Aramark (ARMK) 2017 Q4 法說會逐字稿

Good morning, and welcome to Aramark's Fourth 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'll now turn the call over to Kate Pearlman, Vice President of Investor Relations. Kate, please proceed.

Thank you, and welcome to Aramark's conference call to review operating results for the fourth quarter and full year 2017. 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 in the Investor Relations section on our website, www.aramark.com, and is detailed on Page 2 of our earnings slide deck.

During this call, we'll be making comments that are forward-looking, including our expectations for fiscal 2018. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties and important factors, including those discussed in a notice regarding forward-looking statements and in the risk factors, MD&A and other sections of our Annual Report on Form 10-K and our other SEC filings. Additionally, we'll be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found in this morning's press release as well as on our website.

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

Thanks, Kate. Good morning, and thanks to everyone for joining us. I'm pleased to report that our continued execution against our clear and focused strategy enabled us to deliver another very successful year at Aramark. 2017 marks the 4th consecutive year of double-digit growth in adjusted earnings per share. The company also generated record cash flow of $520 million, which, combined with disciplined financial management, allowed us to achieve our long-term target leverage ratio of 3.5x, ahead of our original expectations that we laid out at our Investor Day in 2015.

There's no doubt that achieving this milestone really underscores the accomplishment we have made in strengthening the balance sheet since the company went public 4 years ago. The financial flexibility that we have achieved since the IPO has recently enabled us to take the next step in shareholder value creation through 2 strategically sound and financially compelling acquisitions of Avendra and the AmeriPride announced last month.

Today, we're also pleased to announce another increase in our quarterly dividend to $0.105 per share, which demonstrates our confidence in our continued strong performance in future prospects.

Turning to the results. As you saw in our press release, we reported another quarter of solid operating results, in line with our expectations. Revenue growth accelerated in the fourth quarter with strong balance growth in North America and international. When we factor in about a point of revenue headwinds from natural disasters, our revenue growth was within the multiyear framework. In fact, our results in the fourth quarter reflect the resiliency of our portfolio as we delivered a 10% increase in adjusted earnings per share of $0.54 despite these headwinds.

For the full year, adjusted EPS increased 14% on a constant currency basis to $1.94. Total company organic sales were up 2%, driven by North America and international.

Adjusted operating income was $961 million for the year, an increase of 2% over the prior year on a constant currency basis despite a 2% headwind from those natural disasters.

We continue to drive productivity improvements across food, labor and SG&A while also balancing reinvestments in the business. This year, adjusted operating income margins increased 5 basis points on a constant currency basis to 6.6% despite a 10 basis point headwind from the impact of the disasters.

Turning to our performance by segment. North America organic revenues grew 1% in the year, led by Sports, Leisure, Corrections, Education as well as Business & Industry. North America adjusted operating income grew 6% to $691 million, driven by strong base productivity gains.

For the year, our international segment delivered broad-based organic revenue growth of 5%, with strong growth coming across Europe, Asia and Mexico. Our productivity initiatives also gained traction in our international business, resulting in 5% growth in adjusted operating income on a constant currency basis to $146 million for the year.

In our uniform segment, revenues were flat for the year at $1.56 billion. AOI declined 10% to $182 million for the year as we proactively extended contracts to lock in revenue in light of the industry disruption and also incurred installation cost related to the onboarding of new business. In the fourth quarter, there was also an unexpected $8 million adverse impact, largely related to our operations in Puerto Rico. We are all looking forward to the successful integration of AmeriPride as we rely on the expertise of our management teams at Aramark as well as AmeriPride to combine these 2 companies with a focus on the customer and on realizing the synergies that will deliver sustainable shareholder value.

Steve will take you through the details of our financial results in a moment, so let me shift my discussion to update you on our progress against our strategic priorities. Our first strategic imperative is all about accelerating growth, and we were pleased to see revenue growth accelerate as we exited the year, with broad-based growth across a number of key sectors. This momentum has continued into 2018, driven by a great back-to-school season where we picked up wins that benefit our Education, Facilities as well as our Sports businesses as well as wins across a number of other key sectors. We expect our client retention rates to remain strong at the targeted mid-90s level across lines of business and geographies. In fact, we're entering 2018 with one of the best years of net new business performance in the company's history, which gives us confidence in the revenue growth within our multiyear framework.

A couple of leading indicators of growth metrics also look good. Our consumer satisfaction scores continue to improve across the portfolio as we continue to innovate against the 4 critical dimensions for today's consumers: quality, health, convenience and personalization. We're improving our product offerings, service and technology across all 4 of these dimensions to consistently elevate the customer experience.

We've been laser-focused on improving our quality and expanding variety through unique seasonal offerings, regular restaurant rotations, limited time offers and exciting celebrity chef partnerships. We're also enhancing our brand strategy with additional segmentation around premium offerings and the core cafe concept featuring a dynamic food hall experience. In health and wellness, I'm proud to report that we are well ahead of our targeted goals in our Healthy For Life 20 by 20 campaign with the American Heart Association. We achieved a 13% reduction in calories, saturated fats and sodium across our menus in higher ed, healthcare and business dining, far exceeding our 3% to 5% annual improvement target. We're also pleased to have been named the Best Employer for Healthy Lifestyles by the National Business Group on Health.

We continue to work across our supply chain to create menus with more vegan, vegetarian and plant-forward options that are produced locally and sustainably. And we're also focused on meeting consumer demand for convenience and speed of service. We're piloting automated ordering and checkout across our portfolio with technology that is generating positive reviews from our customers. We're striving to deliver cutting-edge service that removes friction from the ordering process so that our customers can spend less time in line and more time enjoying the dining experience.

Our growth efforts are yielding results beyond our food business. In 2017, we stood up a separate management team for our facilities business, we're making substantial progress. We've improved our right to win, and we're leveraging best practices across the organization to ensure we deliver service excellence for our clients each and every day. And I'm very pleased with the new business that our team is driving and the increased focus that they are bringing to this very important long-term growth opportunity.

Finally, we're continuing our winning streak in Sports as we're thrilled to congratulate our long-term partner, the Houston Astros, on winning their first World Series championship. We're honored to be part of that historic victory.

Turning to our second strategic imperative, activating productivity. In 2017, we continue to drive strong base productivity improvements while also investing in growth, people and technology. As we go forward in 2018, our focus is threefold: First, to attack complexity in food across the entire supply chain, from procurement to strategic sourcing, from menu optimization to the food production process, as well as waste management. Second, on labor, our attention is on improving headcount productivity through a standard in-unit labor model, flexing that labor based on demand and effectively controlling overtime and agency labor. And finally, we're working to ensure we have an efficient and effective above-unit SG&A structure.

Turning to our third strategic objective, attracting the best talent. We're committed to fostering the right culture to create a great place to work by ensuring we have a diverse and inclusive workplace, and so we were very pleased to once again be recognized by the Human Rights Campaign as a Best Place to Work for LGBTQ Equality and to receive the Best Places to Work for Disability Inclusion Award. Each year, we bring one of our core values, Frontline First, to life by recognizing the outstanding efforts of those who make and market our products through our annual Ring of Stars celebration. And I'd like to congratulate our newest class of service stars that we honored last month.

Finally, I'd like to provide an update on our fourth strategic priority, achieving portfolio optimization. Our M&A strategy has focused on a couple of key objectives: improving our competitive position, enhancing our scale and capabilities, entering new geographies and channels. The pending acquisitions of Avendra and AmeriPride meet all of these objectives and will drive sustainable shareholder value creation.

In terms of integration, planning updates, I'm pleased to announce that we've appointed Harrald Kroeker to the position of Senior Vice President, Integrations, to lead the integration, planning and implementation work for both of these transactions. Many of you have met Harrald as he's been leading our global operations excellence team that has driven significant improvements across food and labor productivity over the past several years. Harrald is an experienced, strategic and operational executive with an impressive track record of leading successful integrations across large-scale, complex, consumer-driven companies. Harrald will be leveraging talent from Avendra and AmeriPride as well as Aramark to focus on achieving the synergies as quickly and efficiently as possible. We're looking forward to welcoming the Avendra and AmeriPride teams to the Aramark family, and to the contributions that their experienced management teams will make to our ongoing success.

We continue to be encouraged by the progress we're making to execute against this clear and focused strategy.

So turning to our outlook for 2018. We expect revenue growth to be within our long-term framework. Adjusted EPS in the range of $2.10 to $2.20. At the midpoint of that range, this would represent the fifth consecutive year of double-digit adjusted EPS growth. And please note that this outlook does not include the impact of the acquisitions of Avendra or AmeriPride, which, as we previously disclosed, are expected to be dilutive to adjusted EPS in the first year and accretive to cash flow.

In closing, 2018 will be a pivotal year for the company as we drive continued growth in our base business by executing against our strategic imperatives and we also began the integration of 2 strategic acquisitions. I'm encouraged by our progress and the momentum that we have heading into 2018, which is a real tribute to the strength and commitment of our entire organization.

Finally, I want to thank all of our team members who deliver service excellence every day to our customers across the world. I also want to salute the heroic efforts of our Aramark team members who supported our clients, consumers and the broad communities in the face of several unprecedented natural disasters and who'll continue to do so with the cleanup efforts that lie ahead. And I also want to thank over 10,000 team members who recently volunteered at our Annual Day of Service, impacting nearly 500,000 families in communities where we operate across the world.

With that, let me turn the call over to Steve for a more detailed review of our financial results.

Thanks, Eric, and good morning. As I look back on our performance in 2017, our operating results for the full year and the fourth quarter were right where we expected them to be. Importantly, revenue growth accelerated in the fourth quarter, and our productivity initiatives continued to gain traction.

I'm also obviously pleased by our cash flow generation, the strength of our balance sheet and with our financial flexibility, which are paving the way for the 2 acquisitions that we recently announced.

Turning now to the Q4 sales reconciliation. Sales on a GAAP basis were $3.65 billion in the quarter. This represents an increase of 3%, with currency tailwind of $24 million or almost 1%. This was due to the U.S. dollar weakening specifically against the Canadian dollar, the euro and the Chilean peso.

Organic sales for the company grew by 2% in the quarter, driven by growth in North America and international and modest revenue growth in uniforms. There was no material impact from mergers and acquisition activity on any of our financial results in the quarter. However, there was an estimated revenue headwind of $25 million or almost 1% related to natural disasters. Our operations were impacted by 3 severe hurricanes in the United States and Puerto Rico as well as the earthquake in Mexico. After factoring in this impact, our revenue growth was at the low end of our multiyear framework, just as we expected it to be.

Adjusted operating income was $255 million in the fourth quarter, which is comparable to the prior year. We continue to drive productivity improvements in our North America and international base accounts and further efficiencies in SG&A, which were partly offset by planned reinvestments in technology and capabilities. Also, there was an estimated $17 million or 7% impact on AOI from natural disasters related to lost business, inventory spoilage and asset impairments.

I would note that our uniforms business absorbed approximately half of this impact due to the permanent shuttering of a portion of our Puerto Rican operations. Currency did not have a material impact on margin or AOI in the quarter. AOI margins decreased 20 basis points on a constant currency basis to 7%, clearly impacted by an estimated 45 basis point headwind related to the natural disasters.

Adjusted EPS increased by 10% or $0.05 over the prior year quarter to $0.54 a share. As AOI was flat in the quarter because of the natural disaster impact we just mentioned, the increase was driven by lower interest and taxes. Interest expense declined versus prior year due to the impact of our recent refinancing. Our tax rate benefited almost equally from our tax planning efforts and the new accounting standards related to share-based compensation. Finally, there was no material impact from dilution in the quarter due to the share repurchase earlier this year. However, the estimated EPS impact due to the natural disasters on our business growth was approximately $0.05 per share, meaning the underlying improvement in the fourth quarter adjusted EPS was well balanced.

Turning now to cash flow and capital structure. As a reminder, we define free cash flow as cash flow from operations less net capital expenditures. The company reported record free cash flow of $520 million this year, which is a reflection of strong operating results and disciplined working capital management. As Eric mentioned earlier, we achieved our target leverage ratio of 3.5x a year earlier than we had originally anticipated, which demonstrates not only the strength of our cash generation but the efforts of our team to manage capital effectively.

Finally, as depicted on the slide and mentioned on our last call, our reported cash flows in 2016 and 2017 were also positively impacted by a reclassification due to the accounting rule change related to share-based compensation. This is a net reclassification in both years between the operating and financing sections of our cash flow statement. This request does not impact either the cash available to the company for use or our leverage levels.

Corporate liquidity remains very strong, as reflected in the $1.2 billion in cash and revolver availability at the end of the quarter. We also have robust financial flexibility as there are no significant maturities until 2022. I'm really pleased with where the balance sheet is positioned at the end of 2017, having demonstrated that the combination of our strong, consistent cash flows and disciplined financial management enabled the company to delever quickly following the IPO. After we complete the pending acquisitions, we will remain laser-focused on aggressive debt repayment, so that we can once again quickly delever back to our targeted leverage range.

Finally, let me turn to our business outlook for 2018. First, please note this outlook does not include the impact of the pending acquisitions of Avendra and AmeriPride. And as we mentioned last month, these transactions are expected to be dilutive to adjusted EPS but accretive to free cash flow in 2018. Aramark will finance the transactions through the issuance of new debt, which will result in increased interest expense and the leverage ratio initially in the mid-4x range. After the transactions close, we will update our outlook accordingly. With this in mind, we are expecting the current operations of the company to generate adjusted EPS in the range of $2.10 to $2.20 per share.

We're anticipating strong improvements in our operating performance this year, driven by food and labor productivity initiatives and continue reductions in SG&A. Interest expense is expected to be approximately $260 million, but the benefits of the recent refinancing will be somewhat offset by an expectation of rising interest rates. Our effective tax rate is expected to increase approximately 250 basis points versus 2017. While we're going to continue to benefit from our tax planning initiatives, there will be less of a benefit from the accounting rule change related to share-based compensation. As the higher levels of excess tax benefits related to the equity awards from the IPO have now been recognized. It's worth noting that our estimated tax rate does not reflect any of the pending legislative changes currently under consideration.

Finally, we do not anticipate a material impact from currency in the year. This year, we expect an increase in cash taxes of roughly $100 million, largely related to the timing of tax credits, the impact of higher income and the lower tax-deductible benefit related to share-based compensation. In spite of these higher cash taxes, we are still expecting to generate over $400 million in free cash flow. We also anticipate that our capital spending will be approximately 3.5% of sales, which is consistent with our average investment over the last 2 years, as we continue to invest in growth and technology.

Finally, turning to our expectations for the first half 2018 performance. We're expecting our revenue momentum to continue, with growth in the front half of a multiyear framework, driven by broad-based growth across a number of key sectors. Consistent with prior years, we expect our margin expansion will be weighted towards the second half due to the timing of reinvestments and new account onboarding. With regards to the first quarter, we're expecting earnings to be comparable to the prior year as the impact of the new account start-ups will be most heavily felt in that quarter.

I'll now turn the call back over to Eric for some closing remarks in advance to Q&A.

Thanks, Steve. And with that, I think, operator, we're ready for -- to open up the lines for Q&A.

(Operator Instructions) And our first question on the line comes from Mr. Stephen Grambling from Goldman Sachs.

I think that the -- probably the biggest thing on folks' minds is just the sales run rate. I think this has been a consistent point of questioning and concern as you've been below the algorithm, for now, I think, 3 years. And even this quarter, you kind of, have an asterisk around it. So is there any way that you can help us quantify the size of new business wins, potential contribution 2018 at the current run rate and how that might compare to prior years at this point?

Sure, Stephen. It's Eric. Well, first of all, let me just reiterate, I think as both Steve and I mentioned, a couple of things related to growth. I think, first and foremost, our growth was as expected in the quarter and within the framework in the quarter, again ex the hurricanes. And so if you think about that, the way I would describe it across, kind of, the 3 lines of business is we had very broad-based growth in North America, very strong momentum across our international business and we returned to growth in our Uniform business. And so I think as you look at that, we -- Q4 was exactly as we predicted. I think as we mentioned in the past, the leading indicators of consumer satisfaction and client loyalty that started to improve at the middle part of last year continued to be very, very good. Our retention rates are in the mid-90s. And to your question on new business, 2017 was one of the best new business years in the company's history. So I think all in, there's been a lot of questions around when will you return to within-framework growth. The simple answer is, we did in Q4.

Nuanced follow-up. You had very, very strong organic growth in the international segment. I guess, I would have thought, we would have seen a little bit more margin flow through there. As you think about the margin opportunity ahead, can you just give us a little bit sort of broad outline around how to think about margins in each one of the segments and in the international segment, in particular?

Sure. Well, as you said, we had phenomenal growth in our international business. And I think a fairly significant driver of some of that margin pressure was the start-up of a very large new account. So I think it's as simple as that, Stephen. I think as we think about margin broadly, again, as you know, we've made great progress over the last several years. We continue to have a high degree of confidence and conviction around the whole margin topic. And as we think about margin going forward, I'd continue to see strong margin growth coming from our North America business, growth from our international business. And then I think as you think about the international business, you probably continue to see some margin pressures the first quarter or so of the year, with a very strong margin pick up as we get through the onboarding of this new business and some of the cost related to the start-up for that new business as we put uniforms into service before we recognize some of that revenue. So nothing's changed from a margin perspective. Again, specific to your international question, that margin pressure was largely driven by the start-up cost connected to a very large new account.

Our next question on the line comes from Hamzah Mazari from Macquarie.

This is Mario Cortellacci filling in for Hamzah. Could you give us a sense of whether a consolidation has helped the uniform market or whether you expect benefits to come later? And maybe you can outline what that looks like for us.

Well, let me just back up maybe and talk a little bit about how we think about the Uniform business. I think I'd start, as I mentioned during the call we had when we announced the AmeriPride acquisition. Now, this is of business we absolutely love. Why do we love it? We love it because it's got good margins, it's got strong cash flow, it can be accretive to growth and profitability of the company. And so I think as we think about the marketplace in 2017, there's no doubt that the consolidations that took place did drive some disruptions. And I think the fact is, as we look at our 2017 results, we think as we head into 2018, you're going to see a very different level of performance from our Uniform business. So what have we done and what are we doing? Well, you're seeing it play out. One of our top M&A priorities was to acquire AmeriPride. We did that. That gives us a lot of different things around scale and increased competitiveness and synergy capture, et cetera. And then second, on the strategy side, we're continuing to execute against what we need to, to grow the business, achieve all of the things we need to on the productivity side in terms of an effective cost structure. So I think as we look at the business, it continues to be a business that we like, and we're very much excited about the AmeriPride, getting the deal completed and moving forward with our integration efforts.

Okay. And just one quick follow-up. Could you walk us through how you think about the sports calendar this year and whether there are any comp issues we should pay attention to?

Well, when you say -- are you talking about 2018?

Correct.

Yes. Well, let me start with 2017 because I do think in 2017, we did see some pressure relative to baseball attendance, and we've actually seen a little bit of pressure on the football attendance side as well. As you think about the real factors that drive that, it tends to be driven by either attendance and/or the lapping of how our teams perform in the playoffs. And so it's probably better as we get closer to those respective playoff runs for us to give you that dynamic relative to who's in the playoffs versus a year ago. But I would say there's nothing of significance that we see at this point in time, that we've called out as a big headwind.

Our next question on the line comes from Toni Kaplan from Morgan Stanley.

I wanted to ask about your 100 basis points target for EBIT margin expansion. Through 2018, I think you laid it out at your Investor Day a couple of years ago, so even passing out the impact of the hurricane this quarter, it doesn't seem that, that is perhaps an attainable target anymore. Is that fair? Or are there some factors in '18 that can still get you to the 100 basis points?

Yes, I think we continue to have confidence and conviction around the 100 basis points, Toni, so I think if you think about -- obviously, there was some hurricane impact on the 2017 number, there's a couple of other things I might point you to, One was when we have year-over-year the significant uptick in new business wins, you're going to have a little heavier start-up cost than normal as well as the fact that we stood up the facility's business, are probably 2 things that you saw happen in '17 that won't be as much of a headwind in '18. But as we think about '18, and we think about the 100 basis point mark, and I think, Steve and I and the organization continue to be committed to have a lot of confidence and conviction around it. And again, our focus is really around attacking the complexity across the food supply chain, making sure we drive continued productivity across labor and making sure we have the right SG&A structure above unit. So Steve, you want to add anything?

Yes, yes, I would. I think we absolutely have line of sight to that number. And on an annual basis, obviously, what drops through doesn't necessarily happen on a straight line one way or the other. But as we sit here today, especially when we look at the -- just the pace of the investments we've made in the technology and when you just look at the overall math of the company, I think we've got very good line of sight to being able to ultimately close that 100 basis point GAAP by the time we finish the fiscal year of 2018 with the business that we have today.

Okay, that's very helpful. And then just wanted to ask in North America Food Services segment, just were there any specific client types that were stronger? Any specific types that were weaker? I just wanted to get a sense of where the positives and negatives were on that growth in North America?

And Toni, I'm assuming you're talking about Q4 specifically?

Yes.

Okay. So if you think about Q4 and the statement we made about how broad-based our momentum was in North America, we saw growth out of the following sectors in North America: education, business dining, leisure, corrections. Actually, Healthcare, Hospitality also returned to growth in the quarter. And really, of the North America food and facilities business, the business that saw some pressure was the Sports business. I mentioned some of the attendance challenges that we had. But other than that, the rest of the business in North America performed very well relative to run rate and relative to our expectations.

Our next question on the line comes from Mr. Gary Bisbee from RBC Capital.

Let me push back on that last one a bit. So even if we assume most of that $25 million hurricane impact was in North America food, you're still under 2% in terms of the organic revenue growth you delivered? And while I realize, the business came back into the 3% ex the hurricanes overall, I think everybody on the phone here would -- or at least, on the investor and analysts side would argue, sub-2% is a pretty disappointing number given all the new business wins that you've been citing. I realized the Education ones came on part way through the quarter, a lot of them, and so you'd expect that to be better. But at the segment level, what's going on in North America? Why wasn't it stronger? And can you help us understand what that looks like the next couple of quarters?

Well, Gary, it's Eric. Let me start again. I just want to be perfectly clear that the growth of the North America segment ex hurricanes was 3% in the quarter. And that was...

How does that -- help me with that math? $25 million divided by the revenue from a year ago is like 80 basis points or something, 90 basis points. And you did 0.8%, unless I saw that wrong in the release. So you add those 2 up, you don't get 3. Am I missing something here?

Yes, let me try to help, Gary. So when we're -- let me start with the entity level first and then we'll go down to the North America. So our entity level revenue ex the hurricane impact was on framework, within the 3%. The $25 million of revenue impact for the hurricanes was almost exclusively in the North America FSS segment. There was a de minimis impact on the uniform number. And so the North America organic growth number ex the hurricane was around that 2% number, for clarity. The company's framework number was the 3% that we were referring to previously.

Yes, right. And so I guess I'm wondering the 2%, I think, is below, ex the hurricane, is below what we would have expected given the positive commentary and everything but Sports growing. So I guess, I'm just wondering is there any more color you could -- either color or you could help us understand why or commentary to help us understand if that business should get over 3% with all the new business that you've talked about bringing on?

Yes, let me maybe go a level deeper for you, Gary. So I think relative to expectations, if there was one business that was off, it would've been the Sports business and specifically related to attendance. I think the other thing that may be a variable, I mean, we're getting pretty deep into the weeds, but just for color commentary, there were a couple of trading days lost on the Education business that shifted based on the timing of school start-up. But again, I think what we're trying to convey is not only the way we finished fourth quarter, but the way we've started in October is very consistent with what we expected from a growth perspective. And that, that growth was very, very broad-based across sectors in North America.

Yes. I would reiterate that, obviously, there's -- we don't provide specific expectations around segment revenue within a quarter for a variety of reasons. But because we're at that point of the conversation, to Eric's point, that the decline in participation at the Major League Baseball level was a point on the North America revenue versus where we had entered the quarter. So that's worthy, I think, of keeping in mind as well.

Okay. Great. And then the follow-up, just the international, sort of, going the other way, it was quite a bit stronger than in the quarter, the organic growth. Were there some seasonal or sometimes there's events that move around timing and stuff that helped or is there some reason that it was so strong and maybe you do we think about that going forward?

Yes, I think, again, if you look at the international business, Gary, I would not project the fourth quarter growth rate going forward. Again, that was driven by the onboarding of a fairly significant new business win. Having said that, if you look at the performance of our international business, which grew mid-single digit for the year, that's the kind of I think growth rate you should expect as we think about 2018 going forward.

Yes. And I would remind everyone that, we talk about lumpiness within the business on a quarterly basis, and that lumpiness becomes magnified as you go down in the individual segments. So I would come back to it's difficult to extrapolate up or down from any individual quarter, certainly more difficult at a segment level, and we caution people, therefore, not to try to model that.

Our next question on the line comes from Manav Patnaik.

My first question is just around the $2.20 EPS target that you set out in 2015. I think I'll come to even last quarter, it felt like that was probably going to be on the low end of whatever you're going to guide. And I was just wondering if you could walk us through what's helped and hurt in getting to that number? I know debt refi and tax were positives, maybe energy was negative, but maybe some color on when you first gave that guidance, where we are today at the $2.15 at the midpoint. And what the moving pieces are?

Sure. I'll take a stab at that. I mean, to my knowledge, the only commentary we provided previously around 2018 expectations was when we did the Investor Day back in 2015, and we talked about an aspirational EPS target of $2.20. So let me start there. Really, the only difference between the midpoint of our range of $2.10 to $2.20 and that $2.20 that was set out at the I Day in 2015 is currency. So there's about a $0.05 share currency impact when you just look at the difference in rates today versus the rates that existed in 2015. So from my perspective, we are expecting EPS completely consistent at the midpoint of that range with the guidance that we set out for ourselves at the I Day in 2015. That's another -- what would be the fifth consecutive year of double-digit EPS growth. So the moving pieces. Of course, the individual lines move around a little bit. And so on a year-over-year basis, we'll have a little more tax headwind in the form of a higher rate than we had in 2017 based on the stock-based comp changes, I referenced earlier. Interest is pretty close to the same, maybe a very modest headwind depending on what rates actually end up doing. And then we clearly are going to have significant business growth, positive contribution as we continue to progress towards the margin target that we've referenced, and we've got the top line growth. So you put all those together, you get yourself to kind of a double-digit midpoint number, which from my perspective is exactly the number that we set out for ourselves in 2015 for 2018.

Okay, and then maybe on the top line. And I guess you said at least 3% for '18. Again, I think I got the impression last quarter that 3% to 5% was well within reach, I guess at least 3%, does put you there. But did you, in your comments talk about the first half being fast to growth than the second half? Maybe just some color on the assumptions, so '18 on the top line?

From a revenue perspective, no, we're -- we expect the revenue over the course of 2018 to consistently be within framework. And so our margin expansion will clearly be more weighted to the second half of the year. But from a revenue standpoint, we will enter the year in framework for all the reasons that we've talked about previously, and I would expect us to be largely within framework for the entire year.

Our next question on the line comes from Andy Wittmann from Baird.

Oh great, sorry, Steve just a clarification on that last one, will be on the North American food, just given the size of that business, and you guys are talking about at least 3% organic revenue growth for the year. And must imply that the North American food is in that 3% range. And is that expected to run through the year? Or was that one that is going to come in that -- in framework as well?

Well, back to my earlier comment, right, we don't provide specific expectations for revenue within a sector and certainly not within a quarter. I would tell you we certainly expect generally better year-over-year revenue growth performance out of the North America FSS segment than we had in 2017 for all the reasons that we talked about. A lot of that strong new business, booked new business momentum that we have is sitting in the North America FSS segment. So I would expect generally better revenue performance from all 3 of our individual segments over the course of 2018.

Got it. And then just as it relates to that comment that you made on flattish EPS I guess, for -- because of reinvestment. That was the main reason in 1Q. I guess, there are some reinvestment also 1Q last year. Is it the fact that maybe you don't get much stock comp benefit this year as it did last year? Or what are the some of the other factors that are holding back 1Q specifically?

Well, specifically on EPS, for sure, the tax rate's going to be higher, so that's going to be a negative year-over-year comparison for us. And while we have start-up compression every first quarter, specifically in the higher Education segment, those tend to be larger accounts generally. And as revenue is growing year-over-year, because we have higher revenue in the first quarter, we will have modestly higher start-up expenses. So it's a combination of growing revenue and some of the start-up that comes with that as well as a higher tax rate on a year-over-year basis.

Got it. And then maybe, Eric, just more broadly for you on just retention. It sounds like you're expecting consistent retention. Maybe an aspiration a little bit higher of improving retention, what're you doing today to attack that? And how much of the retention rate of Aramark versus your peers do you think is part of the reason for the growth disconnect?

It's a thought, well, again, yes, if you think about the growth, our retention rates I think have been pretty consistent and I think are pretty consistent relative to the competitive peers on the food and facility side. Again, it's going to vary by the line of business, somewhere from, kind of, low 90s to high 90s. That gets you, kind of, a mid-90s. But -- and I think as we've said in the past, we certainly set targets for each of our sectors to improve retention rates. Having said that, as you think about the algorithm for us and I think largely if you looked at it for the industry, if you think about the growth algorithm, you'll see about half the growth coming from new business and about half the growth coming from base business. That's been the history. That certainly is the way we've planned 2018. And I think that's very consistent with what you'd see from our competitors peers.

Our next question on the line comes from Dan Dolev from Nomura Instinet.

I think on August 8, you rated the guidance. Was there anything that went wrong in, say, the last 7 weeks of the quarter that resulted in organic growth in North America being that weak?

Well, again, I guess, we'll come back to the topic at the risk of being repetitive. So in Q4 for North America, ex the hurricane, the growth was very consistent with our expectations. So I would reiterate that. As we saw the way the quarter played out, we saw broad-based growth across the Education sector, the business dining sector, the leisure, corrections, and including Healthcare Hospitality that grew. The Sports business declined. That was the one area that if there was a mild surprise, it was really due to some of the things we saw on the attendance side on both baseball and the start-up to the football season. But again, I just want to come back to the point that from Steve's perspective, from my perspective, from the company's perspective, what we told you was going to play out in Q4, ex the hurricanes, played out in Q4. And that was Q4 was going to be the first year -- first quarter where we saw growth for the company for the enterprise within the framework, which we did. We think that bodes well because obviously we finished with much better momentum that within framework growth in Q4, which sets us up for 2018. A lot of that has been driven by a very successful new business year we had in 2017 that began to ramp up in fourth quarter and will continue. And certainly, as we looked at what we saw happen during the early part of 2018, that has continued. So that's the story in North America. Steve, you want to add anything?

Yes. I don't recall whether August 8 is or is not a specific date, to be candid with you. But I can tell you that with the exception of baseball performance over the last 1.5 months, as Eric referenced, being a little bit weaker than we had thought, I don't think there's anything different in where the company's results landed outside of the hurricanes versus what we had been expecting over the course of the entire quarter.

No, I understand. And then my follow-up is, I think you mentioned that the impact of the hurricanes was predominantly in the FSS North America, that $25 million. Is that a fair statement?

From a revenue perspective, that is true. From an AOI perspective, it is more evenly split between the Uniform business and the North America FSS business, and there was a touch in international as well. And the reason that uniforms is disproportionately impacted on the AOI line is that we have 2 facilities in the Uniform segment in North -- in Puerto Rico. Both of them took direct hits, and we currently anticipate that one of those facilities will not be reopening and we have permanently written it off.

Is your uniform geographic but not as levered towards the hurricane affected areas? That it wasn't as much, because your competitor basically highlighted a specific decline in revenue as a result of the hurricanes, that's why I'm asking.

I can't speak for anyone else's particular exposure from a geographical standpoint, so I probably can't answer that question specifically.

Our next question online comes from Anj Singh from Crédit Suisse.

First off, I wanted to follow up on some earlier questions. It seems you're saying new business wins are the strongest they've been. Potential rates are strong. You've lapped a lot of headwinds, yet you're firing at the lower end of the framework. So as we look ahead, what is it that gets you closer to the midpoint of your longer-term framework? Because I think there was some anticipation that for '18, you'd be closer to, say, 4% organic growth rather 3%. So if you could just help us understand that?

Well, again, I'll just talk to the composition of the growth. So as we think about our 2018 growth rates, I think what you'll see is about half of that growth will come from new business, and about half will come from an improvement in our base business. So we don't build into the algorithm any improvement in retention, although we have initiatives to try to drive improved retention. Relative to 2018, our revenue guidance, as we talked about, was at least 3%. And as you think about that, that is within the framework. And as we think about 2018, I think what we're trying to convey is we have the same degree of confidence and continue to be encouraged by the growth momentum. So getting growth in fourth quarter within the framework was a milestone that was important to us. I'm assuming, it was important to you. The fact that we've done that and the fact that as I've mentioned that growth rate is encouraging as we look at 2018 is where you're going to see the business perform at least 3% level. And I think beyond that, we'll see how the year plays out, and that's where I'd leave it.

Yes. We continue to feel where we're going to be significantly better off entering the year than we were last year. And the lumpiness that's inherent in this business, whether it's a quarter-by-quarter look, whether it's a line of business by line of business look is what -- is the reason that we don't be more prescriptive, we are not more prescriptive in trying to fine-tune some of this because we just aren't that accurate at that granular level. But we will be significantly better entering this year and over the course of the year than we were in 2017. We feel very confident in that.

Okay, fair enough. Shifting gears a little bit. I was wondering if you can give us an update on your technology initiatives, particularly as it relates to the pricing productivity opportunity? I know that's one that you've been siding about, Eric. So perhaps where are we on that journey? Is that contributing at all to your 2018 outlook? Maybe some thoughts on when that can become a little bit more of a material tailwind?

Yes, I think we're pleased with where we are. And certainly, as you think about the base growth and our ability to effectively manage mix and the pricing levers, I think there's no doubt that the work we've done is beginning to pay off. So again, we're at a point where I think as we get later in the year, we'll talk more about the impact. I think as we've said all along, one of the things that is a little bit of limiter to us relative to pricing is the ability to gain control of the point-of-sale system as a data and analytic point for us, but again, I think we continue to make progress. Having said that, the technology that we're deploying across the margin march, everything from how we effectively manage labor with Kronos, the Ariba rollout, those rollouts will have more immediate impact, particularly as you think about 2018 in the pricing tools and technology.

Thank you. We have no further questions at this time. I would now like to turn the call over to Eric for closing remarks.

Great. Well, thank you very much, we appreciate you joining with us as always, and we appreciate your interest in Aramark. Everybody, have a great day. Thank you.

Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.