costs, on the whole, are trending low for you guys in protein, and some of those other things as well.

But then you have this potential headwind with minimum wage and wage inflation. So I was just wondering how you see the puts and takes, and what your margin expansion implication is?

Sure. Well, I'd say, broadly speaking, the long-term algorithm remains the same, and we would see that applying to 2016. There is going to be puts and takes; I think we've built those into our planning assumptions. We have a very comprehensive approach to productivity that we've talked about and we'll talk more about on December 1. And so I think the implied assumption is, as we look at 2016, we are comfortable with this long-term algorithm that we've laid out, that we can deliver against that for the year.

Okay. And any specifics, I guess, just on those moving pieces, like the wage versus the commodity costs?

Well, again, I think what we've said before on the wage front is, we have looked at this. There's a lot of things happening at the state level; we continue to monitor this on a local basis. We continue to be able to recruit and hire and, as we've looked at it, as I said, anything we feel that will have impact on us in 2016 is built into our planning assumptions, and therefore, is incorporated into that margin march. Steve do you want to add anything?

Yes, I would just add, from a modeling standpoint, you think about our experience in 2015 -- broadly, it should be comparable with 2016. We would expect, generally, pricing initiatives will offset -- more than offset whatever inflationary pressures we have from all sources.

We generally would expect modest commodity food-type of inflation, given the macro environment. A little bit more wage inflation, but certainly, something in the 2% or lower number, from an aggregate perspective. And specifically on the minimum wage, with everything that has been enacted thus far, the net impact to us in 2016 is a couple million dollars. That's reflected in our overall algorithm, so would not expect, with what is currently on the table today, for there to be a material impact, from what we know about.

Got it, perfect. And then just one more from me, just on the M&A pipeline. I guess we've seen some articles -- looks like you've made an acquisition in Ireland. Just wondering, any comments on that? And just generally on what the appetite or pipeline for M&A looks like?

Yes, I'd make a couple of comments. I think what you've seen us do the last several years is to really focus on getting our base business on track and performing well, and transforming that. I think now that we've done that, we feel comfortable relative to how we begin to look at, what I would call, both on M&A activity.

So again, we'll be very thoughtful. We'll make sure we evaluate each of those opportunities in terms of the strategic fit and the value that they offer. Obviously, as we look at opportunities to add scale or competencies or improve our ability to compete, we will do it.

Specifically to the Avoca acquisition in Ireland, this is a leading brand in Ireland. It's a leading consumer retail brand, one of the most successful retailers in Ireland. And so as we look at this, we think it's a small tuck-in acquisition. They operate cafes and food halls and some destination stores, and they have a very successful catering company as well.

So our ability to take a small tuck-in acquisition and enhance our industry-leading position in this country, we felt it was a good strategic fit. And we're also very happy that the Pratt family will remain involved in the company.

All right, fair enough. Thanks a lot, guys.

Denny Galindo.

Hi, there. Thanks for take my questions.

Good morning.

You posted a really nice quarter and great operating margin expansion for the year, yet your guidance was a little bit below consensus. So I know that some of this is because you like to be conservative, and that's it definitely nice. And it sounds like you expect the back half to be a little bit better than the first half.

But maybe you could delve into a little bit where you see some of the costs that are making you a little bit more conservative there, given the strong Q4 performance, and even a strong 2015 performance. Is it startup costs? Is it maybe more spending on innovation? Have you used up a little bit of the low-hanging fruit on margin expansion? Maybe if you could elaborate there?

Well, Denny, let me make a couple of comments, and then I'll let Steve talk specifically to some of the guidance assumptions. I think at the end of the day, what we feel great about right now, Denny, is, we are coming off a year where we've had very strong results. We continue to execute well, behind a clear and focused strategy, where we're making good progress.

You saw us this year and will continue to see us going forward, on the productivity and margin march front, be very focused on enhancing our margins. And in addition to all that, made meaningful improvements on the balance sheet.

So I would say, as we look to the future, we are very positive and, again, continue to see the same outsourcing potential that the sector has seen. The pipeline of new business is encouraging. We're very confident in our ability to go activate these productivity initiatives to capture margin. And so I don't think there's anything, as we look at 2016, that doesn't give us confidence that the guidance we've put out there is well within reach.

Yes, and I would just add, for those of you who may not be as familiar when we talk about our framework or algorithm, on a medium-term, we generally expect to be able to deliver revenue improvement of 3% to 5% annually, and mid-single-digit adjusted operating income improvement. And that should lead to double-digit EPS performance over the medium-term.

So I think if you look at the range that we've put out for 2016, that works pretty well, associated with those set of numbers, especially once you make the adjustment for currency, which we've tried to highlight to folks. I think the one word of caution I would give in general is, the exit rate for the fourth quarter, if you look at it in isolation, should not necessarily be construed to be the same as the entry rate for the first quarter next year.

We had several one-off events in 2014 above and beyond all of the noise we've talked about that helped our percentage improvements year over year in the fourth quarter. Those will not replicate in the first quarter.

And then as we had discussed before, we've got some investments on some pretty big accounts that we're going to be making in the front part of the year, as we build up teams, et cetera, that won't have any corresponding revenue associated with them.

So I certainly do expect the first half of the year, as we had tried to indicate before, to be better than prior year, but not as strong on a year-over-year basis as the second half will be. And that's largely a function of what we need to do to get ourselves ready to onboard some accounts.

Okay, that's helpful. And then thinking about the organic growth for next year, you were around 3% this year, ex the facility work. And you had the live contract that hit you this year, but retention was still fairly close to the same range and new wins were in the same range.

So if we're thinking about next year, does it look like it's going to accelerate into the middle of that range? And if so, is it because retention improves a little bit, or as it becomes like-for-like business a little better? Maybe you could just talk about how to think about revenues for next year?

Yes, I think as we think about the growth potential of the business -- again, as Steve said, we still see this as a 3% to 5% growth business. What's important, Denny, as you look at -- is how we onboard that new business. Or how in 2015, for example, some of that headwind was created in any given quarter, can influence certainly the quarter, but also how the year develops, depending on how that the business onboards.

We've continued to emphasize that this can be a lumpy business because of the way new business is onboarded, and the revenue tailwind that can create, and in some instances, the startup costs that Steve referenced earlier. So I think our confidence level is, this is a 3% to 5% growth business; that's what's in the long-term algorithm. And if you look at 2016, I think the combination of our ability to grow our base business and bring on new business, both equally weighted at about 50% of the contribution to the top-line growth, we feel confident to get within that 3% to 5% range.

Okay. I'll hop back in the queue.

Sara Gubins.

Hi, thanks, good morning.

Good morning, Sara.

Could you talk about how much new account startups and transformation costs drag margins for the full year?

Yes, I think the best way to think about it would be as follows. As I mentioned in my prepared comments, we saw significant base productivity gains for the year. So think about that as almost two-fold the margin expansion that we reported.

I then think, Sara, you've got to take two things into consideration. So about half of that transition from, let's call it, 60 basis points of base margin improvement was spent back in startups. And then the additional half was spent in investments, with it fairly evenly spread between growth and technology, which nets you to the 30 basis points. Is that helpful?

Very helpful. And as you think about next year, do you think that we should see the same level of, I guess, drag from startups and investments in growth and technology? Or would those start to wane as you lap some of those really big account startups?

So again, what's important here is, based on what we see today, we think that we'll continue to have startup costs as we deal with onboarding our largest client win ever, in Yosemite. We look at the pipeline, but to be honest with you -- take education, for example. We don't know what clients will be onboarding as part of that new business pipeline. So there's still a lot of unknown, is my point to you, relative to what that startup pool will look like and how it will calendarize.

And so on the investment side, as we've said in the past, we continue to see a long runway ahead of us on the technology side. We'll be more targeted, I guess, on the growth and capability side. But for the most part, I think, you would expect to see a similar level of startups and investments. That would be my point.

Okay, great. And then, I might be asking for a little bit of a preview around the Investor Day, but clearly margins are a big area of focus. Do you plan to put out a longer-term margin target at the Investor Day? Or could you help us think about what you would -- at a very high level, what you would plan to present? Thanks.

Sure. Well, at a high level, you should expect us to go much deeper on the margin march and how we think about that, not only over the longer haul. But we'll go much deeper relative to the level of investments and where we are with the deployment of some of this technology, what's been deployed, what's currently being deployed, what's in pilot, and what we have yet to put into pilot. As well as some of the granular detail behind those productivity initiatives. But I think I'd rather wait for that Investor Day to share that information with everyone.

Great, thank you.

Thank you.

Andrew Steinerman.

I just wanted to go over that point of a similar level of startup costs in 2016 and 2015, but you have Yosemite ramping. I assume what you're saying is, although it's a record-level contract, it doesn't have record-level startup costs?

Well, yes. If you purely take that on a standalone basis, Andrew, I think that's a fair assumption. I think part of your point -- just so everybody, I think, understands it that may not, is -- there are different degrees of difficulty, relative to startups. Starting up a model like a Chicago public school, that's very labor-intensive and some of that labor is transitioning is a very high degree of difficulty, relative to the start up.

A place like Yosemite, where we will actually take 99% of the employees over, is a much easier type of startup. My only point is, Yosemite, I hope, is not our only large startup in 2016. So as we look at the pipeline, expect more startup costs on clients that we have yet to win. And therefore, I think a good assumption is that you will see startup costs that will be a result of some great new business wins, which we absolutely hope comes to fruition.

Right. And could you mention, in 2015, what your net new wins were in total?

Well, our net new wins -- again, you'd have to net off the loss of Live Nation. So you're going to be, roughly, $250 million-ish would be a good number. Again, the net number was suppressed by the loss of the large client we've talked about.

And $250 million does not include Yosemite, or does?

Again, it doesn't include -- it includes that we won Yosemite. But we didn't see revenue from Yosemite, which we won't see until March. So part of it --

Oh, I understand your point. I got it. Okay, thank you.

Anj Singh.

Hi, thanks for taking my questions. First off, I wanted to ask on CapEx, your CapEx guidance for 2016, you are guiding it to be flattish with this year. It still seems a little bit elevated in light of your longer-term framework. And maybe I'm a little bit off, but I think you had talked about it moderating a bit in 2016. How should we think about when that may begin to moderate? And any thoughts on what's keeping it a little bit elevated as we look to 2016?

Yes, let me start with that. I would not characterize it as elevated from what we would've expected to be the case for 2016. I think it's consistent -- certainly consistent with experience in the last year or two, and it's consistent with my expectation over the next couple of years. A large portion of what we're doing currently, outside of investment required simply to support the onboarding of new client accounts, we're making significant investments in technology. Eric referenced that a couple times.

We'll give a deeper dive on that at the Investor Day discussion. But when we talk about activating productivity along the lines of improving outcomes in food, specifically, or improving labor -- a lot of that is technology -- either led or dependent. And so we have spent significant amounts of capital and time in the last couple of years, both procuring and implementing technological system enhancements.

And we will expect to continue to do that in the FY16, and as we will talk about at Investor Day, certainly for the next year or two, as we continue to drive the margin march on the framework. I think it's realistic to expect the overall intensity of capital to be somewhat consistent with what we've had.

The individual pieces, the types of things we invest in, will move around a little bit. As we complete investments in the labor space, we will move to things like investments in point-of-sale, but it still will be technology-driven investment.

And the only thing I would add is, again, this is a very asset-like business, and our uniform business is more CapEx-intensive. And as Steve mentioned, we are and will continue to invest in capacity.

The other two drivers of the capital are really client investment when we win new business, which is actually a very good thing. And then the investment in technology, which will have a good return, relative to how it helps us facilitate growth or margin expansion.

So I think we are comfortable with this approach to CapEx. And I think to Steve's point, while it will move a little bit, I think, our point on 2016 is it will be pretty consistent with where we've been.

Okay, got it. That's super helpful. And then shifting gears a little bit. On your margin march commentary, as we look to next year and beyond, I wanted to discuss the topic of group purchasing organizations. I realize it's not a big focus for you guys at this stage, and while you have a GPO, it seems like it's exclusively operating in Canada.

Could you talk about how this business evolves over time? Do you see that evolving to be a larger part of the portfolio at Aramark? Are you investing in that business? Is it a growing business? And if you wanted to scale GPO, would you be able to develop one organically, or would you have to look outside your existing portfolio? Thanks.

Sure. Well, there's several questions in there, so let me try to approach it the way we think about food costs strategically. And I think within food costs, the way I at least kind of bucket our cost opportunities -- one is in the area of strategic sourcing. And I'll come back to that, because that's where the core of your question is. But let me take you through the whole pipeline before I come back.

The second is in the area of menu optimization and our ability to really simplify our menu, which simplifies SKUs, which simplifies the number of suppliers we have, which consolidates our purchasing strength, which adds to our scale and leverage. The third bucket is the whole food production process, kind of the manufacturing process. And then the fourth bucket is waste.

We have opportunities across all of those. Most of our historical focus has been focused on waste bucket. And so when you talk about strategic sourcing, menu optimization or the food production process, we have opportunities across each and every one of those.

On the strategic sourcing side, we do have a GPO in Canada. It is growing, it is something we are investing in, it is something that's a priority for us. But as you think about that margin march, I think you should think about it that we can certainly strengthen our position relative to the GPO.

But understand, we have a lot of strength and leverage with suppliers today, given our size and scale. So it's something we'll continue to look at. But at this moment in time, I think it's fair for you to walk away with -- our margin march rests largely on our ability to get at those four buckets of food, plus what we need to do on the labor and SG&A, to deliver against that margin.

Okay, got it. Thanks a lot.

Stephen Grambling.

Good morning. I have one quick question and a follow-up. You had mentioned exiting some of the lower-returning businesses in the International segment. What percentage of contracts or sales in the North America FFS business would you say would be lower-returning at this point, that you would maybe not underwrite today? And as you are getting better at putting reporting software in place, is the ability to monitor contracts and/or evaluate exiting them, changing? Thanks.

Well, let me start, and then I'll ask Steve to build. There is a very, very, very low percentage of our North America contracts where we would lose money. Most of those would be in the early years. And I think in most instances, we would either have contractual language or would find a way, if we were into a contract that wasn't performing as we have pro forma-ed -- a way to sit down a few years into that, to try to change the economic terms. Or if an exit needed to happen, we would certainly evaluate that.

But I think in North America, you should think of it as, there are very few contracts that are not profitable. And even those that are in the low-margin place are ones that we feel we've got levers to pull as a leadership team, to make them more profitable and get us the kind of return that we --

Yes, I would add, I would say there are very few contracts outside of North America that are unprofitable, as a general matter. I do believe our -- I believe we have adequate -- we have many systems challenges across the organization. However, I do believe we have adequate systems to give us visibility into whether particular pieces of business meet appropriate return expectations.

And I would hope -- to answer the last part of your question, Stephen -- I hope, frankly, we are getting harder on our business, in terms of expectations around meeting returns, in general. It is, of course, very easy to grow the business. It's a little bit harder to do it growing with appropriate returns and profitability.

And so I do think our scrutiny around some of the businesses in general, is increasing as we want to make sure we have the right balance in terms of meeting all of our financial metrics. And I would not expect that will go away, certainly, anytime in the near future.

And I think one of the reasons why Steve mentioned earlier that we've looked at this outside the US, is more to look at it within a given country, where you don't have the scale. It becomes a different question relative to the long-term viability and return of that business. And so, again, these are very isolated instances, but we have begun to cast that lens on certain businesses outside the US.

That's helpful. One follow-up, given you mentioned some of the challenges in communication-related software. Where are you -- or what does the organization look like now in terms of the feedback loop, and where's the opportunity?

Could you maybe just re-characterize that? I'm sorry, I'm not sure I totally understood that.

It goes into the menu optimization, some of the other software you are implementing. But at this point, how quickly do you get real-time information, for example? And how much of the organization has real-time information that can help you manage labor or menu optimization -- all the other things?

Sure. Well, let me just give you kind of the pipeline of technology investments that we've made. And again, these are at various stages, so we can go much deeper on this at our Investor Day. But on the labor side, we've invested in Kronos -- that's broadly been deployed. On the selling side, we've deployed Salesforce.com.

We've worked on our global field financials. So I think it's probably not a fair takeaway to conclude that we don't have information to manage the business or the communication to understand what's happening in the businesses.

Where we're earlier in the deployment would be things like procure-to-pay, Prima-Web, Ariba -- particularly those technology investments on the food side. So again, we are beginning to put some of those into pilot, and would expect to see some level of rollout as we come out of pilot.

That's great. Look forward to I-Day.

Thanks.

Andy Wittmann.

Thanks. I have a question for Steve. Steve, now that you've been at the Company for a little while and are getting more acquainted with the books, are there any opportunities that you see in terms of potentially around the tax rate of the Company, as you've looked at what's been done and what you can do? Maybe some help on that, and what you're thinking for the effective tax rate next year would be helpful.

Yes, sure, I'll answer the second question first. I would think our effective tax rate should be comparable -- 35%, 36% or so. I think we were around 35% for a full-year basis in 2015. I don't think it'll be significantly different.

I think in the medium term, we have modest opportunity to improve the tax rate, as it relates to both cash taxes and book taxes. I don't think -- the nature of our business is not such where we have maybe the scale of opportunities as some companies with a different profile around intellectual property and transfer pricing, and stuff moving across borders. We tend to be very local, as a matter of course. But I think there is some opportunity there.

It will take, realistically, a little bit of time for us. We will need to do some structural things in terms of how we finance ourselves internally, and how ultimately we approach some aspects of the limit to transfer pricing that we have. So in the medium term, there's some modest improvement potential there for us. I do not believe -- again, based on the fact of us being US-domiciled and the nature of our business, there's probably not something that will significantly change that number in the next couple of years, at least under the current legislative environment we have around taxes.

Thank you, that's helpful. My follow-up question is on the uniform side of the business. What we had seen from the other competitors in that space is that they've been benefiting substantially from the energy input costs declining. But outside of that, margins are flattening out.

Now, it seems like your business has got a little bit more moving parts with investments being made. So Steve, I was hoping you could give us a little clarity inside of the uniform business. How much were some of these start-up costs or investments? And what do you think the core margin expansions look like, given the much better top-line growth here?

So let me start, and then I'll let Steve build. I think if you look at the performance of our uniform business, you should walk away with the following conclusions, whether it's 2015 or whether it's the last several years. One is that the broad-based momentum continues, in terms of our ability to grow the top line mid-single-digit, our ability to capture margin. I think the 50 basis points of margin expansion you saw on the year was built off a couple of years of 70-basis point margin improvement.

So we feel very good about our continued ability to grow the top line, as well as expand margins. What you did see and will continue to see as we invest in capacity is a shorter-term impact on that margin expansion. And so I just want to make sure that -- as you think about the performance of the business, it has been very good relative to the momentum it has, and I think that will continue. But you do have this investment in capacity that we much-need to do, particularly on the West Coast, for top-line purposes.

Yes, our uniform experience in 2016, I don't believe, will be different than the experience we had for the whole Company in 2015, when you think about the cadence of investments. We will incur some duplicative costs in the first half, because we're essentially -- we are starting up something new. So we've got -- with a single stream of revenue. And so we've got to pay two-fold to get the new one up, before we can make changes to the old one.

And so the lion's share of the improvement in the fiscal year will be in the second half, just based on the nature of that investment. And I think if you went back and looked at the cadence of our uniform business over the last five or 10 years, you would see something actually quite similar.

As we make money available, from an investment standpoint, we tend to tread water for a period or two to get that bedded down. But it's that incremental capacity that then facilitates our ability to drive the incremental growth.

And to Eric's point, we have great investment opportunities in uniforms. It's a business that generates very good returns, obviously as you can see, for us. And it's a good problem for us to have, for sure, in terms of where our capacity currently is. And we'll make sure we're doing the right thing for them to drive the financial returns that we know they're capable of.

If I could ask a follow-up to my follow-up. I'd be curious for an update on the impact of oil and gas. You touched on it in the prepared remarks, both to the food business, where that's been trending, is that continuing to get softer? As well as the implications for your uniform business?

Yes, so on oil and gas, generally, most of our impact in the FY15 was North America-focused. So I would tell you we probably incurred about $40 million of negative revenue headwinds over the course of the year, almost all in Canada in the remote tar sands, oil sands business. And EBIT was probably high-single-digits, close to $10 million of year-over-year reduction.

We really did not see a lot of direct oil and gas headwind outside of Canada in FY15. And part of the reason we're trying to set expectations for the first half of this year -- I do think the headwinds that we currently see are growing, specifically in Europe, specifically in the North Sea offshore platform business. It seems to be lagging in terms of the re-activity, relative to what North America did.

So I think we will probably have one more quarter, based on the cadence. If energy stays where it is, we probably have one more quarter of down in North America, as we cycle through where things seem to have landed. And I do think we have some modest incremental headwind in the UK, which is what's partially driving our expectations for their revenue performance in the first half of the year.

As it relates to uniforms specifically, yes, we clearly benefited somewhat from diesel, as a general rule. Now, we do tend to hedge our perspective diesel and fuel requirements out over a longer period of time than the next year, so we kind of layer in. So there was some modest improvement in general.

And then I guess, the last thing, back to Europe, real quickly, I would point out that our offshore business -- in general, oil and gas, I think we've said, is about 3% of the total Company. So the European portion of that is obviously that much smaller. So I don't believe it's material, but it will be under a little bit of pressure.

Thank you.

Gary Bisbee.

Hey, guys, good morning.

Hi, Gary.

I'll wait for the details in two weeks on the investments. But I just wanted to get a sense -- total dollars spent through the P&L and the amount being capitalized. Should we think of that bucket of investing in technology and systems as, in absolute dollar terms, growing 2016 verses 2015, and that's why that continues to be somewhat of a headwind to the total productivity gains? Or do we get to a point at some point where that spend peaks in dollar terms?

Well, I think you get to a point where that spending peaks. I don't think we've reached the peak on the technology side. We are probably closer to the peak on the growth, as well as the capability side. But I think the technology investment, Gary, is one that, again, will continue to be one that we've got to invest behind. And I think year over year, I mean, our plan right now would have that investment being similar to 2015. I wouldn't see an increase in it.

Okay. And so then, why -- I'm trying to understand from a margin perspective if -- two things. Number one, if that spend in dollar terms is similar and revenue is higher, that should help margins? And secondly, you have startup losses -- I realize quarter to quarter, the timing could change. But you have them every year, because you're selling $1 billion-plus of new business every year. So I still don't understand why that would be something that depresses margin?

At the risk of over-thinking this, I would be careful about the numbers, in general. I think I'd actually go back to a comment Eric made around our total cost of investment that we anticipate over the course of the year, whether it's startup-related or whether it's technology-related. To some extent, we do not know yet the specifics of some of the startup-associated costs, because some of those accounts. So we're certainly making some assumptions that our overall experience around the intensity required for both startups, as well as the cadence of technology, will be comparable proportionally to what we experienced in 2015. And so to the extent it's better than that, obviously we'll benefit. But it's a little too early in the year for us to make an assumption different than it should be comparable on a year-over-year basis.

And this concludes the Q&A portion of the call. I now turn it back over to the presenters.

Great. Well, thanks, Kelly. First of all, thanks to everybody for joining us. I think we all look forward to the December 1 investor webcast. And as always, we appreciate your interest in Aramark. Everybody have a great day.

This concludes today's conference call. You may now disconnect.