Aramark (ARMK) 2016 Q2 法說會逐字稿

Good morning, and welcome to Aramark's second-quarter 2016 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, Jamison, and welcome to Aramark's conference call to review operating results for the second quarter of 2016. 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 is included in our press release this morning, which can be found on our website, www.aramark.com, and is detailed on page 2 of our 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 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, as well.

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

Thank you, Ian, and good morning, everyone. I'm pleased to report another solid quarter, which, as you saw in this morning's release, keeps our outlook for the year unchanged. Strong in-market execution of our strategy is delivering balanced and broad-based business momentum across the portfolio. In fact, both in quarter and year to date, all of our segments are showing top-line growth, margin expansion, and improved profitability.

Our improved performance is also creating opportunity with regards to the strategic management of the business. Today's release includes some commentary on our acquisition of a small Irish specialty food company, Avoca, which brings a very strong European brand and new offerings to Aramark's portfolio. The release also includes references to our previously announced portfolio optimization efforts, including exiting from India and two small countries in South America, which are driving meaningful margin improvement in our emerging markets business.

Four years ago, with trailing financial metrics and higher leverage, we might have been more hesitant to take some of these strategic actions, especially with the accompanying short-term volatility they create in quarterly results. But with the momentum in improving our financials, and a good line of sight to our food, labor, and overhead productivity goals, flexibility to act on strategic decisions like bolt-on M&A and portfolio actions only enhances our ability to compete and to create long-term shareholder value going forward.

Looking at the quarter, adjusted earnings per share were $0.39, an 8% increase from last year on a constant-currency basis. Total Company organic sales were up 1%, and were negatively impacted by about 1 point -- excuse me, 1.5 point, from the Easter holiday shift, as well as the portfolio actions we took to exit unprofitable geographies and accounts -- actions, again, that were consistent with our Investor Day comments, as we focus on margins and returns.

Productivity gains facilitated an increase in adjusted operating margins to 6.2%, a 30-basis-point improvement versus year ago. Consistent with last quarter, about half of our productivity gains were reinvested in the business, as we continue to support technology, capability, and growth initiatives across the organization. Overall, our constant-currency adjusted operating income was up 6%.

Looking at our strategic pillar of growth, retention rates are strong, and remain consistent with our targeted mid-90s percentage for the year. Our new business pipeline is encouraging, and we're tracking north of $1 billion in new business wins for the year. North America organic sales were up 1% in the quarter, with the early Easter holiday creating about 0.5 point of timing headwind versus year ago.

Our portfolio actions reduced sales by about 1 point, but are meaningful accretive to margin improvement going forward. North America new business wins were strong, particularly in higher education, including wins at Fordham University, the University of Louisville, Presbyterian University, and Valdosta State.

Our International business grew organic sales by 1%. In Europe, we saw good growth in Ireland, Germany, and Spain, offset by further declines in oil drilling in the North Sea. Emerging market business growth was strong, led by double-digit growth in China, Korea, and Mexico. Our new business wins were also strong in our International markets. During the quarter, we won the largest client in our German business's history -- the Cologne Trade Fair Company. This is a 10-year agreement, starting in January, that will provide for the delivery of food service for one of the world's most prestigious event venues, and is the sixth-largest trade fair in an exhibition convention center in the world.

Our Uniform sector performance was equally positive. Uniforms continued to benefit from our investments in capacity expansion, which resulted in organic sales growth of 4% in the quarter.

Another highlight of the quarter was the start-up of our 15-year National Park Service contract at Yosemite, which I'm pleased to report has gone exceptionally well. I'd be remiss if not congratulating our entire leisure team for executing a very complex opening extremely well. We retained well over 95% of the roughly 1,000-plus legacy Yosemite employees, which we welcome to the Aramark family. We've been making enhancements to the facilities and upgrading technology to significantly enhance the guest experience as we head into the peak spring and summer season.

As is the case at Yosemite, innovation across the entire business remains an integral component of achieving our goals. Let me turn to one of the more important innovation areas, health and wellness, and give you an update on our partnership with the American Heart Association.

As part of our shared goal with AHA to improve the diet and health of millions of consumers, we've launched the next phase of our Healthy For Life, 20 By 20 Alliance that provides underserved communities with vital educational support. A new engagement program is currently being piloted in Chicago, Houston, and Philadelphia that teaches people about a balanced diet and how to shop for nutritious ingredients to prepare healthy meals. The learnings will be used to scale the program nationwide, and the impact of well-being will impact tens of thousands of families in communities most in need of this support.

Looking at our second strategic pillar, capturing productivity, we continue to execute well. We saw gains in our base productivity across food, labor, and overheads, which drove about a 60-basis-point margin increase in the quarter. These gains continue to be driven by a focus on waste, as well as reducing complexity across the supply chain to reduce food costs, while also reducing our labor cost through a focus on overtime and agency expenses. In the further reduction of overheads, we continue to expand our usage of zero-based budgeting processes.

Productivity reinvestment in enterprise technology is and will remain an important catalyst in unlocking margin potential, including the deployment of our major tool investments. Kronos, our labor management tool, is now deployed in over 90% of our North America locations. Prima Web, our master menu system, is installed in about two-thirds of our North America locations.

Ariba, which is an SAP solution, is really still in the early stages. By month's end, we will be enabled in 30 pilot locations, where we'll continue to refine our processes, tools, and KPIs to ensure we have it right before broad launch. We're also making good progress with our Micros installation, which is now in about 20% of our locations. Again, remember that Micros is our point-of-sale system that facilitates our broader pricing strategy. Expect us to continue to expand usage of these tools in coming quarters and have a good line of sight to capture our food, labor, and overhead improvement that we identified at Investor Day.

Occasionally, we're asked about the pace of deployment in terms of executing more quickly, which is a very fair question. And I'd only point out that, unlike a fast-food chain or quick-serve restaurant that has a consistent physical footprint, each of our 10,000 plus locations is unique, and requires some degree of customization to optimize results. So we'll continue to approach the rollout in a measured way, geared to our business, that ensures we receive maximum benefit, not only for us but for our clients and the consumers that we serve.

In the second quarter, our productivity gains net of reinvestment drove an increase in North America constant-currency adjusted operating income of 4%, which led to a 20-basis-point increase in North America AOI margins. Our International business delivered a 6% increase in constant-currency AOI, and a 30-basis-point improvement in margins, with particular strong margin expansion across South America. Uniforms drove a 9% increase in AOI, coupled with a 60-basis-point improvement in margins. So I think it's fairly evident that our relentless focus on cost and productivity is paying off across our businesses.

Moving to our strategic pillar of people, in second quarter we garnered strong validation to ensure we're creating a great place to work. Not only did we earn a spot on Fortune's Most Admired Companies list, we achieved first-place ranking for diversified outsourcing companies. We also ranked in the top three categories for all nine criteria that companies are evaluated against, including first place for innovation, global competitiveness, and social responsibility. This honor is a testament to our 270,000 dedicated associates around the world who sell and serve with passion every day.

Also in the quarter, we were included in Diversity Inc.'s Top 25 Noteworthy Companies for Diversity, which recognized our ongoing commitment to a diverse and inclusive workforce.

In summary, we had strong financial and operational performance in the quarter, and we continue to be encouraged by our progress. With that, let me turn the call over to Steve for a more detailed look at the numbers.

Thanks, Eric, and good morning, everyone. I will start with the observation that our second-quarter performance was largely consistent with our broader expectations for all of our segments. On slide 4, let me walk through the revenue reconciliation versus the prior year.

We reported second-quarter sales of nearly $3.6 billion in 2016. As you can see, this is essentially equivalent to the nearly $3.6 billion in sales we recorded in the prior year, though the $20 million difference between the two years does round down to a negative 1% change on a GAAP basis year on year.

The largest reconciling item between the two years is foreign currency. The stronger US dollar in the current year reduced translated revenue from our International businesses by almost $70 million, or 2%. Even though the US dollar weakened a bit in the last month of the quarter, on average it was 8% stronger than the prior-year period. In our case, both the Canadian dollar and the Chilean peso were down low double-digit percentages in the second quarter on average, versus prior year.

Moving down the reconciliation, we recorded approximately $8 million in revenue from our Irish acquisition which closed during the quarter. Consistent with our past practice, we will exclude significant M&A-related revenue from our calculation of organic results for the first year of ownership. We would expect ultimately to record approximately $50 million in GAAP revenue from this transaction by the conclusion of our fiscal year. Our organic revenue therefore increased approximately $40 million in the quarter, or 1%.

There are several components worth delineating within this figure. First, the timing of Easter in 2016 cost us about a day of service versus the prior-year second quarter in several lines of business, or approximately 0.5% for the total Company. This will obviously reverse in the third quarter. Second, the headwinds we face, along with many other companies, from lower energy prices continued. In our case, this was another 0.5% of revenue, and was spread across both our International and North American FSS segments.

Finally, the specific portfolio-optimization steps that we've announced over the last couple of quarters, in both our North American and International FSS segments, reduced revenue by a full 1% in the quarter on a year-over-year basis. The underlying base business, therefore, grew approximately 3%, which combined with the 2% of headwinds from Easter, energy, and the portfolio pruning, gives us the recorded 1% organic growth.

As for our base business, specifically in our North American FSS business, we had notable revenue gains in our sports and entertainment, and higher education businesses. I would point out that, while we started to serve Yosemite, as noted by Eric earlier, it did not have a material impact on the Company financially in the second quarter.

In our International FSS segment, growth was broad based, with Ireland -- excluding Avoca -- China, Mexico, and Korea all recording double-digit gains. Our Uniform segment continued its very steady revenue trend, with another quarter of 4% growth.

Now let's move to slide 5 to discuss the changes in adjusted operating income and our profitability during the quarter. In general, we continue to make excellent progress in this regard, led by productivity initiatives and our strategic portfolio pruning actions. In the center of the page, second quarter 2016 adjusted operating income was $221 million, approximately 4% higher than the prior year's $213 million. However, we did incur a modest 2% currency headwind on earnings during the quarter, which is consistent with the revenue discussion of a few minutes ago. Therefore, on a constant-currency basis, our adjusted operating income improved 6% year over year. Our margin increased to 6.2%, which is a record level of profitability for us, as a company, in the second quarter.

All three segments reported robust improvements in adjusted operating income, with North America FSS up 4%, International FSS up 6%, and Uniforms up 9% on a year-over-year basis. Broad productivity initiatives favorably impacted all segments, while the portfolio actions benefited the North America and International segments. In addition, Uniforms benefited from our expected bounce-back in operating effectiveness, as our West Coast capacity expansion project was completed as planned during the quarter.

Slide 6 provides a roll-forward to help bridge our adjusted EPS year over year, and is presented in the same format as that of adjusted operating income. Our adjusted EPS increased to $0.39 in the quarter, versus the $0.37 we reported in the second quarter of 2015. Taking into account approximately $0.01 of currency headwind, this is an 8% increase on a constant-currency basis. Interest expense was flat for the quarter, year over year, and the adjusted effective tax rate was consistent with the prior-year quarter, at slightly under 36%.

Moving to slide 7, I'll discuss the current state of the balance sheet for a moment. Our financial flexibility, in a word, is strong; and continues to improve year over year, consistent with our expectations. We ended the quarter with approximately $150 million of cash on hand, and no draw on our revolving credit facility. Together, these provide over $850 million in available liquidity. Our leverage ratio, as measured by total debt to EBITDA, improved nearly 25 basis points year over year in the quarter, to 4.1 times. And total debt declined year over year by $160 million.

We recently renewed, through 2019, our $350 million accounts receivable securitization facility, with modestly improved economics. As a result, we have no significant debt maturities of any kind prior to 2019. Given current conditions, we are continuing to closely monitor the markets, and we do intend to be opportunistic, if the economics are justified, to further extend the tenor of our debt maturities.

Finally, year-to-date cash flow, while negative due to the seasonality of our business, has thus far shown a very nice improvement year over year, from both higher earnings and better working capital performance.

I'll now make a few comments regarding our outlook for the remainder of the year on slide 8. Beginning with the full-year expectations on the left, our adjusted EPS range for the year remains exactly the same as it's been, $1.65 to $1.75. Due to rounding, we have incurred $0.03 of year-to-date currency headwinds in the first six months. At current rates, we should have less of a currency headwind for the second half of the year than we faced in the first, and modestly less than we anticipated last quarter. I would estimate approximately another $0.01 to go, which will largely be in the third quarter.

Our capital spending expectations for the year also remain unchanged. We would not expect it to exceed 3.5% of revenue for the year. Our bond offering last quarter did not impact our interest expense assumptions for the year, which remain flat versus 2015. And we continue to expect a full-year effective tax rate of between 35% to 36%, which is comparable to the prior year.

Our free cash flow should be at least $200 million, which would be consistent with the earnings growth in the range above, and clearly our year-to-date performance gives us a nice start towards achieving this improvement.

Our segment expectations for the second half of 2016 are on the right, and you will see they're directionally consistent with our long-term algorithm expectations for broad-based improvement in the business, both in terms of revenue growth as well as margin expansion. All of our segments will show year-on-year growth in revenue in the second half. Our FSS North America segment will benefit from a full period of Yosemite revenue, which should approximate $90 million in the second half. We expect growth in Europe and Asia will drive our International revenue segments. Uniforms will remain on its steady trajectory of recent years.

For the Company, we expect our portfolio optimization efforts will represent about a 1% headwind on a full-year basis. Furthermore, at current levels, the energy sector will account for another 50 basis points of headwind for the year. And, finally, as I mentioned earlier, currency headwinds are mitigating, thus at current FX rates, revenue changes from FX will present about a half -- headwinds equal to about a half of what we experienced in the first half of the year.

Adjusted operating income should grow, year on year, in each of our segments in the second half, primarily driven by better productivity, and complemented by our portfolio-optimization activities. This segment outlook is consistent with our full-year earnings guidance.

I will now turn the call back over to Eric for some closing remarks in advance of Q&A. Eric?

Thank you, Steve. In summary, we continue to execute against our focused strategy that's driving stronger client relationships, moving Aramark to a best-in-class employer, and improving our financial results across businesses and geographies. As the momentum illustrates, we've got the right team with the right strategy that balances continuously improving financial performance with prudent reinvestment to maximize long-term shareholder value.

With that, Jamison, I think we're ready to take our first question.

(Operator Instructions)

Your first question comes from the line of Gary Bisbee. Your line is open.

Hi, guys. Good morning.

Good morning, Gary.

Hi, Gary.

The first question, on the North America food and support services, Easter you called out; but what else accounts for the sequential deceleration in the year-over-year growth rate? Is that just the normal ebb and flow of the business? It seemed like maybe it was a little more than that.

Well, I think Gary, if the you look at our growth in North America, in the quarter and year to date I think we're seeing a pretty similar story develop, which is strong growth in sports and entertainment, education, leisure, and even our business, B&I business, is experiencing some growth. The real pressure points in North America, I'd say, rest in, as Steve mentioned, as we've exited in one instance a large, high-profile corrections account, as well as a similar situation in health care.

I think as is typical in this business, and you've heard me talk about how lumpy it is, while we feel good about where we stand both in terms of new business pipeline in North America, as well as some of the new business wins, the way in which we on-board that new business, the timing of that I think has been a little different than maybe we had anticipated. I'd say those are the real variables driving the North America business.

Gary, maybe I would just add, the seasonality of our business does matter in terms of the percentage changes right around the sequential. The dollar impact of things like the portfolio actions we've taken, as well as the energy head wind is roughly comparable first quarter and second quarter, but the revenue base that it's applied against is going to be much smaller in the second quarter, just because of seasonality. You end up with more of a percentage change, just because the base is a little bit different in size.

Okay, that makes sense. Then the follow-up, just more broadly as we think about it, you gave us the adjustments and I appreciate that. Adding those all back, 3% or so. When I step back, that's still the low end of your range. That's quite a bit below what Compass is doing. How do you think about what it's going to take to maybe get to the mid-point of your range over time? Is Yosemite coming in enough, or are there some other levers you need to pull here to be growing more to the mid or upper end at some point of the long-term range? Thank you.

Sure. Well, I don't think anything's changed, Gary, relative to the 3% to 5% framework. The multi-year framework, I think, remains very much intact from our perspective. Again, the good news is I think we're seeing growth across all reportable segments. There's no debating in 2016 that we're going to encounter some of this head wind, both from a portfolio action and energy perspective.

As we look at the business, again, the drivers of this business are retention that stays fairly steady at that mid-90% range. That's factual. Our base business is actually performing well, which basically puts you back on the new business question. I think the new business pipeline looks good. As I mentioned in my comments, we expect to book north of $1 billion in new business this year. But it's really the on-boarding of that new business that creates the lumpy quarter-to-quarter optics that we deal with.

I think as we look long term, we're going to play our game. Again, we're confident in the algorithm, 3% to 5%. Having said that, we're going to run this business for the long term. Where we see and have opportunities to take corrective actions against the margin and return spring that we talked about at Investor Day, we're going to pursue them.

Great. That's helpful, thank you.

Your next question comes from the line of Denny Galindo. Your line is open.

Hi there, good morning. Thanks for taking my questions. I wanted to delve into the education, since we're in a season where you have a lot of wins. You called out three wins, then we found a number of losses. I wanted to see if you could give any more color on the Toronto loss. It seemed unusual, because they were moving from outsourcing to self-operated; whereas I had the feeling that generally it's a one-way street -- once they go to outsourcing they -- maybe it shifts between the players from time to time, but it's unusual for it to go away from outsourcing. Then we were estimating this might be hike a $0.02 impact in 2017. Maybe if you could give us any color there, that would be helpful, as well?

Sure. Well, I think a couple of things. I think first of all, Denny, I'm not going to talk about any specific clients, but what I would I say is there is an industry dynamic where in some instances business will convert from competitor to competitor, or in some instances it will convert from outsource back to in-sourced. It's not a unique to a particular client phenomenon. That in fact does take place.

I think, again, as I said in our opening commentary, our education business continues to perform very well through second quarter, through the first half of the year, and certainly as we look to the four education clients that I highlighted as we on-board those in September, would expect to continue to see that education business perform like it has for us in the last several years.

Again, I would caution you that when you look at any of these social media posts or warn notices, it's only one side of the story. As you try to net out in a particular line of business, my caution would be in some instances there are new business wins that we have that we're actually unable to disclose because of certain agreements we have with clients. It's very difficult to look at what you're seeing in the media and draw any long-term conclusions. That would be my one caution.

Okay, that's very helpful. Secondly on sports and leisure, it looks like we were looking at the attendance. It looks like Toronto's attendance was very strong this year. You did lose one baseball team net, going from 11 to 10. I think you have both the presidential conventions, and of course the full quarter of Yosemite, which sounds like it adds maybe 1.9% or so. Is this going to create an unusually strong quarter next year -- I'm sorry, next quarter, for that sports and leisure line item?

Well, again, I'd make the following point. I think our sports and entertainment business has performed very well. It's a combination of things. It's a combination of what happened relative to some wins in the business, coupled with our performance to drive per-capita consumption, coupled with some of the things that have happened from a playoff perspective, as well. We hosted the NCAAs this year. We've had a very successful run.

I think as we look at our sports and entertainment business, again, you'll see continued performance that again, in a given quarter-to-quarter lap might create a little bit of pressure. But I would say in the whole scheme of things not to hang your hat on any type of game schedule or playoff schedule or special event schedule. Again, in the whole scheme of the Company it's actually not that meaningful.

That's it from me. Thanks.

Thanks, Denny.

Your next question comes from the line of Andrew Steinerman. Your line is open.

Hi. Could you talk a little bit about support services, and how is that doing? Are you getting some of those margin enhancements out of support services, or is most of the margin enhancement coming from the food services side of the business?

Good morning, Andrew. This is Steve. Just to make sure I understand, when you're talking support services, you're specifically talking about what we would call facilities as opposed to food? I want to make sure I answer it correctly.

Yes, facility services, park services.

I think our progress -- I wouldn't differentiate significantly the margin progress we're making across food or facilities. Obviously, food per se is not a lever on the facilities side. It's much more around labor management. We're also much further along in the roll-out of our primary labor management tool, which is the Kronos tool. I don't believe there's a significant difference in the cadence around progress in either one of those two sectors.

The only thing I would add, Andrew, is if you think about it, the framework's the same. What we're trying to do is to improve head count productivity across any of our lines of business, whether it's food, facilities, uniforms, health care technology. The way we do that is to drive a real aggressive management approach to the management of our labor, as well as in the case of facilities, the same thing applies to the materials we purchase, just like we would on the food side. I think this margin march, the way you should think about it is it's very broad-based across lines of business. Almost, it's virtually every line of business, in every geography. It's very consistent across the Company.

Okay, thank you.

Your next question comes from the line of Stephen Grambling. Your line is open.

Thanks for taking the question. Good morning.

Good morning, Stephen.

As you think about the Micros roll-out and pricing strategies, are you already able to start testing some of those pricing tools, or do you have to wait until you get critical mass?

Well, anything that we would apply to Micros we would be in pilot. I think I mentioned earlier we were about 20% or so on the Micros roll-out. We certainly are piloting things, Stephen. In terms of the broad-based roll-out, again, as I mentioned before, our pricing initiatives and strategies are very much in the formative phases. The deployment of those will largely take place as we go forward. We're right now purely in pilot. Again, that's evidenced by the fact that the Micros roll-out is pretty limited in terms of its current deployment.

Then on margin expansion more broadly, I think at the beginning of the year you had always anticipated a bit more flow0through in the back half relative to the first half. It seems like you've exceeded that so far in the first half, yet you're still reinvesting a consistent 50%. As you look into the second half, does that mean that you're going to be increasing the reinvestment based on where base margins have been?

No, I don't think we think about it that way. I think what we've done, Stephen, if you think about the last couple of years, I would say there is a bit of a principle that would say our investment approach is driven by a couple of things. Typically, when we went into a plan year you'd see a little more heavier investment during the first half of the year. It can also be based on the roll-out of certain initiatives.

Broadly speaking, we're making a lot of progress with a lot of runway ahead of us. Again, as we looked at the first half, our base productivity showed a 60-basis-point improvement. We invested 30 bips of that back into the business. I wouldn't say that becomes a trend. I think we continue to look and evaluate. I think for the most part you should expect first-half investments to be a little higher than you'd typically see in the second half.

Fair enough. One more, if I can sneak it in. You mentioned the working capital improvements that helped free cash flow. Can you talk to whether that's a sustainable thing, if there's additional opportunities stemming from the various initiatives?

I'll try to answer that, Stephen. Certainly I hope some of it's sustainable. There's no doubt a portion of it's timing. In the prior year we were making -- prior year being 2015 -- we made some large commission payments to a former client based on some activity in 2014. We didn't have to do that this year, which would be a one-off event in the first half of the year that would not necessarily carry forward. I think we're doing very well in terms of collections on things like DSO that's getting a lot more focus in the organization.

As we continue to consolidate transactional activity into more of a shared service center environment, ultimately it will give us more visibility and control on centralized disbursements, specifically on the payable side. I wouldn't want to over-promise how quickly we can make that happen.

As I said before, I think the start is promising. It certainly gives us a higher level of confidence that we can achieve the target we've set out here at the beginning of the year. So much of our working capital is seasonal in the fourth quarter. While we're in good shape sitting here today, the reality is much of it will be determined on how we perform in the fourth quarter.

That's great, thanks so much. Best of luck in the back half.

Thank you.

Your next question comes from the line of Anj Singh. Your line is now open.

Hi, good morning. Thanks for taking my questions.

Good morning.

My first one, a question as it relates to your education business; but interested in how it relates to your overall business, also. You've had some notable gains and losses of education contracts, either replacing a long-time incumbent, or being displaced after a long-time of incumbency. Could you talk about some of the factors involved in protecting and poaching such long-term relationships?

Sure. I would say as you look at this business, and I'd say this applies not purely just to education, but to most of our lines of business, the three reasons why we win, or the three reasons why we might lose an account, really come back to the following. Are we providing real meaningful innovation for the client and the consumer? Second, are we providing a consistently great customer experience at the moment of truth? Third, do we have the right team on the ground?

If we win new business, typically it's because we've demonstrated an ability to do that and we'll have the potential client tour existing clients and be able to see and touch and feel that. If we find ourselves in a tough retention situation, it's usually for one of those three variables, as well.

Having said that, I want to come back to the fact that we expect our education retention rates this year to once again be in the high 90%s. I want to come back to that point, along with the fact that we are very encouraged by our new business wins. I want to make sure everybody at least has that as a data point as part of your fact set.

Okay, that's helpful. As a follow-up on Avoca, could you talk about this acquisition as it relates to your brand strategy? Is there a focus on adding brands selectively through M&A over time, or should we expect this one to just get absorbed and re-branded as Aramark? Trying to understand your strategy here versus some of your multi-branded competitors? Thanks.

Let me talk to Avoca, and then I'll lift up and talk more broadly. First of all, Avoca is a leader in Ireland. Again, this is a small, tuck-in acquisition of a leading Irish retail brand. Actually they're one of the most successful retailers in Ireland, and have a market-leading position.

To us, it really complements our strategy. Where we would look to add brands to improve our portfolio offering, really is around does it give us additional scale? Does it give us additional competencies? Does it allow us to maybe play in a particular area of the market where we're not playing today?

I think the fact is that Avoca is a great destination store. They've got a very successful catering business. The Pratt family remains involved. I think it's an acquisition that you'll see will continue to perform well. The broader answer to your question is yes, we will look for these bolt-on, tuck-in acquisitions of brands as we look to the future.

Okay, got it. Appreciate the thoughts. Thanks.

Your next question comes from the line of Sara Gubins. Your line is open.

Thank you. As you're focusing both on revenue growth and margin expansion at the same time, do you see more contracts like Michigan and the health care one that you mentioned that might be low margin, that you would consider exiting to help with the overall margin profile?

Hi, Sara. It's Eric. Yes, I think one of the things that I think we talked a little bit about at Investor Day is we're going to apply a very disciplined screen as we go forward around returns and margin.

That really results in a couple of applications. One is we will look where we have select, smaller geographies, where we've been in the country and haven't been able to make in-roads to the level of profitability and return that we want; and/or at the account level, where after some period of time we haven't been able to maybe implement some of the things we agreed to in the contract, or the pace of play on some of the things that were originally part of the pro forma are not playing out. We're going to be proactive in having those conversations and in making those decisions.

I do think that while they'll be fairly limited over time, I do think it's a discipline and a screen that we feel is important to run the business for the long term, in terms of shareholder value creation.

Okay, great. Then could you give us some more color on the on-boarding being different from what you thought for some of the new business? I know there were issues last year around start-ups. Is this something similar or is it different?

Well again, I think if you're talking about Yosemite, which is the big one we on-boarded in the quarter, first of all, this is a big honor for us to be chosen. The team just really worked seamlessly during that on-boarding process. We continue to manage that transition. For the most part, because we were able to transfer the employee base, that makes the degree of difficulty for some of these openings a little bit easier. I think that, combined with a very aggressive plan that Bruce Fears and our leisure team had, has made that go exceedingly well.

I think as we look at this, one of the things that we're spending a lot of time on across all of our lines of business is the whole concept of mobilization and start-ups. I'd say the answer to the Yosemite question is it was a very successful transition, very seamless. I'd say going forward I think we've got a much more comprehensive plan as a result of some of our learnings the last few years, to make sure we get businesses started up across various lines of business in a more proactive and effective fashion going forward.

Okay, thank you.

Your next question comes from the line of Andy Wittmann. Your line is open.

Hi, great. Guys, the margin gains were in line with the plan. I'm curious as to what the start-up costs for Yosemite and for the California uniform realignment were in the quarter, so I can get a sense of maybe what was really underlying this quarter?

Yes, I'll make a brief comment on that, Andy. I think in the case of Yosemite, several million dollars was the bottom-line impact for us to the negative in terms of investment on start-up costs. We had about a month of revenue based on the start-up date. Obviously we're -- or a couple months of revenue. We were fully staffed and invested going into the quarter. That drag will improve as the year plays out, and we will certainly be profitable on a full-year basis by the time we get to the end of the year.

Then on the uniform side, I think the he easiest thing to do -- they obviously had a rough first quarter based on their historical performance in terms of profitability on a year-over-year basis. Almost all of that under-performance versus their historical average I think you can attribute directly to the expansion project that we were doing on the West Coast. I think that's the easiest way to quantify that for that line of business.

Andy, the only thing I would add, if you want to tick and tie your math to the 60 basis point of margin improvement, and then you figure the 30 basis points that we reinvested, I think about 2/3 of that would have been connected to start-ups, and the other 1/3 would have been connected to investments in technology and a few other things. I would just echo Steve's point that from a uniform standpoint, we are now through that capacity expansion. As we saw in the quarter, the solid quarter that uniforms had, we would expect the capacity expansion to be -- that we talked about on the West Coast for a few quarters to be behind us.

Okay, wow. That's an interesting set-up there. Thank you for that info. I'm curious as to how much longer with the trends that you're seeing do you see the oil and gas head winds continuing? I know you said there's probably a 50-bip head wind for the year. I'm just wondering, presumably this current quarter, the third quarter, it's going to be heavier than the fourth, which will probably a little heavier than the first. When do you feel like on a run-rate basis that growth rate starts stabilizing?

Well, obviously we don't have a crystal ball around the energy prices, which would give me a higher degree of confidence and a precise answer. From a cadence standpoint this year, just looking at what has continued to transpire with energy costs, I think your premise is right. Third quarter will probably be a touch more of a head wind than fourth, just based on the way energy has broadly behaved.

It's also there's a lag, I would remind you, around our client decisions. They don't react immediately to changes in the price, as well. I think for modeling purposes, I think it's best to just assume a fairly consistent head wind quarter to quarter on energy over the course of the whole year. I wouldn't expect the energy head wind in total in the second half to look radically different than what it has in the first.

Thank you.

(Operator Instructions)

Your next question comes from the line of Dan Dolev. Your line is open.

As I look at Compass, and I look at their organic growth, which is about on a 1-H basis about four times faster than yours. Is there anything that they're doing that you are not doing right now that you could be doing? Is it end markets? Is it being more aggressive on any of those markets? Thank you.

Sure, Dan. I'd say a couple of things. First of all, we look at our growth versus competition. I think if you look at it over time, for us it's important to make sure our growth is in line and ahead of the industry. If you look at the last couple years versus the competitor you mentioned, I think in 2014 we grew faster. I think last year they grew faster than us.

As you look across the globe and dig a little deeper, there will be geographies where we've grown faster each of the last several years. Certainly our international business is one of those. There will be markets where they've grown faster. If you look at the North America break-down, there are a couple of spaces where they play that we don't. One is in the GPO space, the other is the elder care space.

I would say again, we are at very different phases relative to our strategic focus. As I mentioned earlier, ours is going to apply a very strong return and margin filter. As we make any decision, we are going to have that top of mind in this organization -- make sure our orientation is around profitable growth. Again, that's translating into us doing a few things I think that might be different, just based on where each of the separate companies are in their evolution.

At the end of the day, I'm not going to obsess about any individual competitor. Our approach is to play our game. We have continued confidence in our ability to grow this business and create shareholder value going forward.

Got it. Then the follow-up on the EPS guidance. You saw $0.05 of EPS, of FX head wind in February. Now it's $0.04. Why not just let that $0.01 flow through to the guidance? Thank you.

I don't think we're that good to be that precise, is my answer. The currency today is different than the currency of last week. In general, it's consistently -- it has moved consistently enough in terms of the dollar, weakening a little bit, that I don't think we will have the head winds in total. We obviously provide a range for the year, and don't get specific within that range, back to -- I'd point you to Eric's broader comments around lumpiness across the business in general, et cetera. That's probably about as much as we can give you on that one.

Okay, understood. Thanks a lot.

Your next question comes from the line of Carla Casella. Your line is open.

Hi. I wondered if you could gives us some more thoughts on the cap structure? I know when you had spoken at our conference you had mentioned potentially converting more of your term loans into longer-term bonds, less-secured structure. Any thoughts on potential or timing there?

Yes, consistent with what I said in the prepared remarks, we're certainly constantly watching it. I don't think our longer-term objectives have changed. I think it is safe to assume we will gradually move away from the secured -- a very heavy secured structure, and take on more unsecured as the opportunity presents itself. That's obviously a term loan to bond kind of a trade over time.

The market conditions remain, of course, pretty good by historical standards. We'll try to be opportunistic in pursuing something when we think it makes the most sense for us as we balance other considerations. But our longer-term objective has not changed. You should expect us to continue to take incremental steps periodically to move in that direction, well in advance of any maturities that are coming towards us.

Okay. That what about you've got one bond that's callable you now. Any thoughts on whether a transaction could include looking at refinancing those, or is that longer-term on your priorities?

We look at all of our outstanding maturities. Obviously we'd have to jump over some term-loan debt to get to the callable bonds, and the term loans of course we can take out with no penalty. You have to get beyond that. We look at the math all the time. Obviously the call will also step down again in the future. Those economics change, but we look at that as part of the broader, what's the right financial and financial flexibility answer for us.

Okay, great. Thank you.

There are no further questions. I turn the call back over to the presenters.

Thank you, Megan. Again, thanks to everybody for joining us. The year's off to a good start, and we continue to have confidence in the road that lies ahead. We thank you for your time, your interest, and your investment in Aramark, and look forward to talking to you at the end of the third quarter. Thank you.