Good morning, and welcome to Aramark's Fourth Quarter and Full Year 2018 Earnings Results Conference Call. My name is Christine, 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]. I will now turn the call over to Kate Pearlman, Vice President of Investor Relations. Kate, please proceed.

Thank you, Christine, and welcome to Aramark's conference call to review operating results for the fourth quarter and full year 2018. Here with me today are Eric Foss, our Chairman, President and Chief Executive Officer; and Steve Bramlage, our Executive Vice President and Chief Financial Officer. I would like to remind you that our notice regarding forward-looking statements is included in our press release this morning, which can be found on our website, www.aramark.com, and in our earnings slide deck. During this call, we'll 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 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. Before I turn the call over to Eric, I wanted to mention that our fourth quarter includes a full quarter of AmeriPride and Avendra results. We'll continue to track revenues separately to the lapping of the 1-year anniversary of the closing of the deal. With that, I will turn the call over to Eric.

Thank you, Kate, and good morning, and thanks to everyone for joining us. As you saw in our earnings release this morning, we finished our 2018 fiscal year with tremendous business momentum. It was a record quarter, and 2018 was a record year, which marks our fifth straight year since our IPO of double-digit adjusted EPS growth. This morning, I want to focus my comments in 3 areas. First, I want to discuss the quarter and our full year results, and then I want to take an opportunity to share the progress we've made on our multiyear transformation journey. Finally, I want to provide a few thoughts on the promising future, which will help set the stage for our December Investor Day. Following that, Steve will take a deeper look into our financials, and then we'll open up the lines for Q&A. So let me begin with our results. For the quarter, we saw significant improvement across virtually every key success metric. Revenue on a GAAP basis were $3.9 billion, an increase of 7% on a constant currency basis. Adjusted operating income was up 33% to $339 million. Adjusted operating income margins were up 160 basis points to 8.6%. And adjusted EPS was at $0.70, up $0.30 versus prior year. Our 2018 full year results saw total company constant currency sales up 7% for the year to a record $15.8 billion. Our legacy business delivered broad-based growth of approximately 3.5%, driven by strong net new wins, consistent mid-90s retention and a solid base business increases. Adjusted operating income of $1.1 billion was up double digit at 15% on a constant currency basis. AOI margins expanded 46 basis points this year to a record 7.05%. As a result, I'm proud to say that we've achieved the 3-year margin target set at…

Thanks, Eric, and good morning, everyone. I'm going to focus my commentary on the fourth quarter income statement results and our year-end balance sheet and cash flow performance, complete reconciliations of our full year performance, which Eric has already covered, can be found on the appendix for your reference. And obviously, we'll be glad to discuss any questions regarding the quarter or the year. So let me begin with the fourth quarter sales reconciliation. Sales on a GAAP basis were a touch over $3.9 billion. This represents an increase of 7% after currency headwinds of $33 million or almost 1%. Currency was unfavorable for us in the quarter due to the U.S. dollar strengthening against our basket of currencies. Constant currency sales, therefore, grew by 8%. This increase was composed of 5% or $184 million from the acquisitions, about 3/4 of which related to AmeriPride, with the remaining 3% growth generated in our legacy business across all of our reporting segments. There was a $30 million or approximately 75 basis point negative revenue impact from natural disasters in the quarter, and that primarily related to wildfires that burned outside of Yosemite and closed the park for several weeks at the peak of the season and less so from hurricanes in the United States and Asia. Adjusted operating income was $339 million in the quarter, which was a 33% increase on a constant currency basis. Impressively, AOI margins rose approximately 165 basis points on a constant currency basis to 8.6%. That's due to a variety of factors, including our continued focus on driving net in-unit food and labor productivity improvements, along with lower SG&A and incentive compensation expense. We incurred losses from natural disasters in the fourth quarter of both 2017 and 2018. The impact on 2018 AOI was $11 million…

Thanks, Steve. So with that, I think, Christine, we'd be happy to open up the line and take any questions.

[Operator Instructions]. Our first question is from Andrew Steinerman of JPMorgan.

Could you give us a comment on wage inflation? Have you kept in front of wage inflation? Obviously, you're expanding margins even with wage inflation in the system.

Sure, Andrew. It's Eric. I think a couple of things. One, if you think about 2018, I think one of the keys to our success is we were really 2 steps ahead of any inflationary pressures that took place in the market. So I think as we look to 2019, I think our plan certainly doesn't anticipate any change to that. I think we'll see similar levels from an inflation standpoint both on food and labor as we saw in 2018. I think it's important: a, that we've planned for it; and two, I think we have proactive initiatives to offset it. And again, maybe just let me remind you that this is a model, this is a company, this is a team that I think has a demonstrated track record to manage through no or low inflation as well as higher inflationary environments. And again, just to walk you through some of the math how we deal with that, 1/3 of our contracts are purely pass-through. Most of the P&L contracts we have, the price lever that we can pull to cover inflation. Again, I want to remind everybody about the flexibility we have with our center-of-plate menu offering that we can flex around many types of food inflation. And then I think just the proven track record over the last multiple years and the way we approach and attack productivity to proactively offset it gives us a high degree of confidence that we're prepared.

Our next question is from Hamzah Mazari of Macquarie Capital.

My first question is around potential consolidation of your supplier base on the food side. I guess, you buy a little over $3 billion of food if you exclude Avendra. How does consolidation impact your business positive or negative?

Sure, Hamzah. It's Eric. I think a couple of things. One, I think you're talking about kind of food consolidation, which -- I think the consolidation in the food industry is not a new phenomenon, right? It's been out there for at least a decade. We're pretty indifferent. I think the fact that we do business with the biggest companies out there and the smallest companies is not likely to change. I think what's most relevant to our procurement is what we've done the last couple of years. You mentioned the Avendra acquisition. I mentioned in my prepared comments a couple of smaller GPOs that we bought. I think the important thing to understand is we've almost doubled, 2x, our purchasing power over the last couple of years. And so to me, what matters most is not what's happening relative to food industry consolidation. What matters is our scale, our ability to leverage that scale. And I think what we've seen so far, certainly post the Avendra transaction, is our ability to consolidate suppliers, reduce SKUs and complexity across the supply chain is really the key to our success and I think is a key strength of ours as we've bolstered our strength and scale in that area. Steve, do you want to add anything to that?

No, -- the scale that we have, just to reiterate Eric's point, is a much more relevant factor in terms of leverage vis-à-vis anybody that we're buying from. Obviously, the broadly -- the food industry is under quite a bit of pressure to find volume growth. And we provide an opportunity for all of them to tap a pretty big source of volume that's getting bigger, I think that actually helps us rather than hinders us in this environment.

Very helpful. My follow-up question, and I'll turn it over is, I realize you hit your margin target, but international margins seemed like they were a bit weaker. Anything -- any color you can add on what's going on in terms of international margin and how to think about that going forward?

Yes, Hamzah. Again, it's Eric. Let me start, then I'll ask Steve to add some color commentary as well. And so obviously, if you look at Q4 margins, full year margins, 3-year margin march against the commitment, there's a lot of great news. And I think what that means is that to deliver those kind of results, we had to have very, very, very broad-based margin improvement and productivity across the company, whether that's lines of business, geography or whether it's food or labor management, SG&A management. And so I think if you look at our international business -- I'll have Steve talk about one kind of accounting change here. But short of that, I think we saw for the full year broad-based margin improvement in Canada, in -- across Europe with one exception, South America, China. So it was very, very broad based for the year. And Steve, do you want to talk maybe the one drag to...

Yes. I mean, listen, on international, I think there's only good news for us over the 3-year period of time. If my recollection is right, I think we're up like 50 basis points or a little more than 50 basis points across that sector in terms of improved profitability. And I would remind you that over the course of 20 -- or during 2018, we reconsolidated a joint venture in our European business that formerly had been obviously off balance sheet. And as part of the mechanical aspect of that reconsolidation, it actually drove margins down just mechanically from an operating piece. And the other things specific to the fourth quarter, the natural disaster impact that we referenced earlier, the portion of that, that relates to Asia was primarily concentrated in our Japanese joint venture, which we only record the equity interest. And so while there was no revenue headwind per se of substance in the fourth quarter from natural disasters in international, they did pick up a portion of AOI headwind from some storms in Japan and other parts of Asia.

Our next question is from Gary Bisbee of Bank of America Merrill Lynch.

I guess, if I could ask about the U.S. Food and Support Services business. When we look at the quarterly result, if we were to try to take out the impacts of the natural disasters this year -- this quarter and in last year's quarter with the hurricane impacts, how is the business trending in terms of revenue and margins? Is it -- it looks like it stepped down quite a bit from the last couple of quarters' revenue. Is that just impact to that? Is there anything else going on?

It's Eric. Let me speak to revenue. In the quarter, if you look at our North America business, I think setting aside our parks business that was obviously disproportionately impacted by Yosemite in peak season, as Steve mentioned in his prepared comments, I think we saw growth literally across every, every segment, maybe ex one. We saw growth in the quarter across B&I, sports, corrections facilities. And so I think for the most part, again, fourth quarter, ex all of the impact of weather, was 3% for our North America business. And I think similarly on the margin side, I mean, the margins from our U.S. business for the quarter and the year continue to perform very, very well. So I think as I look at our portfolio of businesses, whether it's the U.S. and your question or Hamzah's question on the international front, I really mean, when I look at the year, the quarter and the momentum we have right now, it's as broad based as I think I've seen it. So I think the business is working, and it's working very well for...

Maybe I would add. I think our U.S. business was up almost 250 basis points of profitability in the quarter with 3% top line growth. I think they've demonstrated what we're trying to achieve, which we talked about dribbling with both hands, right, how do you drive improved profitability and still drive better revenue performance. And the company as a whole certainly accomplished that this year. And we obviously can't do that without our biggest business in North America being able to do it. And they did an excellent job in the quarter and the year helping us get to where we needed to be from a landing standpoint.

Great. And then just as a follow-up, and I realized you're withholding guidance until the -- holding off until the Investor Day, but given the positive commentary overall, is there anything you call out that would not allow that to be sort of in line with how you've described the long-term growth of the business since becoming a public company?

Well, Gary, it's Eric. Let me maybe take it this way. I think as I enter any new year, certainly, as I enter 2019, a couple of things that you'd want. One thing I'd want is I'd want to have strong momentum, and I think the fact is that we have it. The second thing I want is I'd want to look at the marketplace and be encouraged by the growth opportunity. And as I said in my prepared comments, we continue to be very, very excited about the outsourcing opportunities in the industry. Third, I think the work we've done to make us a stronger company, whether that's on product or brand or our right to win on the selling side or just the improved and strengthened margins. And then I think as we think about 2019, again, from a macro standpoint, specific to the question of inflation, as I mentioned during Andrew's question, we are not planning for the environment to get any better. So I think we've got the right plan, and I think we've demonstrated a very effective track record and capability of driving productivity to offset inflation. I think we've demonstrated a very effective ability to drive double-digit earnings growth. And so as we enter 2019, we continue to feel very good not only about 2019 but beyond the future of Aramark.

Our next question is from Stephen Grambling of Goldman Sachs.

I have two follow-ups to both of those questions, Gary. I think just first, on 2019, are there many other contracts up for renewal that could be at risk? Are you seeing any change in the competitive landscape for either retentions or new contracts? And then second, on the U.S. business, how much of that -- I know that's the food service business, how much of that 250 basis point improvement was base margin expansion versus reinvestment versus maybe M&A?

Sure. I'll start, Stephen, and then I'll let Steve comment as well. So I think if you -- first of all, your first question on kind of the growth. I think as we exit 2018, the way to think about the new business performance is our new business in 2018 performed very much like our new business results did a year ago. So those were pretty good a year ago and they were pretty good this year. Our retention continues to run into the mid-90s. So I don't think there's anything that I can think of that is up for bid that is unusual to what we would typically see through the contract cycle. And then relative to the margin, I think what you've seen happening, which is typical as you've seen very, very good broad-based base margin improvement, largely driven by food and SG&A, and then the drags on that was the weather impact and our investments, which got us down to that 46 basis points. So think about, I would say, strong, strong base productivity offset by the typical investment cycle we would have in Q4.

Yes, that's right. The only maybe nuance in the fourth quarter is, as we expected, right, the intensity of the reinvestment is a little bit less at the end of the year than what it is at the beginning just because of the way we calendarize that. And on the acquisitions, fourth quarter is not radically different than what we described the full year, right? Avendra is clearly modestly accretive for us in and of itself. AmeriPride is definitely dilutive from a margin standpoint. And in the quarter, it's really a wash between the two of them. It's not significant. So the number we're printing here is, for all intents and purposes, base business.

And so I guess, one very quick follow-up on that M&A color, Avendra and AmeriPride. Can you just remind us what your expected kind of time line is for the synergies versus integration investments as we think about the next couple of years?

Sure. So stepping back for a second, right, between the two of them, we had expected to realize about $110 million of synergies over either three years in the case of Avendra, so $40 million in three years for Avendra, $70 million in four years for AmeriPride. That's a good assumption to have. We'll update that at I Day, but that's certainly a very stiff assumption. I believe we had expected in the second year the two deals to become modestly accretive from an earnings standpoint. Again, that's primarily going to be driven by Avendra as opposed to AmeriPride. I think that is still a good assumption for us to have. Again, we're -- we have a little bit of a stub year because we didn't quite close at the beginning of the fiscal. But I would expect them to be, even under our current definition, very modestly accretive in fiscal '19 between the two of them. And certainly, from a cash flow standpoint, they will be accretive in fiscal '19.

Our next question is from Toni Kaplan of Morgan Stanley.

I wanted to ask one on the Uniform business. Can you talk about any risk from tariffs and how that could impact sourcing? And also anything to call out on expense pressures such as fuel, labor, hangers, et cetera?

Sure, I'll start. We do import some cost of goods in our Uniform business from outside the U.S., most of that, we self-manufacture in Mexico. What we kind of import in terms of finished goods tends to come from Asia, mainly China, with less than $100 million in total, well, less than $100 million. So we are seeing a little bit of pressure on some steel-related stuff. For us, that's kind of like hangers and lockers, things like that we put into our workforce. So currently, it's probably several million dollars of incremental inflation run rate going into fiscal '19, but it's not significant from where I stand. It's certainly not going to change our expectations of overall business performance. I mean, the currency has moved a little bit in our favor in terms of what's happened with the Chinese currency to offset some of that. But we don't import a lot at the moment. And so I don't believe it will have a material impact on the Uniform business specifically or on the total company because our food business import's even less as a relative proportion than the Uniform business does.

And Toni, I would only add, just broadly speaking about our Uniform business, I think you're aware, prior to 2017, that business had been very, very accretive to us. And obviously, with the consolidation we had talked about for 4 quarters, kind of the second half of '17 and the first several quarters of this year, the price investment that went into the marketplace. But as you look at the way they finish the year in 2018, as you look at some of the initiatives that we've put in place to upgrade the quality of the garments that we're selling, I think that business is set to have a very good year in 2019.

Great. And then just thinking about margins, with Avendra and AmeriPride sort of now being part of the overall business, your long-term margin potential is likely improved. So how should we just broadly be thinking about the pace of margin expansion going forward?

Yes. I think specific to that going forward, that's something we'll be prepared to talk about at Investor Day.

I would think that we're not going to provide a number on this call as a starter related to that, for sure.

And I think the way to think about it is, I think we've demonstrated over the last several years kind of a best-in-class margin reputation. I think as I said in my prepared comments that getting to that just north of 7% margin was never a destination from my perspective. So we continue to see and plan to continue to unlock those opportunities. But I think we're going to leave it at that for right now.

Our next question is from Manav Patnaik of Barclays.

I was just wondering broadly, if you look at the next 3 years, call it, like is it fair to say that the next 100 basis points is going to be hard to work than the first 100 you did? And maybe, I guess, excluding the acquisitions because, I guess, they do give you a little bit of a help to start with, just on the base side, like is the low-hanging fruit -- I'm just looking for some color around the work that you're excited about really.

Well, again, I'm not going to get committed to any kind of numbers, but I think our playbook is likely to be pretty similar. So if you look at the play we've been running, it's really been attacking complexity across the supply chain on food. It's been really making sure we continue to focus on improving headcount productivity from a labor standpoint. And it's been making sure that we're efficient and effective our above-unit SG&A structure. So I think that's likely to continue to be the playbook that we operate against. And I think as I said before, we continue to see opportunities. But again, we will talk about both the growth opportunities and the margin opportunities at Investor Day.

Okay. And then just in your facility services business, I guess, you had stood that up. I was just curious for just any update on momentum trends there.

Yes. I think if you take a look at 2018, it's a business that performed pretty well for us, right, mid-single-digit growth and grew the profitability. I think the deeper we get into that and the more specialized we get, again, you'll see us run a play similar to what we've run on food. And so I know one of the things the team has and will continue to do is to look at all of our contract types and to make sure that we've got the appropriate return criteria up against that. So I think we're pleased with the progress we made after we stood up that business and kind of set the strategy for facilities on its course. And we'll continue to operate that business and move it forward as we move into 2019.

Our final question is from Shlomo Rosenbaum of Stifel.

I just want to ask you a little bit about organic growth. Just shy of 3%, you guys have had. At least from the commentary, it seems like you guys are winning a good amount of business. It's broad based, there's a lot of momentum. What -- why -- when is it going to translate to kind of on a regular basis as being a little bit of a faster revenue growth? And why don't we see that kind of conversion in this quarter?

Well, let me make a couple of comments on revenue. First of all, we did have a record year. And I think if you look at that 3.5% full year growth rate, it's a number that we feel pretty good with and certainly was above our greater than 3% commitment for the year. So I think from my perspective, I feel as good about revenue as I sit here today as I ever have since I've been at Aramark. Again, I want to make sure that you're grounded relative to the marketplace growth. And I think if you look back over the last 5 years, 10 years, 20 years, pick your time frame, you'll see that the industry and the big 3, if you want to take the big 3, grow at kind of a 3% to 4% clip. That's the growth rate in the industry. I think that's the -- consistent with our performance in 2018. And so again, from our perspective, there is a lot to like about the growth trajectory of the business and the growth opportunities in the marketplace, so...

I would just add kind of back to how do we -- how we are trying to create the greatest amount of shareholder value. Our approach is balanced. We -- it will remain balanced, right? We tend not to focus exclusively on any single metric. And so we believe that consistently growing revenue with an outweighted effort against growing margin even faster and improving the balance sheet and driving better cash flow is the right hand for us to play at this point in time. And I think you should expect us to continue to drive a balanced progression and a balanced set of improvement across all of our metrics.

Okay. And for my follow-up, I just want to ask a little bit about the growth of the acquisitions themselves. If you go back into the 10-Qs and you subtract the actual from the pro forma, it would seem like the combination of both of the acquisitions had -- would have generated about $196 million in revenue in 3Q '17, $180 million in 2Q '17. Running in around the $184 million, $185 million level, what -- can you kind of bridge the gap over there? Is losing some revenue on AmeriPride side due to acquisitions, just customers kind of moving away a little bit over there? Or can you just bridge those numbers for me?

Well, I will make some broad commentary around that. I think as it relates to both of the acquisitions, I think largely from a revenue standpoint, we're pretty much where we expected to be. We had actually -- as it related to AmeriPride, that's the bigger number obviously. We had expected to have a little more loss of legacy AmeriPride share than we have experienced thus far. We're ahead of what we thought we would be on the AmeriPride side of things generally. And I think we're very, very pleased on the Avendra side with the stickiness of their business. So I don't believe there has been any material or frankly, immaterial deviation from kind of what we expected. So far, the revenue performance of those 2 deals to do. The timing matters a little bit, right, because we don't have clean, clean quarters in our first quarter or second quarter if you're trying to do some kind of a year-over-year comparison. But I think we're right where we thought we would be, probably a touch ahead specifically on the AmeriPride revenue experience thus far.

Yes, I would say, specific to AmeriPride, which is the bigger revenue number, that number has grown in line each and every quarter, if not faster than our base Uniform business. And I think to Steve's point, we actually have seen less client loss than we had pro forma in the acquisition. So I think we're very, very encouraged by the revenue performance of both of those acquisitions.

Thank you. I will now turn the call back over to Eric Foss for closing remarks.

Christine, thank you very much. Again, as we close the call, I'd like to, first of all, invite all of you to join as for our upcoming Investor Day, which will be on December 11. We will discuss, as I mentioned earlier, our strategic imperatives, showcase what we're doing on our brand strategy and some new innovative menu offerings as well as discuss the financial outlook for the next 3 years. So as always, thanks for joining us today. Have a great day, and we look forward to seeing you at December 11. Thank you.

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