Aramark (ARMK) 2016 Q4 法說會逐字稿

Good morning, and welcome to Aramark's fourth-quarter 2016 earnings 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 Kate Pearlman, Vice President of Investor Relations. Kate, please proceed.

Thank you Kaylen, and welcome to Aramark's conference call to review operating results for the fourth quarter and full year 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're 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, including our expectations for FY17. 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 annual report on form 10K and our other 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 mornings press release, as well as on our website. With that, I'll turn the call over to Eric.

Thanks, Kate. Good morning, and thanks to everyone for joining us. Before starting, let me just take a moment to acknowledge a changing of the guard that you just heard in our Investor Relations function. Ian Bailey, whom you all know, has been promoted to our VP of Corporate Planning. Ian has lead IR for us since the IPO. And I'd like to thank him for his leadership and invaluable service to everyone on both sides of this call.

I also want to welcome Kate, who just opened the call. Kate is our new Investor Relations leader and joins with a distinguished investor relations and finance background. You'll find Kate every bit as reliable and helpful as Ian. And we remain committed to communicating openly, transparently and proactively with you.

With that last point in mind, let me turn to our latest performance. This morning we reported a strong quarter and a record FY16 financial and operating results, with the highest margins and profitability in Aramark's history. The consistent execution of our clear and focused strategy resulted in strong 11% adjusted EPS growth on a constant currency basis, an 80% improvement in free cash flow, and we continued to strengthen our balance sheet.

2016 marks our third consecutive year of double digit earnings growth since taking the Company public. And the Board's recent decision to increase our dividend by 8% is a confirmation of the ongoing momentum in the business. It really has been a great year. And I'm very proud of and want to thank our 270,000 team members for their passion and commitment to deliver against our brand promise, and to elevate the customer experience each and every day.

This year we also completed two strategic tuck-in acquisitions. We acquired Avoca, a small Irish specialty food company, which brought a European brand and new offerings to our portfolio. And we also added HPSI, a company with industry-leading technology in the group purchasing space.

While these transactions were smaller in nature, they are illustrative of the momentum that we've got in the business, the profitability, balance sheet and line of sight on food and productivity, and how that is giving us the ability to behave more strategically and longer-term focused. We expect this focus to pay off meaningfully in areas such as portfolio optimization, pricing, as well as group purchasing.

Turning to our financial results for the first full year, adjusted earnings per share was $1.71, an increase of 11% over prior year on a constant currency basis. Total Company organic sales were up 2% net of portfolio strategic actions of about 100 basis points, as well as 50 basis points of energy headwinds that we have mentioned previously. When you take those factors into account, our underlying growth was roughly in the middle of our multi-year growth frame.

Turning to our focus on revenue, we continue to achieve strong mid-90%s retention rates, with 2016 closing the year at 94% despite about 1 point of strategic portfolio actions. As a reminder, while a revenue headwind, these strategic actions are accretive to margins.

What is very encouraging from my perspective is that the growth in our business is broad-based across segments, which I think reflects the strength of our well balanced portfolio. North America organic sales were up 2%, bolstered by new business wins in education and sports and entertainment, as well as increases in our base business.

Our international organic sales increased 1% due to growth in both Europe and emerging markets. And I'm pleased to report our uniform business grew 3% in the year as we continue to leverage recent capacity expansion in our uniform business to support growth.

In addition to our revenue momentum, we drove significant improvements across food, labor and SG&A productivity, while continuing to balance ongoing reinvestment in the business. As a result we drove almost 40 basis points of margin expansion to 6.5% and an increase in adjusted operating income to $939 million, which was up 8% on a constant currency basis with all reporting segments showing both margin expansion and improved profitability. Our improvement in adjusted operating income also helped to strengthen our balance sheet, with a 30 basis point reduction in our leverage ratio to 3.9 times.

2016's results also reflect meaningful progress against our three key strategic tenets, accelerating growth, activating productivity, and attracting the best talent. As we've discussed, in the near term we will continue to place a strong margin filter on our growth strategy. But outsourcing prospects remain very robust and our sales pipeline remains encouraging.

As part of our accelerating growth pillar we will continue to identify new growth opportunities, as evidenced by some recent wins in our North America business. In our own backyard here in Philadelphia, we've recently signed two leading universities, Drexel University and Temple University, as well as the Pennsylvania Department of Corrections. In our uniform business we added Publix, the largest employee-owned grocery retailer in the US. And outside of North America we gained a new business dining client, Shafer Technologies in Germany.

We've also kicked off another successful NFL season where we serve more than six million fans annually at 11 stadiums. We opened the new US Bank Stadium, home of the Minnesota Vikings. And recently expanded our partnership with the Super Bowl champion Denver Broncos to manage their retail operations in their team store.

And switching gears to the NHL, we opened the new Rogers Place Stadium in Edmonton, home of the Edmonton Oilers. This quarter we also went back to school with [seven] new contracts in our K-12 business with 250 new recipes based on student feedback and our own research. We're offering more options designed to meet current student preferences, such as grab-and-grow breakfast items and fresh made-to-order lunch entrees.

Innovating the everyday is what enables us to win both new clients, as well as retaining and expanding our existing client relationships. And as we accelerate growth in our food business, we are doing that through an innovation framework centered around promotions, celebrity chef partnerships, and proprietary concepts.

This framework is driving revenue and consumer satisfaction and loyalty through quarterly, on trend, limited time offers, as well as restaurant rotation and seasonal menu highlights. In addition we continue to expand our celebrity chef partnerships with celebrity chefs like Cat Cora, Andrew Zimmern, Jimmy Vanos, and Danny Meyer, including the debut of the first ever in-arena Shake Shack at the Wells Fargo Center, home of the Philadelphia Fliers and Philadelphia 76ers.

In our international segment we're expanding our partnership with Chopped Ireland. Chopped is a successful, healthy fast food franchise working with Aramark to expand its presence in the corporate, education, and industry sectors in Ireland.

And turning to our own health and wellness initiatives, I'm pleased to report the year-one results from our American Heart Association Healthy for Life 20x20 partnership [RN]. We've reduced over 30% of our main dishes now our vegetarian or vegan, and over 50% of the entrees or sandwich items now contain 500 calories or less. And in our underserved communities where we are piloting this program, we've increased fruit and vegetable consumption by almost a cup per serving per day.

A critical component of our Company's progress is reflected in our second strategic initiative, activating productivity. This year we delivered substantial improvement in food, labor, and SG&A productivity, resulting in almost 40 basis points of margin expansion. Our base productivity remains strong, which facilitated further investment in growth and capability. It's important to note that the productivity improvement is broad based across our portfolio, as adjusted operating margins increased 30 basis points in North America, 30 basis points in our international business, and 40 basis points in our uniform business.

We also continue in our efforts to establish a repeatable business model across the portfolio that allows us to attack inefficiency across our supply chain, everything from menu design to reducing waste. We're also reducing our labor spend through a proactive approach that includes a standard labor model, a flexible model for scheduling, and a relentless focus on managing overtime in agencies.

Finally turning to our third strategic initiative, attracting the best talent. An engaged and productive workforce is critical to our ability to consistently deliver excellent customer service. Core to this is building diverse and inclusive culture where our team members are rewarded and recognized for selling and serving with passion. And one way we do this is through what we call our Ring of Stars program where we recognize front-line employees who embody Aramark's core values, an abiding commitment to customer service, a passion for innovating and a dedication to involvement in the communities we serve. I'm also proud that our engagement efforts were recently recognized by Black Enterprise Magazine, which once again named Aramark as a top 50 best employer for diversity.

In closing, we're energized by the progress we continue to make in 2016 along our transformation journey. We also achieved record profitability. And we've reported the third consecutive year of double digit earnings growth, all while continuing to reinvest in the business for future growth and value creation. With that, let me turn the call over to Steve for a more detailed look at the numbers.

Thank you Eric, and good morning everyone. Quickly touching on the fourth quarter, aside from a stronger than anticipated free cash flow generation, our results are broadly consistent with our previously communicated expectations. Organic growth was flat as we continued to face headwinds from energy in all of our lines of business, as well as the lingering impact of several strategic portfolio actions. In North America FSS, the incremental benefit of the Yosemite business, was partially offset by weaker top-line performance in our healthcare sector. We delivered meaningful improvement in adjusted operating income and margins due to broad-based productivity gains. Reconciliations of adjusted operating income and adjusted EPS for the fourth quarter are provided in the appendix.

In the interest of time, I will address the remainder of my comments to the full year. Before I begin, for those of you less familiar with our story, our multi-year framework for the Company envisions 3% to 5% annual revenue growth, mid to high single-digit AOI growth, double digit adjusted EPS growth, and specifically by 2018 a 100 basis point improvement of our AOI margins versus 2015 levels.

Turning to slide 5 we reported $14.4 billion in sales on a GAAP basis during 2016 compared to $14.3 billion last year. This is an increase of nearly 1%. As you can see from the slide, currency headwinds related to a stronger US dollar reduced our sales by approximately 2%, or $260 million. Our results were most affected by the Canadian dollar, the euro and the Chilean peso, each of which weakened in the mid to high single digits on average over our fiscal year.

In addition, we are continuing to exclude from organic sales approximately $50 million in revenue related to the Avoca acquisition that we completed earlier in the year. Adjusting for the currency headwinds [and] M&A impact, organic sales growth for the Company was a positive 2%. Our strategic portfolio actions reduced growth by approximately 1%. Combined with about a 50 basis point headwind globally from energy [clients] in the year, this represents about 150 basis point headwind to growth. Therefore our underlying organic growth was in the middle of our multi-year framework that I just mentioned.

Let's now move to slide 6 for a discussion of our adjusted operating income year-over-year performance. Given we are reporting record levels of adjusted earnings and profitability, we clearly made significant progress in 2016, driven by productivity initiatives and our strategic portfolio actions.

In the center of the page, full-year 2016 adjusted operating income was $939 million, which is approximately 7% higher than the prior year. We incurred a 1% currency headwind, which is the drop-through of the revenue impact I mentioned earlier. Therefore on a constant currency basis our adjusted operating income increased 8% year over year, which is at the higher end of our framework.

Our AOI margin on a constant currency basis increased to a Company record of 6.5% for the full year, which was up 36 basis points versus the year ago figure, and a solid start versus our three-year goal of 100 basis points improvement. All three segments delivered strong improvements in adjusted operating income, with North America FSS up 7%, international FSS up 8%, and uniforms up 6% on a constant currency basis. Productivity momentum was broad based across all the segments, while the portfolio actions favorably impacted North America and international.

Turning to slide 7, which provides a roll forward of our adjusted EPS year over year. Our adjusted EPS increased to $1.71 in the year versus $1.57 in 2015. Taking into account approximately $0.03 of currency headwind, this represents an 11% increase on a constant currency basis. Both our adjusted tax rate and our interest expense, exclusive of refinancing related costs, were comparable to the prior year.

Let me spend a minute discussing the reconciling items between our adjusted earnings per share and our GAAP results. We continued to experience a gradual decline in LBO-related intangible amortization, and our share-based compensation figure was down as expected, given a large amount of IPO-related activity in the prior year. As we get closer to the completion of our current transformation program, our severance-related charges continue to decline.

On slide 8, I'll comment on our cash flow and our balance sheet for the year. We grew free cash flow, which we define as cash from operations less CapEx, by 80%, in large part due to an increase in net income, a reduction in pension contributions, the timing of certain capital expenditures, and declining transformation spending. The record results reported today strongly contributed to strengthening our balance sheet and financial flexibility at the close of 2016.

Our year-end liquidity remains strong. And our cash and revolver availability was approximately $865 million at the end of the year. Our total debt to covenant adjusted EBITDA declined by approximately 30 basis points to 3.9 times. And net Capital Expenditures for the year were $486 million, or approximately 3.4% of sales. Our debt profile was significantly improved, with approximately $1.4 billion in refinancings, extending maturities 8 to 10 years.

We have no required refinancing needs before 2019. However, we will continue to look for attractive market opportunities and be opportunistic as conditions warrant. The increase in our dividend that Eric mentioned will allow us to maintain a payout ratio of approximately 20% to 25% of earnings.

This is consistent with our commitment and past practice with regards to balanced capital allocation. Our capital allocation priorities remain unchanged. Absent strategic opportunities we expect to allocate the majority of our 2017 free cash flow, beyond what's required to service the dividend, to debt repayment as we continue to approach our leverage target. I expect leverage to end 2017 in the range of 3.6 to 3.7 times, which will be achieved through a combination of both debt repayment and EBITDA growth.

Slide 9 details our initial expectations for 2017. We're highly confident that 2017 will deliver another record year of performance for the Company. And while the year is going to be quite solid, I will remind everyone that quarters will continue to be lumpy, as the business does not and it won't start operating on a straight line.

With this in mind, I will start on the left-hand side of the page with some 2017 modeling aids. Adjusted EPS is currently expected to be between $1.85 and $1.95 per share, although double digit EPS improvement from the framework from higher adjusted operating income, combined with a modest tax rate benefit, and slightly offset by $0.01 or $0.02 of currency headwind should land us near the center of that range. Capital spending should be consistent with the last few years in the range of 3.25% to 3.5% of sales.

Interest expense should be comparable to 2016 levels, excluding the impact of the prior year's refinancing costs, as lower debt levels will be offset by longer average maturities. We expect to see a modest decline in the tax rate. This is largely due to some tax planning activity coming to fruition, as well as the adoption of new accounting standards related to employee share-based compensation. And we expect to generate at least $300 million in free cash flow.

Turning to revenue expectations for the full year. We expect that the underlying growth in our business will be near the midpoint of the multi-year framework. However, we do anticipate about 100 basis points of headwinds from the tail end of our strategic portfolio action carryover, a less favorable Major League Baseball playoff schedule in our sports business, and ongoing pressures in the energy sector, which are now affecting all lines of business. Due to these headwinds we expect reported revenue growth for 2017 at the lower end of the framework.

The phasing of the various items impacting our revenue outlook for the year will be felt most heavily in the first half of the year, will likely incur several hundred basis points of revenue headwind early in the first half, and our performance will improve as the year moves along. Therefore, for the first half we're still expecting modest revenue growth in all segments except FSS International, which will be flat relative to the prior-year period. In addition we expect our uniform business to grow at a slightly slower pace in 2017.

We're anticipating AOI growth across all segments due to our continued productivity initiatives. However consistent with prior years, we expect our productivity gains to accelerate in the back half of the year due to higher investment levels in the first half, as we continue to lean into margin drivers and opportunities aggressively. Adjusted EPS should follow the same pattern.

And before I turn the call over to Eric again, I would like to thank Ian Bailey for his contributions to building out from scratch our Investor Relations function over the last three years. I'm thrilled to have someone of Kate's experience join the team. And I wish both of them good luck in their new roles. With that, I'll turn it back over to Eric.

Thanks, Steve. So in closing let me just reiterate our confidence we've got the right strategies in place and continue to be relentless in our focus on executing against that. And while we're all pleased with our 2016 results, I think we're even more excited about the future. And so with that, let me turn the call back to Kaylen and we're ready to take any questions.

(Operator Instructions)

Your first question comes from the line of Toni Kaplan. Your line is open.

Hi good morning.

Good morning.

So in North America food services, there's a little bit lighter on the organic constant currency growth side this quarter. Aside from, I guess, energy and the strategic actions that you called out, could you talk about sort of the operating environment there, how retention is trending, new business wins? And are you seeing anything in the pricing environment, specifically as it relates to the food services in North America?

Sure, Toni. Well a couple of things. I think as you look at our North America business, again up 2% for the year, I think we saw strong performance out of our education, sports, and leisure business. So those trends continue, and we would expect to continue as we get into 2017. I mentioned in my prepared comments, but let me go just a little bit deeper.

Relative to new business, we've had a pretty good run. I think we started the year pretty strong as well, particularly in the education space. We've picked up a couple of new departments of corrections as well.

And so I think the net of all of this is, the pipeline continues to be -- look encouraged. And as we think about 2017, we would expect -- there's no doubt we're going to face some headwinds relative to the strategic decisions, and as well as the energy sector. But I think as we look at our North America growth, we would expect to see, again, continued strong performance in 2017.

From a pricing perspective, I think there's really nothing that has changed. We continued to be -- the pricing approach has been consistent with past years.

Great. And then in the past you've mentioned reinvestment in the business. Did you pull back on that at all this quarter, just given that margins were very strong despite the slightly lower top line?

I think if you look at, again, what we've done, it was fairly consistent both in the quarter as well as on a full-year basis. So if you think about what we call our base productivity, you saw that up about 50 basis points in the quarter and up about 60 basis points on a full-year basis. Then if you net out the investments in those two areas of growth and transformation, I think you had about 10 points of impact in the quarter and about 20 points of impact on a full year basis.

And Toni, that would be consistent with the pattern we've really had the last couple of years and consistent with what we would expect to happen in 2017 as well. Just based on our budget cycle we tend to start the investments early in the year in the first half. And start to get the lion's share of the benefit from those investments in the second half. So you should expect the same kind of cadence related to how it drops through.

Terrific. Thanks a lot.

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

Great. Good morning.

Good morning.

Want to dig into the comments that you had on the healthcare segment. You mentioned that was a headwind to growth. Can you talk about how much of a headwind and what types of issues came up that presented that headwind?

Sure. Well I think a couple things. One, let me backtrack. And if you look at our historical performance of our healthcare business, really as we entered 2016, that business has grown for us each of the five years prior. And again, not unlike, Andy, other businesses for us, what drives that growth is really our ability to onboard new business and obviously retain our existing business.

In Q4 we began to see that shift a little bit. And again, I think we continue to see that sector probably be impacted a little bit by some disruption and consolidation. So I think we're likely to see for the next couple of quarters that pressure continue. Having said that, I think as we look at our healthcare business during the latter part of the year and going forward, again there continues to be a large outsourcing opportunity. I think our right to win is pretty clear. And I think our prospects look pretty bright. Steve?

Yes. I would just add that within a given particular period of time, obviously the pace at which we grow in any of our segments is just a function of the new business we add relative to the existing business that we don't retain. And so we did see in the fourth quarter those numbers flip against us.

And as Eric referenced, the consolidation in the healthcare space, we often say we tend to win or lose business based on the team that we have on the ground, based on our ability to innovate, based on our ability to provide a great customer experience. In healthcare sometimes you win or lose also based on the consolidation game. And when two systems combine, depending on the system that is the winner of that, there's generally two providers and they tend to go to one.

And in the fourth quarter we had a couple where it did not go our way. So I'd expect that for another couple of quarters it will take us to work through the fact that we've been on the wrong end of some of those consolidation plays as well.

That's good color. And my follow-up question then, Steve, is for you. And it has to do with the tax rate guidance that you gave here. In the past you've talked that you saw an overall opportunity for tax rate for things that you can control. It seems like your commentary on the conference call says this is more of an accounting change.

But I want to understand in more detail. If you could talk about the accounting change that's leading you to be able to recognize maybe 200 basis points of tax rate decline? And how that is the same or different from the internal opportunities that you see?

Yes. I believe -- I think our rate will be lower in 2017 for sure than it was in 2016. And I think it's a combination of the two. We will certainly get a benefit from the implementation of some of the planning that we're starting now. I think we've got further to go on some of our planning opportunities, but you're starting to see the baby steps in that direction.

The accounting change and the specific number will escape me, but it essentially relates to guidance that requires us to treat the tax benefit from share-based compensation a little bit differently than we had done in the past. So historically when we take deductions for share-based compensation we would not have run that through the tax provision. And going forward the guidance would have us recognize a portion of that.

How much benefit we ultimately get is very much a function of how much activity there happens to be around equity exercises over the course of the year, what the share price is, et cetera. So I think we're being -- trying not to get too far ahead of ourselves and trying to guess what people will do in that space. But I believe the planning certainly will provide us a solid benefit on a year-over-year basis all by itself.

Great, thanks.

Your next question comes from the line of Hamzah Mazari. Your line is open.

Good morning. Thank you. Just had a question on the GPO acquisition. How big could that be for you over time?

It seems like one of your larger competitors has a big exposure to that. And has helped margins. Just trying to understand how that impacts your margin profile if that gets bigger over time?

Let me start, and I'll ask Steve to comment specifically on HPSI. I think as we've thought about the margin opportunity on our business, I think we look at it holistically. And as we've talked about our margin march, I think the majority of that margin march is really kind of controlling what we can control, which is managing the existing buckets of food, labor, and SG&A.

so certainly as we put that line of demarcation on the 100 basis point march over the next three years, that is largely just through pure focus on productivity across those three levers. We obviously currently are a big procurer of food. And we do all of that buying directly for ourselves.

But as we get into some of these other opportunities, we do believe GPO is an opportunity. And while HPSI is small in nature, your point about the untapped opportunity I think is correct. Steve, you want to comment?

Yes, I'd certainly echo that. And just the $140 million or so we spent on HPSI, the margins of that particular business, they will be accretive. So what the company is as a total, it's a higher margin business than what we have today.

It's not material to the entity. And I would not expect, frankly, it to be material for the medium term. But it does provide a platform, as Eric mentioned, for us to go to market on behalf of parties other than ourselves, which we have not historically had access to.

That's helpful. And then just a follow-up question. I know you guys have talked about the impact of wage inflation, food inflation on your business. Maybe you could just remind us, given the results of the election, what your thoughts are on inflation and how that impacts you? And then maybe any other positives or negatives as it impacts you as a result of the US election result. Thank you.

Sure. Well, let me start. Again, I think from my perspective, at this point relative to the election, I think that it's really impossible to know any specific impacts on our business. I think the market's reaction certainly the last week has indicated that generally it seems to be positive relative to the business climate. So from our perspective, we'll play a wait-and-see game relative to that.

I think relative to your question on inflation, again, we've seen the last several years, certainly in 2016, a fairly benign inflationary environment when it comes to food. Again, we purchase a very diverse market basket and have a lot of levers to us, not just pricing lever, but because we have opportunities to change our menu we can deal with any type of inflationary pressures pretty adeptly.

On the labor side, I think as we've said in the past, while there has been a lot of talk, and even in some states some action on this front, we feel like we've got a very good plan of action on how to deal with that. And have been able to mitigate that with a lot of the productivity efforts that we've put in place across the labor front. Everything from a more structured in-unit labor model to making sure we schedule our headcount appropriately.

We flex that labor and attack overtime and agency labor. So I think when all is said and done relative to inflation, we would expect it to continue to be fairly benign and very manageable and within our control to offset it.

Great. Thank you.

Your next question comes from the line of Manav Patnaik. Your line is open.

Thank you. Good morning, guys.

Good morning.

Just a follow-up on the tax part. So in your new EPS guidance is obviously some benefit from that tax change that you've assumed, right? So I was hoping you could help us quantify how much of that was the benefit versus when you try and do the apples-to-apples versus last year?

A couple of pennies if you just do the bridge on a year-over-year basis. If you start at $1.71, which we're reporting, and you say that goes up around 10% or so, you're getting into the high $1.80s. A couple of pennies of tax benefit offset by a couple of pennies of currency headwind gets you somewhere in the middle of that range.

Okay, fair enough. And just on the free cash flow guidance as well. I think you did $320 million this year, I guess.

And you're guiding to equal to or greater than $300 million, I guess. What was the size of the timing impact this year? And maybe why you don't expect them to repeat next year, maybe some color there?

Yes, similar to -- we're certainly pleased with what we generated this year, obviously. It was more than we thought we would print at the end of the day, of course, given what we had communicated previously.

We'll take the same approach that we did last year. I think this is a number we're confident that we can deliver as a general rule. We still have opportunities on the working capital side. It was the use of cash for us again this year, generally.

I would expect that we will spend a little bit more on capital in just absolute dollar terms in 2017 than we did on 2016. And I think the timing of some of our interest payments associated with a lot of the refinancing and conversion of term loan to bonds will probably require visibly higher interest payments within the year.

So I'm confident on the $300 million. I certainly will look to do our best to achieve that or exceed that. But I think that's a good starting point for us.

Okay. And then last one for me is just around the energy headwinds and the portfolio rationalization. Correct me if I'm wrong, but it sounds like there's some more headwind from both those than maybe what you guys had originally talked about. I was hoping you could just contextualize what's going on specifically in those areas, than?

Yes, I don't think there's any additional pressure. What we tried to characterize was, relative to the strategic decisions we were talking, there was going to be kind of a 18-month run or so relative to some of those decisions we would take. And then I think on the energy side, while we've had pressure, one of the things that is a little bit of a lagging indicator relative to energy is the whole employment scenario, particularly as it applies to a lot of our uniform customers.

So I think that is the one additional one that's been a little bit of a lagging indicator relative to some of the other energy headwinds we've talked about for the last couple of quarters. But I don't think there's anything changed relative to what we're experiencing or what we had expected to see.

No, I would agree. And the fact that it continues to carry into 2017, which is obviously not the preferred outcome for any of us, is just a function of how we experienced the energy in the prior year. We experienced continuing and growing headwinds over the course of the year. So it takes a couple of quarters for us to lap that as we get into 2017.

All right. Thanks a lot guys.

Thank you.

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

Hey, guys. Good morning. Let me follow up on that last one, that last question. So I think we all understand there's some variability quarter to quarter in your revenue growth as things move around. But the year-over-year organic growth rate North America food fell 3 points. And you're saying the energy drag isn't materially worse, the exit isn't really different than your expectation. I think you don't really have many contracts larger than 1% of revenue.

So was this multiple things in healthcare? Help us understand what happened here and how quickly that bounces back in 2017? It just seems like you're telling the message that everything is in line with plan. But it was definitely a lot different than what I think your investors expected.

Well again, I'll start and I'll let Steve comment. Relative to the fourth-quarter growth, I think it was very consistent with what we had expected. And I think it's somewhat indicated, Gary, on earlier calls.

Again as we all know, there is going to be quarter-to-quarter volatility on this business. And as a result of some of the strategic actions, as a result of some of the energy sector pressures, and as a result of some of the sports, you did see in Q4 and will continue to see the early part of 2017, those headwinds.

So again, if you look at our North America business, as I said earlier what we've got, any time you have a business portfolio that is this diverse, you're going to have puts and takes across the portfolio. So the sectors that are performing well that we called out are sectors like education, sports, leisure. And the ones that are more pressured are kind of the B&I energy headwind and impact and the healthcare sector that we talked about. So again from my perspective, it was very consistent with what we expected. And again, Steve, I don't know if you want to add?

My only comment is (inaudible) the full year landed exactly where we told everybody that it would land. And so I can't do everybody's squeeze math necessarily. But I don't think there were any surprises for us.

And we're trying to be as clear as we can moving into 2017 that there is no doubt we will face proportionately more headwind in the first half of the year for all of the reasons that we talked about. So I would just encourage people to make sure that's incorporated in their own internal expectations of how our revenue will print over the course of the year.

Just a follow-up. You said a couple pennies on tax. When I plug in 2%, it looks more like $0.07 or 4% or so of the growth.

What am I missing there? Is that 200 basis points a rough approximation, and maybe there's a range that's not that big? Or is there some other reason the math isn't as simple as taking you pretax income and taking a 2% haircut?

It will be a couple of pennies. We're not trying to be overly precise. And I think it will be somewhere in the neighborhood of 200 basis points. So it could be a little bit higher or a little bit lower.

I think you can comfortably expect us to get several cents of benefit by the time we're finished with the year. That's all we're trying to indicate.

Okay. Fair enough. Thank you.

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

Hi. Thanks for taking my question. Can we dig a little deeper into again, sorry to harp, on FSS North America? But if you think about the 4.7% growth that you printed in the third quarter, can you give us maybe a bridge in terms of basis points of how you get to that 0.3% growth? Thank you.

I'm sorry. Dan. Could you please repeat that question for us?

Yes. I said if you think about the 4.7% organic growth from the third quarter, can you maybe give us a very -- a much more detailed bridge in terms of energy headwind, Yosemite, the impact of easier compares, Easter on how you actually get to that 0.3% growth? The detail behind that deceleration.

I think the big difference, if you look at it, is I think new and loss quarter to quarter were somewhat comparable. And what you had in third quarter was much stronger base business growth. So to me, if you want to decouple how much of the growth differential from third quarter to fourth quarter was new, was loss and was base, I'd say new and loss very comparable, and the base business just performed stronger in third quarter.

And when you think about how we think about that, so the sequential piece of it, what did we benefit from in the base? We would have benefited from arena playoffs in the third quarter of our third quarter. And some of our teams made it to pretty advanced into playoffs and became champions ultimately, which clearly helped us.

I believe the timing of the holiday helped us in the third quarter, which won't repeat for us in the fourth quarter. So once you start drilling down there's a couple 3Q specific items that don't flow through to the fourth quarter which contributed to the deceleration.

I just want to echo. I know we've mentioned this before. Again, one of the things that you learn very early as you get into this business is the quarter-to-quarter volatility based on the playoff scenario, perhaps in sports that Steve highlighted, based on the timing of onboarding new business. And for us, we're going to control what we can control, we're going to play our game.

And again, as you think about our multi-year framework, that will play out. But it will play out over the course of the year and years, not within each and every quarter. And I just want to keep coming back to that point.

Okay. Thank you very much. Appreciate it.

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

Hi. You mentioned your focus on debt reduction. And I know you've got a -- one of your bonds has a piece that's callable currently with a price that steps down later this year. Any thoughts to whether you'd refinance those or whether you'd expect to pay that down with cash, or whether you'd take care of it ahead of maturity?

We'll certainly at it, obviously, when we get closer to the call date. I'm sure we're not going to do anything in advance of that, quite honestly. But a lot of turmoil here in the market in the last couple of days.

I think you can safely assume we'll remain very opportunistic. I think we've tried to be pretty aggressive in improving financial flexibility broadly in terms of refinancing some of the both term loan and some of the nearer-term fixed rate stuff that we had.

So we'll look at it. And if it makes sense for us to do that as part of either a one-off or a larger transaction on the balance sheet, you should expect us to act where it makes sense for us to.

Currently you're happy with -- earlier in the year had talked about moving some more of the term loans into bonds or longer-term financing. And you did a big chunk of that. Are you happy with the percentage of your debt that's in the short-term floating versus the longer-term fixed rate at this point?

It's better than it was. We're effectively about 80% fixed because we have a series of swaps against the term loan. So the fixed floating prima facia is a little bit misleading. I generally would still like to have a little bit more bond as opposed to bank debt.

So I think on the margin if the opportunity presents itself we would still probably look to shift that proportion a little bit. We will not totally get out of the bank term loan market. I don't think we would want to do that for a variety of reasons. But continuing to shade it a little more to bonds is probably a realistic expectation to have.

Okay, great. Thank you.

Your next question comes from the line of [Najeet Kasir]. Your line is open.

Good morning, everyone.

Good morning.

Could you please just quantify the impact of the rationalization of the portfolio on the margins? Sorry if I missed that. And my second question is, regarding the energy headwinds it seems like your peers have already that, flagged over the past two years ago. And it's already behind them. Can you tell us if there's any specific to Aramark, why this hitting the top line growth today?

And my last question is on the free cash flow generation on the operating activities. It seems like there was an income tax deferred of $52 million and the other activities of $9 million. Can you help us to understand the driver behind these, please? Thank you.

Sure. I'll take the first and then I'll let Steve answer the second and the third. I think relative to your margin question, again the majority of that 40 basis points is really driven by food, labor and SG&A productivity. And there is a positive impact, but it's really fairly de minimus relative to the portfolio rationalization.

I would agree I'll say strategic actions, it's about 1% on the revenue side in terms of what we've talked about from a headwind. And generally they are accretive to us, but Eric's right, it's a much smaller proportion than what we do within a productivity side.

From an energy perspective, our primary energy exposure has been in our business in Canada where we do remote oil sands servicing those fields, as well as platforms in the North Sea off of the UK. And so I would say we felt changes in employment levels in Canada first where there's the highest cost of extraction, which would make sense. Obviously, that was more than early to mid-2015 type of an experience.

And then as energy stayed at lower levels than it had been moving into 2016, we started to see more of an impact in the European business where you have more fixed cost permanent type of platforms where they are much slower to make decisions around employment levels ultimately on those platforms. And so most of what we're talking about is energy in 2017 is European related. And then as Eric mentioned, within our uniform business where we have probably the longest lag time on some of the employment and some of the oil service type of industries, as those employment levels continue to come down just based on what some of those companies are announcing, we're seeing modest headwind there.

And then finally on the free cash flow question, the change in the deferred taxes. Some of that is purely going to be accounting driven and the timing of payments that we make against various federal, state and international obligations. We also, because of some of the equity activity that happened over the course of the year, we took some deductions around the way some of our payments were made, which influences that particular line item.

Thank you.

Sure.

There are no further audio questions at this time.

Great. Well in closing, let me just thank all of you for joining us. We appreciate your ongoing interest and investment in Aramark. Everybody have a great day.

Thank you once again for joining us today. This does conclude today's webcast. And you may now disconnect. Have a great day.