Aramark (ARMK) 2017 Q1 法說會逐字稿

Good morning and welcome to Aramark's first-quarter 2017 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 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 first quarter of FY17. 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, 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 10-K and 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 morning's press release as well as on our website. With that, I'll turn the call over to Eric.

Thanks, Kate, and good morning, everyone. This morning we reported solid operating results, in line with our expectations. We are very excited to announce that the Board has authorized a $250 million share repurchase program over the next two years, which reflects the confidence in our ongoing business and growth opportunities, as well as our improved cash flow outlook.

This is the first share buyback of significant size since the IPO in 2013, and further indication of the continuing progress we made strengthening our balance sheet since going public. This quarter we intend to repurchase about $100 million of shares based on our improved full-year free cash flow outlook, as we now expect to generate more than $350 million in cash flow this year.

Turning to our Q1 results, we reported adjusted earnings per share of $0.55, a 10% increase from last year. Total Company organic sales were up 1%, in line with our expectations, with growth across all three reported segments. Our underlying revenue growth for the quarter was at the low end of our multi-year framework, partly offset by the timing of 150 basis points of headwinds that we previously communicated.

While energy headwinds adversely impacted all three reporting segments, the less favorable schedule for Major League Baseball playoffs impacted the North America segment, and the tail end of our strategic portfolio actions impacted our international business. We expect these headwinds to dissipate as we move into the second half of the year.

Looking forward, I am particularly encouraged by the strong retention rates that we're driving, consistent with our targeted mid-90% for the full year. I'm also excited by the robust pipeline of new opportunities across a number of key sectors.

Given these positive trends, we continue to expect revenue growth to accelerate in the back half of the year. We are expecting our North America and international FSS segments to deliver that growth. And we are now expecting that our uniform segment will deliver flattish results for the year due to both energy headwinds in an increasingly competitive market environment.

Our adjusted operating income, which increased 1% to $266 million in the quarter. Our base productivity improvements, as well as higher operating leverage in uniforms, were partly offset by the expected seasonal losses at Yosemite, as well as the drop-through of the revenue headwinds that I mentioned.

We also reinvested aggressively in the business in the first quarter to support technology, capability, and growth initiatives. Consistent with previous years, we expect the level of investment to decrease in the back half of the year.

I'm pleased with our ongoing momentum in implementing the productivity initiatives across our portfolio, again with our objective of delivering our multi-year framework of 100 basis points of AOI margin improvement by the end of FY18. We remain focused on executing against the three strategic objectives: accelerating growth, activating productivity, and attracting the best talent.

In terms of growth, I would like to highlight a few of our recent business wins. We just won a new business dining contract with eBay. Outside the US we are increasing our client base in Ireland through a new contract with Hammerson Dundrum, a high-end retail destination.

I'm also excited to announce a new food and facilities client in South America, ENAP, which is an oil and gas exploration company. We also will be expanding our relationship with Chicago Public Schools where we currently provide food and custodial services. Last month the school board authorized a new agreement for integrated facilities management. The combination of these new opportunities and others in our pipeline, as well as our recent strong results and retention, reinforce our confidence in our improved revenue and margin outlook in the second half of the year.

Turning to some recent highlights from operations, we are continuing our proud tradition as being a partner of champions. Last month we helped host the NCAA Division I National Football Championship at the Tampa Bay Buccaneers Stadium, which is one of our clients, where two of our long-time higher education partners, the University of Alabama and Clemson University faced off in a football classic. And at another one of our clients, James Madison University, they captured the FCS National Football Championship. We want to congratulate all of these respective organizations, and let them know how honored we are to serve them.

This past Sunday, nearly 3,500 Aramark service stars were shining at the Super Bowl, one of the biggest and brightest stages in the world. Our team members served over one million fans and guests during the week-long festivities. We also served as the NFL's exclusive retail merchandise partner at over 70 locations throughout Houston.

The only thing better than hosting a Super Bowl game that goes down to the very last minute and keeps fans eating, drinking, and buying merchandise, is a Super Bowl that does all of that into overtime. Thanks to the incredible game the Patriots and Falcons played, Sunday was the single largest food and beverage in retail sales day in Aramark's sports entertainment history. And we are already planning for Super Bowl LII next year at the new U.S. Bank Stadium, home of our partners, the Minnesota Vikings.

As I've often mentioned, innovation is integral to our success and we continue to focus our efforts on making sure we have high quality, fresh products with an emphasis on making our menus healthier. Building on the popularity of the pop-up restaurant trend, we have created a proprietary pop-up concept called Fresh Ginger, which celebrates the unique flavors of the Pacific prepared with the freshest quality ingredients. We expect to roll Fresh Ginger to hundreds of locations nationwide.

We have also launched a new self-ordering cashless kiosk concept in our sports business called Zoom Foods, which increases volume as well as speed of service and convenience for fans. Results for the initial pilots were better than expected, so we will begin scaling this at additional locations, including the Super Bowl this last weekend.

We also continue to evolve our thinking in the digital space. Our goal is to bring a world-class mobile solution to our consumers to foster deeper relationships via improved insights and loyalty programs. And these outstanding food data science capabilities will deliver more relevant menu innovation, which is going to translate into higher levels of consumer satisfaction.

We continue to raise the bar on quality. A recent example is our introduction of our new crave-worthy cookies. These new cookies were developed based on what consumers told us they want: no high fructose corn syrup or artificial colors or flavors, and made with real butter.

We also continue to build and leverage our celebrity chef partnerships. A few examples include a new partnership we launched at the Super Bowl with NFL Hall of Famer Eric Dickerson, who is a culinary talent in his own right. It's called EDQ, a fantastic barbecue concept featuring Eric's family recipe. Feedback has been tremendous and we are now looking to scale across other venues. Our partnership with Iron Chef Cat Cora also continues to grow and response to her Mediterranean offerings has been strong as we continue to extend the brand.

Eating healthy is also top of mind with our consumers. And I'm happy to report we continue to move forward with our Healthy for Life initiative with the American Heart Association. This month we are launching a national marketing campaign called Feed Your Potential to empower consumers to discover, choose, and share healthy foods. We will be activating the campaign in our client locations across web and social media, as well as through community programs. And we are very excited about the campaign and the meaningful difference it can make for our consumers' and clients' health and well-being.

Turning to our second strategic pillar, activating productivity, our AOI margins were flat at 7.1% in the quarter. However, our base productivity improved, and the rollout of the systems that support our productivity initiatives continues to proceed on pace. The productivity we gained were delivered through solid improvements in food, as well as SG&A, and those were offset by the planned investments we made in technology capabilities and growth, as well as a new strategic approach we are taking in our facilities business.

We recently reorganized our Facilities Management Team to ensure we are consistently delivering high-quality service through a repeatable business model. And we are leveraging a core competency within Aramark to focus on the meaningful opportunity in the facility space. As we have mentioned before, the sequencing of these reinvestments will typically be heavier during the first few quarters of our fiscal year, as they are designed to support our operating plan key initiatives.

Turning to our third objective, attracting the best talent, I'm particularly proud of the work we've done to build a diverse and inclusive workplace. For the third consecutive year, Aramark was named a Best Place to Work for LGBT equality. We were also once again named the Top 50 Employer for providing a positive working environment for people with disabilities.

Also, as part of our new facility strategy, we recently entered a joint venture with the Carter Brothers, a leading minority business enterprise company offering integrated facilities management and related services. We are excited to partner with another NFL Hall of Famer in Chris Carter and his brother John, and the company they founded to enhance our portfolio, and help more clients meet their supplier diversity goals.

In closing, I want to personally thank our 270,000 team members across the globe, who work tirelessly every day to create a truly great customer experience. And with that I will turn the call over to Steve.

Thanks, Eric, and good morning, everyone. Before I get into the slides I thought I would take a minute to summarize from my perspective where we are financially at this point in the year. The underlying growth of the base business was at the low end of our multi-year framework. And we faced about 1.5% of known headwinds. So, no surprises on the top line.

Steady productivity progress continues across all of our segments. And we essentially reinvested all of that during the quarter in order to drive even better outcomes in the future. I fully expect our revenue and AOI growth to accelerate in the second half of the year, as the drag from headwinds and the reinvestment fades.

I'm very pleased with the strength of our balance sheet, as well as the improved free cash flow outlook. Our commitment to our 2018 leverage targets is unchanged. But the fact that we're going to generate more cash sooner allows us, when combined with our strong business outlook, to expand our balanced capital allocation plans via share repurchases a few quarters earlier than we otherwise expect.

Let me now turn to the sales reconciliation. Sales on a GAAP basis increased 1% in the quarter to $3.7 billion. GAAP sales were impacted by currency headwinds of $42 million, or approximately 1% as the dollar strengthened against a number of currencies, primarily the pound sterling, and the euro. $19 million in revenues related to the Avoca acquisition are excluded from organic sales. And please note that next quarter we will lap the one-year anniversary of this transaction, so it will be reflected in base organic revenue going forward.

Organic sales for the Company grew a touch over 1% in the quarter, due primarily to the first year of operations at Yosemite, two new stadiums in our sports business, as well as growth in education, international, and uniforms. This was partly offset by lower healthcare revenues in North America that adversely impacted the results by about 50 basis points.

The 150 basis points of headwinds on the base business included 75 basis points related to the less favorable Major League Baseball Playoff schedule and about 75 basis points combined from energy in the final stages of the strategic portfolio actions. As a reminder, for the full year we are expecting 100 basis points of headwinds from these three items.

Adjusted operating income was $266 million in the first quarter. There was no material impact from currency translation or M&A in the quarter. As compared to the prior year quarter, AOI was adversely impacted by the expected seasonal losses at Yosemite, as well as a drop through of the less favorable Major League Baseball Playoff schedule and the healthcare revenues.

The combination of these three factors resulted in approximately $8 million, or about 3% of pressure on the results. In spite of these, adjusted operating income increased by 1% from the prior year, or approximately $3 million.

Adjusted EPS increased 10% over the prior year period to $0.55 a share as the impact of business growth, lower interest, and lower tax expense more than offset the effect of share dilution. Interest expense was lower than prior year, driven by lower debt levels, the roll off from prior-year interest rate swaps, and a modest benefit from a stronger dollar on our foreign currency interest payments.

Our tax rate was lower than prior year due to our tax planning efforts, as well as the adoption of the new accounting standards related to share-based payments. As I mentioned last quarter, these new rules will favorably impact our tax rate, but it is difficult to anticipate the timing of employee stock option exercises. Finally, share dilution related to equity grants and activity created about a $0.01 headwind.

Turning to a review of our capital structure, corporate liquidity remains strong, as reflected in the $818 million in cash and revolver availability at the end of the quarter. As you are aware, we do not have any significant debt maturities until 2019. However, we will continue to look for attractive market opportunities and be opportunistic, as conditions warrant, to improve our financial flexibility further by extending maturities.

I'm also pleased to report that our debt-to-covenant-adjusted-EBITDA ratio declined 40 basis points year over year to 3.9 times. We are now expecting to generate more than $350 million of free cash flow in 2017. And, as a reminder, we define free cash flow as cash flow from operations less capital expenditures.

Our improved outlook is driven largely by lower pension contributions, improved insurance outcomes, lower transformation spending, and improvements in working capital. As a result, we're also increasing the three-year target that we had set at Investor Day from $800 million to over $1 billion in free cash flow during the years 2016 through 2018.

I want to repeat that we are firmly committed to meeting the long-term leverage target that we laid out at Investor Day of 3.5 times by the end of FY18. As Eric mentioned, we will be repurchasing $100 million in shares in the second quarter.

Looking forward, with regard to capital allocation, absent strategic opportunities we still expect to allocate free cash flow beyond the servicing of the dividend to debt repayment as we continue to approach our leverage targets. We are going to opportunistically consider share repurchase within the Board authorization. I continue to expect leverage to end 2017 in the range of 3.6 to 3.7 times, which will be achieved through a combination of debt repayment and EBITDA growth. There is no difference from our earlier expectations in this regard.

Finally, turning to our business outlook in 2017, our expectations are largely in line with what I communicated last quarter. We continue to expect operational earnings to generate low double-digit adjusted EPS growth for the year. At current exchange rates we are now expecting a full $0.02 of currency headwinds in the fiscal year.

Regarding revenue expectations for the full year, we continue to expect that the underlying growth in our business will be near the midpoint of our multi-year framework. As I mentioned before, we expect 100 basis points of headwinds from the final stages of our strategic portfolio actions, the Major League Baseball scheduled comparable, and the energy-related pressures. Therefore, reported organic revenue for FY17 will be near the low end of the 3% to 5% framework.

Turning your attention to the right side of this slide, our expectations for the first half of the year for the Corporation are largely unchanged from what we had previously communicated; namely, we continue to expect modest revenue in AOI growth in the first half with improved performance in the second half. Regarding segments, we are now expecting modest revenue growth in our international segment due to better-than-expected performance in Asia versus our previous expectation.

As Eric mentioned, we are anticipating that revenues and AOI in our uniform segment will be flat for the first half, as well as for the full year as conditions in that industry weaken broadly. I reiterate that we don't expect to see margin improvement in uniforms during the remainder of the year similar to what we saw in the first quarter. As reminder, this is because the prior-year first-quarter results were adversely impacted by a capacity expansion project on the West Coast.

We continue to expect AOI growth across our segments due to ongoing productivity initiatives in FSS. However, consistent with prior years, we expect our gains to accelerate in the back half of the year, because we are going to reinvest heavily in the first half.

In summary, we anticipate that the year-over-year second-quarter results for the Company will look quite similar to the first quarter, with an acceleration in the second half of the year. I will now turn the call back over to Eric for some closing remarks in advance of Q&A.

Thanks, Steve. In summary, the year is off to a good start, and certainly in line with what we expected. We have continued confidence in the road that lies ahead. You should expect us to continue to reinvest as we see growth in productivity opportunities with our business.

We are certainly excited by the Board's vote of confidence in our business prospects that's reflected in the $250 million share repurchase authorization we announced today. Finally, we remain committed to making sure we continue to focus on driving long-term shareholder value.

With that we are ready to take any questions. Operator?

(Operator Instructions)

Your first question comes from the line of Hamzah Mazari. Please go ahead, your line is open.

Good morning, thank you. Just a question on uniforms. You mentioned increased competition. Is it anything structural or is that largely cyclical? Because it seems like the energy markets are getting incrementally better. So, just any color around what you may be seeing in the uniform business.

Sure, Hamzah, it's Eric. Good morning. Thanks for your question. There is no doubt that energy is impacting not just our business in uniforms but the entire sector.

And I think what has happened is, while you have heard us and others talk about the energy headwinds for several months and quarters, the fact is, what you are now seeing start to trickle through on the uniform business is the fact that a lot of the peripheral businesses that are connected to energy, businesses that are associated with that or restaurants, et cetera, are starting to be more impacted.

I think as Steve and I look at where we are and what is likely to play out during the rest of the year, I think that the uniform sector is going to be impacted and continue to be impacted a bit by the energy dynamic. I also think that the marketplace dynamics have changed a little bit. I think you're seeing the marketplace play out, where everybody is looking to protect their market share.

Having said that, this is a great business. It is very well positioned to grow. And it is very consistent with the core competencies we have with an attractive margin structure. I do think that this will be a more challenging year for the uniform sector than it probably has been the last couple of years.

I think the only thing I would add is just specifically around energy markets, the lag between reaction of folks in that space and the price of oil should not be forgotten. The price of oil will go up and down much quicker than our customer base will react to, whether it's positive or negative, in terms of the decisions they make around employment levels, et cetera.

That's helpful. And then just a follow-up, you mentioned the Chicago public schools and doing integrated facilities management. How much of that do you do across your portfolio now? And is that an opportunity for you as you look forward? I know the core business has been food but is that an opportunity going forward? Thank you.

Certainly the dominant percentage of our businesses is in the food space. But, having said that, we made a commitment to put a dedicated structure in place, as I mentioned. We felt some of the impact of that decision in the first quarter. Our facilities business is largely focused in soft services and it's roughly 20% of our business today. Having said that, part of the intent of standing up this structure is to look at the broader facilities opportunity going forward, including some of this integrated services that we were able to solidify with Chicago public schools.

Great, thank you.

Your next question comes from the line of Anj Singh. Please go ahead, your line is open.

Hi, thanks for taking my question. First off, I just wanted to see if you can give an update on the healthcare business. Are you starting to see that stabilize in the quarter? Just wondering if there are any encouraging signs with the outsourcing opportunity in that business. I wanted to get a sense, do we need to lap the pressure we saw in 4Q to see that return to growth or is there are any offsetting factors intra year.

I think if you look at our healthcare business, again, this is a business that we've had a pretty nice run with it for several years. It is facing some pressures. There is a lot of consolidation going on that has impacted us as some of that has taken place. And I think the healthcare pressures right now are likely to continue for the next couple of quarters for us as we lap some of the consolidation.

Our base business, I think, is performing pretty well, and we just are going to have to continue as the outsourcing opportunities present themselves, ramp up some of the new business opportunities that are in the pipeline. But I do think you will continue to see the healthcare pressures on the North America business for the next several quarters.

Okay, got it. And one for Steve -- I just wanted to understand your EPS guidance a little bit better. It seems with $100 million of share buybacks there would be some tailwind to your EPS. So, just wondering what the offset is. Is it the softer uniform contribution? Or is it something else?

There's obviously a lot of moving parts related to the broad earnings guidance for the year. It is early in the year for us. We will get a little bit further along before we do a fundamental reassessment of the entire range.

But specific on the share repurchase, obviously it will be modestly accretive. The way the math works, it is somewhat dependent on the time of year that we end up buying the shares.

If we buy back the $100 million that we have communicated at some point in the second quarter, it is potentially $0.01 for us by the time we get to the end of the fiscal year, with a little bit more moving into 2018. But I wouldn't expect it to be more accretive than that.

Okay, got it. And a quick housekeeping one -- what was your base productivity gain in the quarter?

If you looked at our base productivity, we saw an improvement of about 40 basis points with really good performance in food and SG&A. Again, that was then offset by what we disclosed earlier relative to the investments that we had planned, the standup of the facilities and a few startups. But really good performance, especially on the food side. Good improvement in waste and a 40 basis point improvement in total.

Okay, got it. Thank you so much.

Your next question comes from the line of Toni Kaplan. Please go ahead, your line is open.

Hello, good morning. Could you talk about -- one of your biggest competitors has achieved very strong growth in North America food services that some people attribute to a sectorization strategy of having multiple brands. Is that something that you would consider? Or if not, what would you think you would do to try to narrow the growth gap? Thanks.

Sure. I think a couple of things. As you've heard us say, I think, dating back certainly to I-Day and pretty consistently quarter in and quarter out, it is really important for us to play the game that we are playing. And I think as you look at some of the things that have taken place, we are very focused right now, just given where we are on margins, on making sure we continue to increase margins. As we look at an improved balance sheet, I think it will give us a little more flexibility than we have had historically to play the tuck-in M&A game a little bit, which will help if we choose to look at multiple brands.

The fact is, if you look at our brand portfolio and our brand offering, one of the things we've done is we do have a brand called Lifeworks that has been very impactful for us in the business dining space. You can look for us to continue to leverage that brand. But I think, for the most part, we feel pretty good with the brand portfolio. And for us, as I mentioned in my prepared comments, it is really about us making sure we are upping our game relative to quality, innovation and health across the portfolio.

Okay, great. I know you mentioned the uniform segment and the increasingly competitive environment there. Just wondering, given two large competitors potentially coming together in that space, could you see any disruption there that you might be able to take advantage of? Or would you expect that would impact more aggressive pricing in that space?

I think, relative to what we would expect to happen, you are likely to see continued consolidation. It is a very fragmented business, so I think you are likely to see opportunities locally and regionally to roll up some of the current competitors in that space. And I think it is just too early to tell what will happen relative to the deal and if and when it gets approved. But I think we feel really comfortable.

Again that business is really less about your national scale, and really about your local relevant market share just given the direct store delivered nature of that business and the importance of drop size economics. As we look at our business on a market-by-market basis, we feel really good that in most cases we are positioned as a strong, either the lead player or a strong number two, and think that will continue even post deal.

Terrific, thank you.

Your next question comes from the line of Andrew Steinerman with JPMorgan. Please go ahead, your line is open.

Hi. Steve, could you go through the share buyback math with me again? I know you said it won't be more than $0.01 accretive by the end of the fiscal year. I think that means if you do the $100 million, not the whole share buyback. And my second question is, is share buyback accretion included in the $1.85 to $1.95 guide?

The first part, Andrew, yes, I was referring to $100 million. We do a weighted average shares outstanding calculation in the denominator. So, if you buy shares back four months into the year you get two-thirds of the full-year benefit. The $0.01 would be related to $100 million. And at this point, because we have not moved the range, to the extent that there is some accretion from that, that would be reflected in that current range.

And if you did more share buyback that would be beyond that, right?

To the extent we would buy back more than $100 million we would have more accretion depending on the timing in the year that it was done, that is correct.

Thank you, appreciate it.

Your next question comes from the line of Manav Patnaik, Barclays. Please go ahead, your line is open.

Thank you. Good morning, gentlemen. Just to probe on the uniform business a little bit more, it does not sound like your peers are saying there was anything different about the competitive market or pricing. And the energy stuff, we that was coming. So, the change in the guidance, is that a factor of you guys not being able to protect your market share, as you phrased it earlier?

No. I think if anybody communicated that, that certainly wasn't the intent. Again, I think if you look at our first quarter you will find that, amongst the other free public peers, we were second relative to our performance. Relative to our market share position and how that has played out during the first quarter, we feel really good about our performance and will continue to make sure we do that.

All I was commenting on is, as we look at the year and what is going to play out here, I think that the energy impact coupled with some of the marketplace dynamics will make that business a little more challenging than it has been the last couple of years. Having said that, if you look at this business long term it's still a very attractive business. So, that was really the comment.

Yes. If you look at the uniform rental space in the first quarter, the industry is not performing at a positive 5% AOI improvement year over year. And there are some specific reasons that are giving us that results. So, we just want to make sure everybody understands that won't go through in the prospective quarters for us. That's just not where the industry is currently.

And then you talked about the peripheral impact from energy in the uniform business. I was hoping maybe you could elaborate there, but also in the context of food services, like why that wouldn't happen in good services because it sounded like you called out a new oil and gas exploration win in energy impact.

Again, I think as we mentioned in our opening comments, if you looked at energy, there was energy headwind across all three of our reportable segments. So, it is affecting our food service business in North America, specifically in Canada. It is affecting our food service business in international, both in South America and Europe. And it is, obviously, in uniform. So we are feeling that impact. My point was, as you looked at a lot of the connected industries, one of the things that I think has played out, and maybe then more of a lagging indicator, has been the impact that has had on some of those peripheral businesses in the uniform sector specifically.

Okay, got it. Just last one, in terms of your leverage target, I was just curious how you think about either the tax reform, particularly interest deductibility and so forth, how that would alter your thinking around those target ranges.

Clearly we will reassess, obviously, the appropriateness of the leverage targets when we have something definitive to react to from the administration. There's no doubt if there was something that somehow changed the advantage we have around interest deductibility associated with the current levels of leverage, of course we would have to reassess that.

As we stand here today, I think our view broadly around the tax reform, from everything we have read, is that we probably are going to be a net winner, if there is a broad-based reduction in the corporate headline rate. That would be somewhat offset if they would do something a little more revenue neutral around interest expense.

We've got obviously the 35% to 39% rate in the US against the 70% of our earnings. So I think that would offset any impact on interest. But we will, to answer your question, of course, reassess the appropriate capital structure broadly. And we won't be alone in doing that, to the extent interest starts to get treated differently under the tax code.

Got it. Thank you.

Your next question comes from the line of Andy Wittmann, RW Baird. Please go ahead, your line is open.

Great, thanks. I just wanted to make sure we clearly understood the revenue guidance. You mentioned at the low end of the 3% to 5% range. Is that excluding the 100 basis points of headwind or including the 100 basis points of headwind?

This is Steve. I think that's where we would be after we incur those headwinds. On a full-year basis, we are expecting wherever we would otherwise be, about 1% lower as a result of those headwinds.

Okay. And then just as far as net new business outlook goes, you mentioned a couple of the wins, Eric, in your prepared remarks. I wanted to just get a sense, have you been able to put any other new business in the portfolio that's going to be starting up this year? Can you talk about the overall size of your bid pipeline as it stands today? Has it been improving, increasing in its size, just as we look at the intermediate term for outlook for revenue growth? I'd like to get a sense of what you're looking at.

Sure. First of all, specific to the pipeline I think we feel really encouraged by the size of the pipeline, and how some of that pipeline will actually come to fruition relative to the decision-making process and timing of that. If you really think about this whole first-half/second-half dynamic, I think the thing that gives us confidence in it is we are seeing really solid retention rates. We have had some of our bigger clients across sectors that was up for rebid that we've been able to lock down and renew and extend those contracts. So, we are really encouraged by what we saw in the first quarter relative to retention.

I think the second thing is some of the headwinds that we've talked about, certainly major league baseball playoffs and other things, will begin to subside, particularly as we get into the second half of the year, including the strategic actions we took internationally.

And then the third reason for that conference that really gets at the core of your question is, some of this business that we've won relative to, especially schools -- so, when I talk about CPS, when I look at the higher education business, Temple Drexel and others that I think we've mentioned, the onboarding of that obviously takes place as we get into the second half of the year.

So, for all of those reasons that drives our confidence in second-half performance. And that drives the confidence we have that, when all is said and done this year, it's going to be a pretty good year for us on the new business front.

Okay, thank you.

Your next question comes from the line of Stephen Grambling with Goldman Sachs. Please go ahead, your line is open.

Good morning. Thank you for taking the questions. Just turning to the international segment, you didn't really touch as much on this during the market visit but you did cite some wins in the segment in the quarter. Can you just provide maybe some broader color on how you see the strategic positioning of this segment evolving over the next couple of years, and how much overlap or synergies you get between it and the other segments? Thanks.

Sure. Stephen, when you look at our international business, first of all, it has performed very well for us over the last several years, and we would expect that performance to continue in 2017. If you looked at our first quarter, the 1% number that we showed was actually more like about 3% growth. We had about 200 bps of the impact of the strategic portfolio repositioning. So, if you looked at it, our business in Europe grew. We had really strong double-digit growth in Ireland. Our emerging market business was led by China, Mexico, Korea, all at double digit.

And I think as we look at that business we think that our portfolio is somewhat strategically advantaged. We don't feel like we have to go compete in every geography. We think we can be strategically selective. We like our portfolio of services. In South America it is largely linked to mining. But we've seen strong performance.

As we look at our international business in the coming quarters and on a full-year basis in 2017, we would expect it to continue to not only drive top-line growth, but the thing we've loved about that businesses is we've also made good progress on the margin and profitability of it. It is a business you can look for us to continue to grow and invest in.

And one quick follow-up on that, and one other question. The follow-up, what benefits do you get across the segments from the international segment? Do you buy together? Will you get any benefits from HSPI potentially looking across borders?

No, I don't think you see as much -- certainly HPSI is not going to be advantageous. Most of our buying is done within country borders. We obviously leverage our size and scale globally through our global procurement organization.

But I think the primary synergy, if you will, is just the expertise we get and the best practice sharing we get, which largely emanates from North America, and how we can then extend that into some of the countries we do business with globally. But in terms of the procurement of food, there is no real advantage across country borders.

I would just add, most of our productivity initiatives are extremely transferable across our food and facilities business, our international business. Obviously uniforms is a domestic business for us so international is always going to be food and facilities. And the things we drive around waste management or appropriate staffing within account, et cetera, very applicable across all of the geographies where we are servicing clients.

That's helpful. Then one last if I can, can you provide an update on the pricing initiatives, where that stands today?

Sure. I think as we have said in the past, we continue to see and pilot new ways to think about pricing. I think what is encouraging is if you look at our base business, our base business actually performed pretty well. And as we look at the pricing opportunity going forward, as we continue to gain control of the point-of-sale, it will give us the ability to really think a lot more strategically about price.

The initiatives we put in place in 2017 are being rolled out. I think for the most part they are being executed in line with our expectations. And there's just a lot more game for us to play in that area as we go forward and get a little more sophisticated with the technology.

Great. Thanks so much.

Your next question comes from the line of Dan Dolev, Instanet. Please go ahead, your line is open.

Thank you for taking my question. It looks like you had a big drop in SG&A, I think about 20 basis points. Can you maybe give us a bit of bridge, specifically of North America, on the puts and takes that led to the margin decline on a year-over-year basis? Thanks.

This is Steve. I will start. We certainly continue to have a very keen focus, as a general broad comment, around SG&A specifically with the initiatives we have. We obviously are targeting to continue to get more efficient to the extent that we are finding those opportunities.

I would just point out, if you are looking at the face of the income statement, this SG&A number here, we obviously allocate a broader piece of SG&A back to the business. This is a GAAP number that you are looking at.

So, the $10 million or so improvement on a year-over-year basis in the prior year, there were a couple million dollars of transformation or restructuring related expenses that did not repeat in the current year. And then in the current year we have some hedge gains of close to $6 million or $7 million, which are showing up as a benefit this year and we did not have that last year.

So, we pull all of those out of our adjusted operating income so they are not reflected in any of the other numbers we had been talking about on an adjusted basis. But, broadly, we certainly continue to drive total SG&A down throughout the organization, and we will continue to do that.

But I think the simple math is really 40 bps of base productivity improvement, largely driven by food and SG&A, offset by 40 basis points, split, I think, 25 and 15, accordingly, in the investments that we talked about -- technology, capability, and then, to a lesser extent, the investment in starting up the structure for facilities. That really is the math of subtract 40 to get to flat.

In North America. Or are you talking about the overall business?

That's the total. But it'll be consistent with the flat margins.

Got it. And Yosemite -- just one last question -- how big was the drag from Yosemite on North America?

A couple million dollars of operating losses in the quarter.

Understood. Thank you very much.

Your next question comes from the line of Gary Bisbee, RBC Capital Markets. Please go ahead, your line is open.

Hello, guys, good morning. You've talked about some of the revenue headwinds likely dissipating later in the year and some of the new business, like the universities and schools, et cetera, that are coming on later in the year. So, the revenue outlook or commentary, it sounds like you expect it to get better, back to the range.

If we take a step back, as we think to next fiscal year, is there any reason why you wouldn't be there? The biggest question I get from people is two fiscal years in a row you have been below the low end of the range. This year you've got your work but out for you to get to the low end.

It seems like there's been a bunch of headwinds, but every year there is something. So, is 3% to 5% really the right number? Is there confidence in the second half, is there any reason we shouldn't project that forward to next fiscal year? Just any comments on that would be helpful. Thank you.

Sure, Gary. Again, the 3% to 5% is a long-term number. So, I don't think you've ever heard us talk about 3% to 5% being an annual number, and definitely not a quarterly number.

But I think, to the genesis of your question, one of the big drivers of revenue in this is the timing and onboarding of new business. So, to the earlier question, as we get into the second half of the year we would expect that number to be more consistently in or at the lower end of that number.

And as we look to 2018, we will obviously talk more about it as we get much closer to that because there's a lot of things that could impact that. But the trajectory of the business you would expect to be more second half, and therefore continue into the first part of 2018. I think that is a fair assumption.

Okay, great. And then just a follow-up, maybe taking another slice at the revenue, it seems to me that at a high level there are three factors -- new business, lost business and then what you are doing on a same-store basis. Help us understand what has caused you to be below the low end of the 3% to 5% for a fairly extended period? And what drives the confidence that gets better?

Is it mostly lost business like the strategic exits -- obviously energy has been challenging -- and you just expect that stuff to normalize? Or has there been a new business inconsistency or anything else going on that's worth thinking about? Thank you.

I think the way I would think about it is, we have had some headwinds that we've talked about, and I think the right math is about 150 basis points. As I think back to 2016 and certainly look at the first quarter of this year, I think we've been fairly transparent, we certainly try to be, on how that 150 basis points of headwind builds.

As you think about that, on the new business side, again, I think the only thing related to new business is, while the pipeline can look very attractive, the actual timing of how that pipeline both evolves relative to decision-making, as well as the onboarding of that, is one that is less in our control and can be a little more disruptive relative to the quarter-to-quarter math.

But I think, for the most part, the way we looked at the business is we would expect, if we are in the 3% to 4% target of the long-term algorithm, about half that growth should come from new business and about half that growth should come from base business. That's what we would look to do as we go forward.

Thank you.

Your next question comes from the line of Andrew Steinerman with JPMorgan. Please go ahead, your line is open.

Hi I wanted to look a little bit more at the organic revenue growth acceleration in North America this quarter. Could you be quantitative by end market -- B&I, education, healthcare, sports, leisure and correction -- on what drove the year-over-year acceleration in this first quarter?

I think if you look at the business, Andrew, again, our North America growth was fairly broad-based. I think we called out education. Our sports business performed well. Our leisure business, obviously, with the addition of Yosemite, performed well. Our corrections business performed well. I think the big area of pressure was the healthcare business that I think we tried to highlight. So, that is really the rack and stack of the various subsectors within North America's performance in the quarter.

Right. But the thing that changed the most since the fourth quarter is probably education, right?

I think education, but I also think the performance in sports and obviously leisure were also extremely strong.

Great, thank you.

Your next question comes from the line of Steve Gojak with Cleveland Research. Please go ahead, your line is open.

Part of my question was asked earlier but just a follow-up to the operating margin. I know the flat performance this quarter, 40 basis points of underlying improvement, offset by 40 basis points of investment. As we look at the second quarter and through the back half of the year, what is the rough way to think about how those two factors progress, the investments versus offsetting the underlying progress?

I think a couple of things. One, if you really look at our base productivity performance, it has been very strong and consistent quarter in and quarter out and even year in and year out. So, I think the way to think about it is, we have tried to communicate that when we look at these investments, they are very directly linked to annual operating plan initiatives.

When we come out of our annual operating plan, we link the timing of those investments and capability and technology largely to those initiatives, which get deployed, for the most part, during the first and second quarter, but certainly during the first half of the year. So, I think the way you will see the margin line play out is, as the year unfolds, you will continue to see the margin flow through, get stronger as some of those investments subside as the year unfolds.

Great, thank you.

There are no further questions at this time.

Great. Again, thanks to everyone for joining us. We appreciate your ongoing interest in Aramark. Everyone have a great day. Thank you.

Thank you to all our participants for joining us today. This concludes today's presentation. You may now disconnect.