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Edited Transcript of ARMK earnings conference call or presentation 4-Feb-20 1:30pm GMT

Q1 2020 Aramark Earnings Call

Philadelpia Feb 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Aramark earnings conference call or presentation Tuesday, February 4, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John J. Zillmer

Aramark - CEO & Director

* Rich Kotzker

Aramark - Associate VP of Capital Markets & IR

* Thomas G. Ondrof

Aramark - Executive VP & CFO

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Conference Call Participants

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* Andrew Charles Steinerman

JP Morgan Chase & Co, Research Division - MD

* Andrew John Wittmann

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Gregory R. Bardi

Barclays Bank PLC, Research Division - VP

* Hamzah Mazari

Jefferies LLC, Research Division - Equity Analyst

* Ian Alton Zaffino

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* John Henry Hanna

BofA Merrill Lynch, Research Division - Associate in Equity Research

* Kevin Damien McVeigh

Crédit Suisse AG, Research Division - MD

* Seth Robert Weber

RBC Capital Markets, Research Division - Equity Analyst

* Shlomo H. Rosenbaum

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Stephen White Grambling

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Toni Michele Kaplan

Morgan Stanley, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to Aramark's First Quarter 2020 Earnings Results Conference Call. My name is Paulette, and I will be your operator for today's call. At this time, I would like to inform you that this conference is being recorded for rebroadcast. (Operator Instructions)

Rich Kotzker, Associate Vice President, Capital Markets and Investor Relations, will kick off today's call. He is handing in for Felise Kissell, who is unfortunately under the weather. Mr. Kotzker, please proceed.

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Rich Kotzker, Aramark - Associate VP of Capital Markets & IR [2]

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Thank you, and welcome to Aramark's first quarter fiscal 2020 earnings conference call and webcast. This morning, we will have the pleasure of hearing from our Chief Executive Officer, John Zillmer; as well as our new Chief Financial Officer, Tom Ondrof, who we're excited to have join us at Aramark just about 4 weeks ago.

As a reminder, our notice regarding forward-looking statements is included in our press release this morning, which can be found on our website and in our earnings slide deck. During this call, we will be making comments that are forward-looking. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties and important factors, including those discussed in the risk factors, MD&A and other sections of our annual report on Form 10-K and our SEC filings.

Additionally, we will be discussing certain non-GAAP financial measures. Year-over-year GAAP results include the impact of the divestiture of the Healthcare Technologies business that was completed in the first quarter last year as well as some miscellaneous unusual organizational items. 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 John.

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John J. Zillmer, Aramark - CEO & Director [3]

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Thank you, Rich, and good morning, everyone. I look forward to spending time with you today to share an update on the progress we are making across the company to accelerate revenue growth and unlock the economic potential of the business.

As I continue my visits with our operations leaders and client partners, I am more encouraged than ever about Aramark's strong DNA. There is unified commitment to service, quality and innovation that is amplified by the integrity and passion of our team. This powerful mindset gives me confidence in our dynamic path forward as we create long-term value for the company and all of our stakeholders.

I'm very pleased to welcome Tom Ondrof to the team as Aramark's new CFO, appointed about 4 weeks ago. We're extremely fortunate to have Tom, a highly seasoned foodservice and hospitality industry veteran, who is not only a financial expert, but also provides valued insights as a former Chief Development Officer and Chief Strategy Officer. In a few minutes, Tom will share his initial observations from our financial results, along with his immediate priorities.

I also want to take this opportunity to thank Steve Bramlage for his numerous contributions during his 5-year tenure with Aramark as well as for providing his expertise and guidance during this transition period. We wish Steve all the best.

Turning to our financial performance. The quarter materialized as expected and reflects the early actions of our reinvestment for accelerated revenue growth. While we saw organic revenue growth across all segments, there is ample opportunity ahead to drive additional performance.

As we work to elevate company's hospitality culture and drive future growth across the business, we have realigned resources, specifically in the areas of client retention, sales, marketing, finance and human resources to more directly support our field organization, who serve our clients and end customers.

Marc Bruno, a respective leader at Aramark, who has been with the company 26 years after rising through the ranks, has been promoted to Chief Operating Officer, U.S. Food and Facilities. As someone who originally hired Marc at Aramark, I'm very confident in his ability to inspire the teams and drive performance.

In addition, Gary Crompton has returned to Aramark as President of Business Dining. Gary is a highly respected industry leader with more than 2 decades of prior experience with Aramark, including serving as President of Business Dining and Healthcare Hospitality.

I firmly believe our leadership changes, that also include the recent appointment of John Orobono to oversee our Global Supply Chain and Group Purchasing Organization, as I mentioned on our last earnings call, combined with the talented teams already in place, create favorable catalysts for the business. We've already begun to recognize John's influence on our supply chain strategies as we implement customized and differentiated experiences for clients that complement our productivity and product quality enhancement initiatives. John and the team are actively strengthening and leveraging our global spend pools, conducting comprehensive reviews of targeted product categories, refining our broadline distribution programs and extending our procurement scale and innovative forms, including beyond our traditional touch points.

We have commenced our reinvestment in the business, funded by the approximately $35 million and further synergy capture for the Avendra and AmeriPride integrations. Our spend to date includes more field-based resources for new account sales efforts and client retention as well as establishing resources to actively pursue adjacent business opportunities that further serve our clients' needs. We anticipate continuing to realign resources and add where necessary throughout the balance of the year, particularly in the second quarter, to ensure we are well positioned for the opportunities ahead.

As part of our work to reignite the hospitality mindset across the portfolio, we are actively creating customized dining experiences that meet our clients' partners' unique needs and preferences. I'm very pleased with the early progress of this approach that has already resulted in several new and expanded relationships.

I continue to be confident in the company's long-term prospects. In just a few short months, we've mobilized several key components of our focused plan to unlock the economic potential of the business. This approach is quickly being adopted by our sales and operations leaders. In fact, a few weeks ago, I participated in our global sales meeting. The excitement, the energy and commitment of the team reinforced my enthusiasm in the extensive runway we have ahead.

Before I turn it over to Tom, some of you have asked about our business in China, given what all of us are seeing unfold with the coronavirus. First and foremost, we focus on ensuring the safety of our employees and the clients we serve. Broadly speaking, China represents about 2% of our total company business, primarily in health care, with minimal presence in the Wuhan region. We are monitoring the situation daily, and we're in constant contact with our Chinese leadership team.

Now I'd like to turn the call over to Tom to share his initial observations and insights on the company's financial performance.

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Thomas G. Ondrof, Aramark - Executive VP & CFO [4]

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Thank you, John. I'm excited to be here and to have the chance to work with you. While I've only been a part of the company for a short time, it's already clear that there's a great deal of talent in the organization and a genuine enthusiasm for the future prospects of Aramark. I look forward to partnering with John, the Board and our business teams to position resources to best serve our clients, drive disciplined revenue growth and strengthen our capital structure for added financial flexibility.

As John mentioned, the quarter materialized as expected and reflects the early actions of the commitment to reinvest in a hospitality culture and support future revenue growth. In the first quarter, organic revenue grew 1.6% compared to the prior year with increases delivered across all segments.

U.S. food and facilities posted a 0.9% increase in organic revenue, backed by solid-based business growth in Healthcare and Sports, Leisure and Corrections, partially offset by negative net new business in Education. Reiterating John's point earlier, there is ample opportunity in the year ahead to drive top line performance.

International grew organic revenue a healthy 3.2%, despite the unfavorable impact of the strategic exit of noncore custodial accounts in Europe late last year, with notable performance also delivered in South America, overcoming the social unrest in Chile.

Uniform showed balance in the quarter, growing organic revenue 2.5% from pricing and volume increases, while also remaining focused on increasing adjacency services for the additional -- for additional revenue opportunities.

Turning to adjusted operating income. In the quarter, constant currency AOI was down 2% compared to the prior year. AOI in U.S. food and facilities declined 11% on a constant currency basis primarily as a result of actions to accelerate growth, negative net new business in Education and an increase in medical insurance claim costs and lower income from possessory interest versus the prior year.

International grew constant currency AOI 43% due to the strategic exit of the noncore facilities accounts in Europe as well as the timing of incentive-based compensation in the prior year.

Uniforms increased constant currency AOI by 2% over the prior year as productivity improvements in operations and the anticipated synergies from AmeriPride were partially offset by investment in sales force, resources and training.

Adjusted EPS was $0.62 for the quarter, which was flat to the prior year on a constant currency basis. This was a result of the slight decrease in constant currency AOI just outlined, offset by the benefit of reduced interest expense and a lower adjusted effective tax rate in the quarter.

The free cash flow of negative $405 million was $88 million less than the same period last year due primarily to the timing of incentive-based compensation payments compared to the prior year and special contributions to employee retirement plans this year. These outflows were partially offset by slightly lower quarter-over-quarter capital expenditures. A reminder that free cash flow is historically negative in the first quarter due to the seasonality of the business.

Capital structure continues to strengthen and is an area of focus and opportunity. The company reduced its net debt position by $221 million in the quarter, and leverage ratio remained at 4.2x.

And finally, with an as-expected first quarter behind us, the outlook for fiscal 2020 on a 52-week basis provided during the last earnings call remains unchanged.

Earlier, John asked me to share my immediate priorities, so let me wrap up with that before turning the call back over to him.

Over the next few quarters, I plan to focus my time on 5 areas. Number one, growth. I will support the investment to increase sales resources across all business lines and lean on my previous experience to help reinforce the sales process and implement reporting tools to drive accountability and increase close rates on new business.

Number two, ownership and retention. I will work with John and the senior operating teams to continue to identify opportunities to invest in field-level hospitality by culinary resources, training, merchandising and marketing programs and help implement the appropriate level of decentralization to promote account ownership by unit managers and improve client retention.

Number three, procurement. I look forward to working with John Orobono and his team to identify ways to grow the Avendra business, bringing value and savings to Aramark's clients and GPO customers.

Number four, G&A. While I believe that a company can't cut its way to greatness, I will work with the businesses and corporate teams to ensure that G&A dollars are invested in the right places, and we are fit-for-purpose to best support our field associates and clients.

And lastly, free cash flow. I will look to review and implement a series of tested working capital initiatives to improve free cash flow, reduce debt and provide financial flexibility to support client investment opportunities and enable us to execute a disciplined, strategic M&A program.

While appreciating the immediate work ahead of us, I'm confident that we will, over time, execute on John's vision to provide great service to our customers and position Aramark for sustained excellence. I look forward to spending time with many of you in the coming months.

John?

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John J. Zillmer, Aramark - CEO & Director [5]

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Thanks, Tom. I appreciate your insightful perspective and know that your financial and industry expertise will be an invaluable asset to us as we propel the company forward.

Before we have the opportunity to take your questions, I also want to thank our associates across the globe for their extraordinary focus on serving our customers and growing the business, and to offer my congratulations to the Kansas City Chiefs, our customer, for a great season and their Super Bowl win on Sunday.

And now we'd like to go ahead and take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Ian Zaffino from Oppenheimer.

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Ian Alton Zaffino, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [2]

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(inaudible) Maybe you could also maybe broaden conversation and talk about some of the experiences you've had (inaudible) or maybe just talk about your best practices you'll bring to Aramark.

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John J. Zillmer, Aramark - CEO & Director [3]

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We're very sorry. Your question cut out several times. Could you -- would you mind repeating it?

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Ian Alton Zaffino, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [4]

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Yes, sorry. The question was for Tom. Maybe you can talk about the 5 areas you're focused on, maybe touch about your experiences that you had at your last shops, how you'll kind of weave those into what you're doing at Aramark and those 5 areas you'll focus on or maybe just talk about some best practices that you could bring to the table.

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Thomas G. Ondrof, Aramark - Executive VP & CFO [5]

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Yes, yes. I mean it's a -- a, it's great to be here. I sort of bring in 25 years of experience to the business. John was very persuasive in laying out his vision to me. He's a tough guy to say no to, so it's great to be back in the industry. And Aramark has such a great history. So I was excited about John's vision and the chance to help the company sort of reset its priorities and take a more balanced approach to running the business.

I did lay out the priorities that I have, so I do not want to really repeat those. I think I would mention that they were listed in a specific priority. Growth is going to come first. We are very focused on that. In John's initial few months, his priority has been there. And I think everything else sort of falls from there.

So in terms of best practice, you've got to be able to grow the business, you've got to create momentum from the top of the P&L and then have it work its way down. So that will certainly be the priority. And we won't lose -- I think some really good things have been put in place here, some good disciplines, a good cost culture. But I think, again, it's just trying to bring the balance back to the forward-looking execution of the business.

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Ian Alton Zaffino, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [6]

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Okay. And then just a question for John. Just more broadly speaking, how do you feel about your brand lineup, what you have, what you may need to add or maybe some areas that you might need to add in? Or were you kind of happy with what you have and what Aramark has?

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John J. Zillmer, Aramark - CEO & Director [7]

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Yes, thank you. Well, first of all, I'm very confident in our ability to compete as one Aramark that, as an organization, we have the capability, the technology and the branded concepts that our customers want. And where we don't have a brand that serves a particular needs, we'll develop and implement one appropriately for each individual customer. I've always had a firm belief that customized solutions are the solution set that best serves the needs of our clients and our customers. And so I don't have an out-of-the-box solution for any customer in any part of this industry. I think we have -- in Higher Education, we have Harvest Table. We have Simple Spoon in B&I. We have LifeWorks. We have a number of premium brands we can bring to bear when that serves the client's interests. And we can also compete as one Aramark against the vast majority of our customers and clients.

I also believe that we'll do whatever is necessary to compete aggressively to win new business. And we'll partner with branded concepts. We'll partner with strong operators. We'll partner with prospective organizations in a way that serves our clients' best interests.

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Operator [8]

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And our next question comes from Kevin McVeigh from Crédit Suisse.

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Kevin Damien McVeigh, Crédit Suisse AG, Research Division - MD [9]

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Great. John or Tom, the growth initiative is super helpful. Can you give us a sense -- it may be hard, but just the kind of current trajectory is 2% to 4% type organic longer term. What can that ultimately become? And how much of it is kind of close rate versus retention because it looks like 2 -- kind of the first 2 are revenue, the second 2 are kind of cost? And just any thoughts on that organic growth longer term and what that can mean from a margin perspective.

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Thomas G. Ondrof, Aramark - Executive VP & CFO [10]

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I think the higher is the initial answer right now, not to the -- yes, it's hard to say, really, at the moment. I think the overall industry, I know you've looked through sort of the market structure, the global opportunity across all the business lines, the geographies that Aramark serves, there's a ton of opportunity. So the growth rate should be higher.

What can it be? Mid-single digits, I think, is probably the goal over the course of time. I think that's quite doable, but there's work to be done to do it. Right now, I talked about fit for purpose, and I don't think we're there yet. And it will take time, and you can't put salespeople in today and expect them to make an impact tomorrow, but we will get there.

In terms of the margin impact, we'll be disciplined about that growth. Again, the market opportunities are great enough that -- and there's enough available market out there that we don't have to, as been -- as has been said many times over the years in this industry, just beat each other up. So we'll be disciplined and thoughtful with our growth. And so I think the margin will progress. And I think that, that should be the goal. If we can't strike a balanced approach to growing the top and the bottom line, then we're not really doing our job.

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John J. Zillmer, Aramark - CEO & Director [11]

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Yes. And I would add just a couple of comments, Kevin. I think, as we've said historically, we want to improve our retention rate, and we want to grow the base business as well as sell new accounts. And all 3 elements are important for that growth trajectory. And we have opportunities to improve the level of service to our customers to help grow the base business. So we have increased mix share in the accounts that we already serve. So we increased participation rates and increased check averages, which leads to further growth. We believe that we are kind of at the historic level of retention inside the company right now. And we think we have opportunity to improve it. So adding 100 basis points of retention would dramatically alter the trajectory of the business going forward. And we think we have that opportunity and, as Tom said, the improved closure rates in the business as we sell new accounts. So we've got 3 levers. We're working against all 3 of them.

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Operator [12]

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Our next question comes from Andrew Steinerman from JPMorgan.

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Andrew Charles Steinerman, JP Morgan Chase & Co, Research Division - MD [13]

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It's Andrew. I want to know if organic revenue growth should progress throughout the year, particularly thinking about second quarter. As I look at Slide 7, it doesn't have that little graph that was in the last slide deck that sort of had aligned up into the right to give you a sense of quarterly cadence.

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Thomas G. Ondrof, Aramark - Executive VP & CFO [14]

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I hate to, Andrew, get into sort of quarter-by-quarter detail. We, I think, talked historically about it progressing throughout the year. I think we still feel confident about that if -- start to finish, so to speak. So we fully expect to have good, solid momentum going into -- to fiscal '21, but within the second, third, fourth quarter as we see a progression.

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John J. Zillmer, Aramark - CEO & Director [15]

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Sorry. I was just going to add. You have the seasonality kind of occurring in the business. You have the ramp-up of national parks and the sports and entertainment business that occurs in the third and fourth quarter, and second and third quarter, especially on the sports side. So it's hard to really kind of delineate the quarter-over-quarter growth. As you know, the selling season in Higher Education tends to be in the spring, so it's too early to make a call on what the sales hit rate will be and what the closure rate will be. So working very aggressively to move those numbers, and we'll have better visibility here in probably the next quarter.

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Andrew Charles Steinerman, JP Morgan Chase & Co, Research Division - MD [16]

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And the drag from the custodial contracts in Europe is now fully in the numbers as of first quarter, right?

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John J. Zillmer, Aramark - CEO & Director [17]

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Yes, that's correct.

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Operator [18]

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Our next question comes from Toni Kaplan from Morgan Stanley.

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Toni Michele Kaplan, Morgan Stanley, Research Division - Senior Analyst [19]

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This is for Tom. Just a follow-up on, I think, the first question that was asked. But just given your prior experience at one of Aramark's main foodservices competitors, just curious on any initial thoughts on noticeable differences between the 2 organizations. And I guess, what do you think will help Aramark accelerate growth closer to what that competitor has been doing historically?

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Thomas G. Ondrof, Aramark - Executive VP & CFO [20]

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Yes. Well, Compass is a great business. Aramark is a great business. So that's probably as close as I'll get to a comparison. What I know is there's no structural difference between the companies. They're similar, but different. I think roughly 25% in Compass' business is in lines of service or geographies that Aramark is not in, and the same works sort of the other way. So the comparisons are a little different. But I understand the need or people's desire for benchmarks. But our goal and our focus is really going to be on being the best we can be. And I know that sounds like a cliché, but we want to grow the top line at an accelerated rate. We want to progress the margin, and we want to deliver free cash flow increases. If we do that, we're going to deliver for our shareholders, regardless of what any of our competition does. So that's really our focus. We'll look up one day and sort of see where we are in a comparison way, but that's not what we're after. We're after serving our clients and serving our shareholders and doing that with the -- all the experiences that John and I have and a really, really solid management team has that's in place and that John is putting in place.

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Toni Michele Kaplan, Morgan Stanley, Research Division - Senior Analyst [21]

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That's helpful. And then as my follow-up, do you anticipate any changes to the company's capital allocation policy? Is M&A more or less of a focus? And I guess, how are you thinking about the current buyback authorization? And just any thoughts around capital allocation would be helpful.

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Thomas G. Ondrof, Aramark - Executive VP & CFO [22]

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Sure. A bit early to sort of definitively opine on it. But -- and I do know, in a general sense, that our first priority with free cash flow is going to be to reinvest in the business and take the opportunities we can to support growth. M&A on a disciplined and strategic sort of tuck-in basis would be the second. And then if -- and then reducing debt, of course. So once those 3 things are sort of evaluated, then we'd look at other options for the cash. But I'll get a little deeper into that as I go and, certainly, give a clearer view on the set priorities as we get into the year.

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Operator [23]

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Our next question comes from Gary Bisbee from Bank of America.

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John Henry Hanna, BofA Merrill Lynch, Research Division - Associate in Equity Research [24]

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This is actually Jay Hanna on for Gary today. I was just wondering quickly, on the GPO, what's the longer-term road map there? Is that going to be an M&A focus or, I guess, internal growth? What's the longer-term plan?

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John J. Zillmer, Aramark - CEO & Director [25]

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Yes. I think -- this is John. I think you hit both elements. We're going to work very hard to grow the purchase spend by selling those services to third parties and to continue to expand our relationship with our partners in that business, so there is definitely an organic opportunity there. We'll also look to bolt-on acquisitions in the GPO space that will increase our spend pool, and there are various opportunities to do that. We'll primarily be focused on serving both the needs of our existing business as well and really getting the synergies out of that combination of our purchase spend as core Aramark and the GPO spend as well. So we still have plenty of earnings improvement opportunity on both sides.

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John Henry Hanna, BofA Merrill Lynch, Research Division - Associate in Equity Research [26]

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Okay. Great. And then for that $30 million to $40 million incremental spend this year, did I hear you say that was primarily going to occur in Q2? Or like, what's the cadence for the remainder of the year?

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John J. Zillmer, Aramark - CEO & Director [27]

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Yes, we have -- basically, we've already begun investing. We've begun hiring salespeople throughout the businesses, targeted on those businesses that we believe have the best growth characteristics and our best opportunities. Uniform Services has made significant hires over the course of the year already. And we'll continue to bring on additional people primarily focused on adjacent opportunities, first aid, restaurant services and the like, bring those sales managers on first because those represent significant margin opportunities. And we have a great base of business to sell against in our existing customers and potential new customers. So we'll be spending that -- we've already begun spending those resources. We've added resources in the various growth organizations, and we'll continue to ramp up through the balance of the year. It's our belief that we'll spend that entire amount at some point during the year, but it really depends on the quality of the people that we're able to recruit, develop and hire. And the cadence will really be determined by that, by the availability of quality candidates.

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Thomas G. Ondrof, Aramark - Executive VP & CFO [28]

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And I'd like to add on the sales side and sort of the growth expectation that the different lines of business will have different sales cycles. And so we've tried to -- and I know John has tried to add across those different sales cycles. So for instance, uniforms, refreshment services, sort of B&I have shorter sales cycles a load of contract, so to speak. And so the impact could be felt a little sooner from those hires. Healthcare, Education, certainly, parks, entertainment, they have long multiyear sales cycles. But if you don't start doing the work, building the relationship today, you'll never grow the business. So there are some investments that will pay off more in the near term, others that will be multiyear payoffs.

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Operator [29]

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Our next question comes from Manav Patnaik from Barclays.

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Gregory R. Bardi, Barclays Bank PLC, Research Division - VP [30]

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This is actually Greg calling on for Manav. I just wanted to dig in on the Uniform business a bit more. I think, last quarter, it may have been a little early to talk about it and maybe some of the commentary already about investments give some indication of how you're thinking about that business, but just hoping to get some color on how you're thinking about Aramark's competitive positioning there and opportunity going forward.

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John J. Zillmer, Aramark - CEO & Director [31]

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Sure. This is John. First of all, I will tell you that I spent a significant amount of time inside the Uniform business over the course of the last 4 months and have been extraordinarily impressed by our operating team and the strategies they have laid out for the organization, the opportunities they have in front of them in terms of improving the growth rate and improving margin. As I said on our last call, my primary focus is going to be on looking at ways to improve the operating results of that business and looking at the strategic investment opportunities that we have inside of Uniform Services.

The Board has not taken up any discussion with respect to strategic alternatives, and I don't anticipate doing that in the near term. I'm really focused on improving the core business. It operates at a very good margin, and we've got a great team running against it. They have worked very hard to realize the synergies of AmeriPride and are undergoing significant strategic implementations with respect to the route accountability system, which will have dramatic impacts with respect to, I think, our ability to operate and report on the business. And so we're really focused on those efforts right now. But I will tell you, the time that I've spent with the Burbank team was extraordinary and really, really like the business and think that they're really focused on the right things.

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Gregory R. Bardi, Barclays Bank PLC, Research Division - VP [32]

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Very helpful. And then maybe on the foodservice's side, just curious also to get your perspective on the facilities side, because that's, I guess, a piece that has kind of differing views among the big catering players on how active to be in that space. So just hoping to get your view on how facilities fits with the core foodservices offering.

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John J. Zillmer, Aramark - CEO & Director [33]

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Yes, you bet. First of all, we have 2 different facilities businesses. On the health care side, the facilities business is integrated along with our foodservice operations because it's truly an integrated system sale. And so that business is aligned in that organization and very focused on serving the total needs of the health care system and the health care customer.

And then in the other businesses, facilities has stood up as a standalone business, providing services to a wide range of customers, both in higher education and business dining. We like the business, operates at good margins. We've got a very strong team working against that business. We see it as an opportunity to continue to grow. We've got some very strong technical capabilities and a very strong portfolio of existing customers. We also have significant opportunities. There are -- it is a very large segment, and we have a very specific business unit focused on growing that segment. So we like it, and we're not going to shy away from it. And we have people really focused on doing the right things in that business.

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Operator [34]

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And our next question comes from Seth Weber from RBC Capital Markets.

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Seth Robert Weber, RBC Capital Markets, Research Division - Equity Analyst [35]

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Maybe a similar question, but on the educational business, can you just talk about the headwinds that you're seeing there and what the plan is to kind of turn that business more positive? And when -- I know it's kind of a long-cycle business, but how are you thinking about the turn that could happen in Education?

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John J. Zillmer, Aramark - CEO & Director [36]

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Yes, that's absolutely true. It is a long-cycle selling business, and we are very focused on that selling season right now, as you would guess. We think that -- first of all, we're the #1 in that business. We have a very strong position, and we think we have certainly a right to win. I think that business was affected by the decisions over the last few years to cut resources and to centralize resources. So we have appropriately moved resources back into the business to be focused on serving those unique customers and developing a portfolio of solutions that really serves the higher education marketplace more effectively. So I think the downstreaming of those resources, the repositioning of them, if you will, into higher education will help to accelerate that change. We've got a very aggressive team of sales leaders in that marketplace and a good operating leadership. And there are a couple of fundamental issues inside of higher education that, I think, all companies will struggle with over a period of time, like lower enrollments in certain universities, and that's a headwind that we'll need to work through.

We have a number of customized programs developed to improve the meal plan take up by freshmen and the readoption of meal plans by upperclassmen, focused on new marketing initiatives to go ahead and have an impact on that as well. So we're -- it's not a single solution kind of change. It is approaching the marketplace with multiple solutions, and I think that will have a very significant impact in the very near term on that business unit.

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Seth Robert Weber, RBC Capital Markets, Research Division - Equity Analyst [37]

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Okay. So you think that could -- we could see a positive turn by the end of fiscal '20.

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John J. Zillmer, Aramark - CEO & Director [38]

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Absolutely. I think we can absolutely see a positive turn in our new account acquisition rate and our retention rates. Whether that will translate immediately to top line sales growth in this fiscal year is an open question. Remember, when you sell a new account, you're opening it in the fall, so you'll have one period of new business implemented in this fiscal year. So you'll see a turn in the success, but not necessarily an improvement in the numbers until we get into next year.

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Seth Robert Weber, RBC Capital Markets, Research Division - Equity Analyst [39]

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Okay. And then if I could just get a clarification, John. In your prepared remarks, I think you used the term going after business aggressively, doing whatever it takes kind of thing. I mean I just want to understand where pricing kind of comes in, in you -- in that framework. I understand there are a lot of initiatives to help margin, but is pricing going to be a lever that you'll use to go after new business?

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John J. Zillmer, Aramark - CEO & Director [40]

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Well, I will -- I'll answer it this way. We're going to compete on a very disciplined basis. And we are not going to use price as a lever to sell new accounts. We're going to provide services to our customers that are designed to fit their needs and expectations. And we will do it on a basis that is accretive to margins and to grow the business appropriately and on a balanced basis. We are not going to lower our financial expectations to sell new accounts.

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Operator [41]

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Our next question comes from Hamzah Mazari from Jefferies.

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Hamzah Mazari, Jefferies LLC, Research Division - Equity Analyst [42]

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My first question is just around how are you thinking about time frame for the turnaround on organic growth. Is it 5 years? Is it 3 years? And as part of that, I know you talked a lot about net new business retention, adding salespeople, but are you comfortable that there's nothing structural in your product or any heavy lifting that you have to undo from sort of prior management team's investments in standardization, technology and -- et cetera?

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John J. Zillmer, Aramark - CEO & Director [43]

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Yes, I will both answer that. Tom, you go ahead.

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Thomas G. Ondrof, Aramark - Executive VP & CFO [44]

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Well, again, as I mentioned before, I don't think there's anything structural. It's sort of an execution. It's an approach to selling new business. It's a resource to selling new business, making it a priority, making retention a priority. But in terms of a client offer, just the hospitality culture, the focus on serving and satisfying the customer and client, that's all there. I don't believe it is going to take additional CapEx in any category, either for clients or within the business, to grow. This is just about a prioritization and a reinvestment in feet on the street and then letting, as I mentioned before, those businesses grow. But they'll all be at a different pace based on the life cycle -- or the sales cycle. So probably, to answer your question, it's going to be less than 5 years but more than 1 quarter.

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John J. Zillmer, Aramark - CEO & Director [45]

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Yes, I would -- it's very well put. It's going to be less than 5 years and more than 1 quarter. I think we definitely have a strong pathway and trajectory towards significantly improving the organic growth rate in a, what I would characterize, the medium term. The -- we have expectations to improve the growth rate this year and then to continue to improve it next year. As we've made these strategic investments and new selling resources, we expect that many of them will be productive this year in some of the businesses and that the longer cycle sales will begin to really have an impact in 2021, particularly in higher education. So I don't see this as a multiyear effort. I also don't see it as a multiyear investment requirement. We believe that we'll -- we have the resources that we need to operate the business going forward, that we can make these -- we've made this strategic investment this year, and we can add these resources and really have an impact on the business across all 3 of those growth paradigms, if you will, base business growth, retention and new account sales. So we see this as a strategy that will accelerate going into the end of this year and will continue going into next year as well.

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Hamzah Mazari, Jefferies LLC, Research Division - Equity Analyst [46]

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That's very helpful. My follow-up question on Uniform, you talked about sort of no strategic options at this stage. And at the same time, you talked about investing in adjacencies in that business and turning it around. First of all, maybe talk about is there any synergy in Uniform and the foodservice business. I guess you're the only company that owns a uniform asset. And then two, is the Uniform business a turnaround, too? So are you executing on 2 separate turnarounds? Or is the Uniform business just investing in first aid a little bit?

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John J. Zillmer, Aramark - CEO & Director [47]

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Yes. I would not characterize the Uniform business as a turnaround business. I would say it's a business that performs very well in the marketplace it operates in, that there are some differences in the structure of the business between us and our competitors that we're working to close, both through technology implementations and by scaling up the organization through the AmeriPride acquisition. The route accounting system is one area where that acquisition, we believe, will pay very significant dividends. So I see it as a business that has significant improvement potential, not as a turnaround business. They operate very effectively given the assets that they have and given the resources that they have.

So the strategic investments in Uniforms is really about creating additional runway, adding the adjacency services, like first aid. We've already built that business very significantly in a very short period of time. It comes at very good margins. It's very accretive. And so the investment in those sales managers, we think, will drive very significant returns in that business. So again, I don't see it as a turnaround. I see it as significant improvement potential.

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Thomas G. Ondrof, Aramark - Executive VP & CFO [48]

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And I think I'd add that while it doesn't have that sort of traditional synergy definition or overlap with the other side of the business, it's a very familiar business to me. I'm -- I've not been exposed to it in my career. And walking in, it feels very familiar. It's a B2B business. It operates very similarly to the food and service side from a contract standpoint, from a business relationship standpoint, retention. All those things are very familiar. So I think for both John and I, it's not a very difficult business to manage. It's got an excellent operating and management team. And as John said, it's got good financial metrics. So I'm excited to get into it a bit more.

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Operator [49]

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And our next question comes from Andrew Wittmann from Baird.

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Andrew John Wittmann, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [50]

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Great. I'm going to keep going on Uniforms a little bit here. Some of your competitors have cited some concerns about some softness in their end markets that have held them back that made them a little bit more optimistic on their own guidance. I was wondering if you guys have seen any pockets of weakness, either by end market or geographically that would be notable.

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John J. Zillmer, Aramark - CEO & Director [51]

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I would tell you, I don't see that. As I look at the business, I think, in general, they are experiencing good growth across all the geographies, and I don't see any particular segment weakness. We do serve -- we have significant customers in the automotive sector. We have significant customers across such a wide variety of customers and clients. I think we're somewhat insulated from any specific industries' downturn, if you will, or softness. But I would tell you, from both a geographic perspective and a customer perspective, we're confident in the trajectory for that business this year.

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Andrew John Wittmann, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [52]

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Great. And then just a follow-up question here. I just want to try to get a sense of your goals for the margin profile. I mean, a few years ago, a company called G&K Services was generating operating margins in the 12% range before they got taken out by Cintas. That was on less than $1 billion of revenue. You guys are obviously more than twice the size of that. Is move to 12% or beyond, is that the right way to think about what your business is capable of? Or how can you put the margin potential in context for us as you effectuate your plan?

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John J. Zillmer, Aramark - CEO & Director [53]

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Yes, I think it's -- certainly, we aspire to that level of margin attainment. And I think that, over a period of time, it's attainable, particularly as we scale up the adjacencies.

The real difference between us and Cintas, historically, has been the fact that we're unionized and they're not, the fact that they've got a business that was built by building plants to specification as opposed to by acquisition, which is the way we built the company. So we have a different footprint, different plant structure that gives us a slightly lower margin profile. But again, the build out of the services, capabilities, the adding of adjacency services, the improvement of the route accounting system gives us significant headroom in terms of margin improvement potential, and so that's what we're focused on. As I mentioned on our last call, I've run multiple distribution businesses. I've spent significant time inside the Uniform company. And I'm very confident on our ability to have a significant impact on the margin potential in that business.

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Operator [54]

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Our next question comes from Shlomo Rosenbaum from Stifel.

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Shlomo H. Rosenbaum, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [55]

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John, I just wanted to ask you, it is a long-cycle business and you noted a number of things that are changes that are going on right now that will -- should impact the business more positively as time goes on. The ones I'm noticing are through hiring and then kind of the routing system that you're talking about in Uniforms. Are there other ones that you want to highlight that are already going on, but people can't really -- you don't see the impact immediately, but it's one of those things that as you put it into motion, the impact on numbers would become more apparent over time?

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John J. Zillmer, Aramark - CEO & Director [56]

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Yes, I think that's a great question. And I think, really, the actions that we've taken to date have all been focused on creating that long-term growth potential opportunity. Probably, the most significant action we've taken to date has been to re-resource the businesses by taking the organizations that had been centralized into a center of excellence and focus on multiple businesses and downstreaming them back into the markets that they serve.

So we've taken resources out of the center, giving them to business dining, giving them to health care, giving them to higher education. We put people back into the businesses that they know and love, so they can focus on that -- in those individual markets and have really deep, intimate understanding and deep impact on those businesses. And I think that, that will have a significant result over a period of time, as those leaders and those sales leaders have the opportunity to reengage with customers in a much more intimate way. So very much behind the scenes.

I think also the strengthening of the leadership group, the reintroduction of Gary Crompton into business dining, Marc's promotion, those are all, I think, terrific elements of contributing to the growth culture in the company and the focus on new account sales and customer relationships, and that will have a significant impact over a longer period of time.

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Shlomo H. Rosenbaum, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [57]

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Great. And then on Compass' call, they talked a little bit about weakness in B&I sector in Europe. Is that something that you guys are noticing as well? Or is there anything on a macro perspective besides, obviously, the stuff going on in China that you want to call out on this call that people should be aware of?

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John J. Zillmer, Aramark - CEO & Director [58]

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Yes, I don't think -- we're not seeing that. Our international results are actually very strong. We don't break it down, obviously, by country and by segment. But we're not seeing that softness in the European results.

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Operator [59]

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Our next question comes from Stephen Grambling from Goldman Sachs.

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [60]

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Just have a couple of quick follow-ups. You talked to the synergy capture benefits in the quarter. Can you just elaborate on the magnitude of the capture, maybe what's left, as you think about the 2 acquisitions of AmeriPride and Avendra? And then perhaps talk to integration costs that may be expected going forward?

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John J. Zillmer, Aramark - CEO & Director [61]

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Certainly. First of all, we projected the synergies for the total year to be approximately $35 million between the 2 integration -- between the 2 acquisitions. We see that materializing as expected. Don't see any real gaps in that realization and either -- on either organization, seeing significant progress in Avendra and AmeriPride. We did not calculate, as part of the AmeriPride acquisition, the value or the benefit associated with the implementation of the route accounting system across the enterprise. And we're beginning to really see that, that can be very a significant, tangible synergy benefit, but haven't really quantified it yet, as we've adopted it in a couple of our former Aramark facilities and are piloting and testing it, and really satisfied and happy with the results that we're seeing. So as we get further along in those tests, we'll be able to quantify that theoretical benefit by that implementation, but we're already seeing very positive impacts from it.

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [62]

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That's great. And then maybe another follow-up. On the cash flow side, CapEx this quarter looked a bit lower than typical and lower than the prior year period. Can you just talk to the trajectory of your CapEx spend? And it sounds like most of the investments that you're making are going to be much more P&L focused and investing in sales folks versus client contracts, but we've seen some of the peers start to inch that up. So if you have any thoughts around client contract investments and how you think about evaluating those versus other opportunities.

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Thomas G. Ondrof, Aramark - Executive VP & CFO [63]

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Sure. The 2 different categories of capital, if you will, to secure contracts, gain contracts, we don't particularly differentiate. It's cash out. It's cash to win new business. And so we look for acceptable returns for that investment, and we'll continue to.

In any given quarter, CapEx can be a bit lumpy based on the opportunities. Hopefully, we are looking at a great fourth quarter and then install of Education business, and that would be a requirement of CapEx more than likely. So in terms of progression, I think it's best to look at sort of the full year year-on-year. And at the moment, we're looking at the pipeline that we've got. We're, again, optimistic that the opportunities are there and the CapEx will trend towards historical norms and then into next year as well.

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Operator [64]

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We'll now turn the call back over to Mr. Zillmer for closing remarks.

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John J. Zillmer, Aramark - CEO & Director [65]

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Terrific. Again, thanks, everybody, for joining us this morning. We look forward to conversations at the end of next quarter. We're very pleased with the state of the organization, and I'm very pleased to have Tom sitting by my side here as we move forward. And looking forward to just great results through the balance of the year. So thank you very much.

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Operator [66]

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Ladies and gentlemen. This concludes today's conference. Thank you for participating, and you may now disconnect.