Aramark

NYSE:ARMK

Earnings Call Transcript 2019-Q4

[Operator]

Good morning, and welcome to Aramark’s Fourth Quarter and Full-Year 2019 Earnings Results Conference Call. My name is John, and I’ll be your operator for today’s call. At this time, I would like to inform you that this conference is being recorded for rebroadcast, and that all participants are in a listen-only mode. We will open the conference call for questions at the conclusion of the company’s remarks.

And I will now turn the call over to Felise Kissell, Vice President, Investor Relations and Corporate Affairs. Ms. Kissell, please proceed.

[Felise Kissell]

Thank you, and welcome to Aramark’s fourth quarter and full-year fiscal 2019 earnings conference call and webcast. This morning, we have the pleasure of hearing from our new Chief Executive Officer, John Zillmer; as well as Steve Bramlage, our Executive Vice President and Chief Financial Officer.

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 other SEC filings. Additionally, we will 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.

Our results are affected by accounting rule changes, as well as changes to the definitions of adjusted operating income and adjusted net income, which we began to utilize in the first quarter. Please refer to the appendix and the earnings slide materials for detailed reconciliations.

With that, I will now turn the call over to John.

[John Zillmer, Chief Executive Officer]

Thank you, Felise, and thanks to all of you for joining us today to discuss Aramark, our fourth quarter and full-year results, as well as our key strategic areas of focus going forward.

As you know, I returned to Aramark nearly 45 days ago as CEO after spending over 23 years with the company earlier in my career. Today, there is truly nowhere I would rather be given my passion for the business, combined with the many promising opportunities ahead as the team and I offer a path forward for the company that is focused on elevating culture, accelerating revenue growth and unlocking the economic potential of the business.

I expect our commitment and progress in these three areas will be increasingly evident as the year unfolds, reflecting an unwavering goal of positioning Aramark for a strong and value-creating future.

Before Steve reviews the specific drivers for our year-end performance, I would like to provide you with a few initial insights and observations, as I continue my immersion with our clients and employees, many of whom are familiar faces. I’ve spent time in the field over the past weeks and it is clear that we have a lot of talented people working for the company who are committed to doing the right thing for our clients, customers and fellow employees.

I do believe there is ample opportunity to reinvigorate our field leaders with a sharper focus on hospitality and customer service. This translates into empowering our frontline to serve our clients’ ever-changing needs by providing differentiated and customized experiences, while realizing sizable benefits from organizational scale.

Recognizing how important it is to effectively manage this balance, one of my first priorities was to appoint a highly respected leader in global supply chain and group purchasing. I’m very pleased that John OroBono has returned to Aramark after decades of prior service with the company. John is an industry expert who has deep experience and strong relationships with our field teams, suppliers, distributors and client partners, complementing the impressive team we already have in place.

Together, we will partner closely with our senior frontline leaders to evolve our supply chain strategy, advancing the company’s growth, productivity and product quality initiatives. I commend the organization for tripling our procurement scale, growing the portfolio and driving free cash flow to both strengthen the balance sheet and enhance financial flexibility.

The Board, the leadership team, and I firmly believe that is – now is the time to pursue a more accelerated revenue growth strategy, while appropriately balancing other important financial drivers of the business. I’m confident that we can achieve our objectives, while holistically serving our clients’ needs and inspiring and empowering our frontline associates.

Where appropriate, we will deliberately increase resources and customize clients and field solutions, expand and reinforce our sales capabilities and talent, as well as pursue select mergers and acquisitions activity, all of which will fuel our client retention and new business revenue opportunities.

I would now like to turn the call over to Steve for a review of our financial results. Following Steve’s remarks, I’ll provide my key takeaways, before having the opportunity to take your questions. Steve?

[Steve Bramlage]

Thanks, John. And on behalf of the entire organization, welcome back to Aramark. We’re excited to have you here and look forward to pursuing the opportunities ahead together.

As 2019 concludes, we’re encouraged by the overall operational performance across the business, that’s going to serve as a solid platform for the future. Key takeaways from the fourth quarter compared to the prior year included legacy business revenue up 3% with growth across all of our reportable segments, good operational performance and synergy capture across the company, that was offset by significantly higher incentive compensation for employees throughout the organization, resulting in a 2% decline in adjusted operating income on a constant currency basis.

Adjusted EPS was up 1% versus the prior year on a constant currency basis, again, impacted by higher incentive compensation, while also benefiting from lower interest expense.

By year-end, we had reduced net debt by $593 million versus the prior year and improved our leverage ratio to 3.86 times. This was accomplished through generating $499 million in free cash flow, as well as using proceeds from the sale of our Healthcare Technologies business.

Turning to revenue in the quarter. Adjusted revenue grew 4.9%, driven by legacy business revenue growth of 3% and a 1.9% increase related to an accounting rule change via ASC 606. Adjusted revenue growth reflects approximately $49 million of currency impact. FSS U.S. legacy business revenue was up almost 2%. Revenue growth in the quarter was led by sports, leisure and corrections, which was up 6%, capturing both higher per capita consumer spending and good attendance in our major league baseball stadiums and national parks.

Healthcare, excluding the impact of the HCT divestiture grew 4% from record high retention rates and solid base business growth, while Business & Industry increased 2% with ongoing benefit from notable recent wins, including Dell and Credit Suisse.

Segment performance was offset by a 2% decline in facilities, primarily related to proactive renewal activities that we had noted earlier in the year. Education was down 4% from disappointing net new sales, as the selling season came to a close, and John will review some of the initiatives that we’re implementing to drive the Education business going forward.

FSS International legacy business revenue increased 6%, as it continued to exceed our and my expectations. The performance in the quarter was again due to strong new business and very high retention with growth in almost all geographies, including Europe, despite last quarter’s strategic exit of non-core custodial accounts in that region.

Uniforms’ legacy business revenue grew nearly 3%, driven by price and volume, offset by attrition from some legacy AmeriPride business that had previously served our major FSS competitors as those contracts expired.

In the quarter, constant currency AOI was down 2%, or $8 million. The story here is really around higher incentive compensation, which for us is a net of bonuses, retirement contributions and stock-based compensation, and that was $44 million higher than the fourth quarter of the prior year, with a particularly significant impact in the FSS U.S. segment. This was a bit higher than we had expected, but it’s a good outcome for the company, especially for our employees.

Outside of this item, underlying business profitability increased compared to the prior year. Overall, we executed really well in accounts across most lines of business and continued to realize synergies from both of Avendra and AmeriPride.

And finally, there was significantly less of a negative impact from weather in the fourth quarter of this year, primarily in U.S. FSS. International improvement was led by contributions from our joint venture in Japan and the exit of negative margin contracts in the non-core custodial accounts in Europe.

The narrative around margin follows the framework for AOI, while the printed margin does show a decline. Those numbers are impacted by approximately 15 basis points related to the revenue recognition accounting changes, which primarily affects Uniforms. Driven by the factors that I just outlined as well as benefiting from reduced interest expense and a modestly lower tax rate, adjusted earnings per share was $0.68 for the quarter, which is up 1% from the prior year on a constant currency basis.

In addition to the adjusted operating results, our GAAP operating income and net income were further impacted by costs from several notable non-recurring items in the fourth quarter, including legal settlements; the retirement of Eric Foss, our former CEO: and advisory fees related to a variety of shareholder and Board-related matters. Reconciliations of these items to our GAAP results are included in our press release materials.

Moving to the full-year, we saw a balanced improvement and progress across multiple key operating financial metrics. Legacy business revenue grew 3.6%, it’s a little better than our initial expectations. FSS U.S. and Uniforms finished up 2% and 3% on a legacy basis, respectively.

Clearly, international was the outstanding story here with 9% legacy business revenue growth and that included the deliberate account exits in Europe that we had mentioned earlier. International performance was driven by new business wins and very high retention rates, a stellar result from our international teams.

Constant currency AOI for the company finished up 5%, inclusive of $67 million of higher incentive-based compensation expense for the year. That also means operational performance across the lines of businesses was quite good, combined with about $25 million from deal wrap in the first-half of the year and over $30 million of incremental synergies realized from Avendra and AmeriPride.

AOI margin for the year was down 13 basis points to 6.67% on a constant currency basis. But again, please note that this is after the impact of higher revenue reclassified from the accounting change, which compressed margins by a comparable amount.

Adjusted EPS for the year was $2.24 and that represents 8% growth on a constant currency basis. This growth was primarily driven by M&A wrap in the first part of the year, higher AOI, and good base business and synergy performance, as well as a slightly lower effective tax rate and share count, somewhat offset by higher interest expense for the year. As a reminder, first quarter interest expense was over $20 million higher related to the wrap from financing costs of Avendra and AmeriPride.

Our GAAP operating income and net income results for the full-year, in addition to the fourth quarter items discussed earlier, were most notably impacted by the gain on the sale of Healthcare Technologies in the first quarter, the amortization of intangibles from our LBO and business combinations, merger and integration costs for Avendra and AmeriPride, and the one-time investments into our domestic workforce via proceeds that we received under U.S. tax reform.

We’re pleased with our free cash flow performance printing $499 million. Please note that this does not include $23 million of proceeds from governmental agencies relating to property and equipment that appears elsewhere on the cash flow statements, but that was included in our guidance. It also reflects approximately $85 million of one-time costs related to spending on integration and the HCT divestiture closing costs.

For the fiscal year, we reduced net debt by $593 million from a combination of free cash flow and approximately $200 million in proceeds from the sale of the Healthcare Technologies business, and that led to a leverage ratio of 3.86 times, that’s an improvement of 21 basis points from the prior year.

We end the year with a noteworthy financial flexibility and no significant maturities due until 2024. We will remain opportunistic about extending the balance sheet maturities and lowering our cost of financing as market conditions warrant.

Overall, our performance in 2019 helps build a stronger platform for the future. We are encouraged about the road ahead as we work to accelerate revenue growth, while remaining cognizant of the longer-term opportunities that are still in front of us to improve profitability, grow earnings, increase returns on capital, accelerate free cash flow and reduce debt.

We will constantly assess the propriety of the current portfolio of businesses, as well as our capital allocation decisions and capital structure, and most importantly, we will not be reticent to invest when we have good opportunities to realize and create long-term value for our shareholders.

Now, let me begin with a few items for consideration specific to 2020. First, on revenue, we will take another step forward in simplifying our financials on a year-over-year basis. Starting next quarter, revenue growth will no longer be impacted by the accounting change from ASC 606, and additionally, we will return to using the terminology of organic revenue growth now that we have completely lapped the acquisitions of Avendra and AmeriPride.

Second, the 2020 fiscal year and fourth quarter results will contain an extra or a 53rd week when compared to prior period results. Our guidance provided is based on 52 weeks for year-over-year comparability purposes. The company’s metrics for organic revenue, adjusted operating income, adjusted net income and adjusted earnings-per-share growth will be adjusted for the extra week and identified in the non-GAAP reconciliations of financial measures. Prior to the adjustment, the 53rd week is expected to have a full-year benefit of approximately 2% on each of these metrics.

However, for free cash flow, the 53rd week, not the full-year, will be moderately negative as outflows from an extra week of interest and tax payments, payroll and client commissions offset additional collections, and we will work very diligently to minimize this negative impact over the course of the year.

Finally, our initial outlook for 2020 excludes any significant change to the current set of macroeconomic conditions. With all that said, we currently expect organic revenue growth of approximately 3% and that’s expected to consistently improve as the year progresses.

Adjusted EPS growth that will benefit from the continued business operating momentum we saw in the latter part of 2019, productivity improvements and lower interest expense, as well as approximately $35 million and further synergy capture from the Avendra and AmeriPride integrations, of which a significant amount is going to be reinvested to propel longer-term U.S. growth and pursue opportunities for shareholder value creation. The pace and the scale of these investments will be determined by John and the Board in the months ahead.

Free cash flow generation should be at least $600 million and net debt to covenant adjusted EBITDA of between 3.5 times to 3.6 times by the end of the fiscal year. We remain extremely optimistic about our industry’s long-term outsourcing prospects and Aramark’s future opportunities to create value.

With that, I’ll turn the call back over to John for his key takeaways before we take your questions. John?

[John Zillmer, Chief Executive Officer]

Thanks, Steve. While still early, it is clear to me that there is a significant runway to drive the business forward in a way that unlocks meaningful value for all of our shareholders. My immediate priority is to nurture our hospitality culture and entrepreneurial spirit with our employees that solidifies the foundation for our accelerated growth strategies.

While the overall performance that Steve just reviewed was admirable, most notably, international, sports and business dining, we have an immediate opportunity to further support education, as well as our other businesses.

Our areas of focus will center on placing additional field-based resources to support new account sales efforts and client retention, enhancing our product and service offerings that appeal to broader audiences and value-added innovation and technology that improves productivity, while appropriately servicing our clients’ needs.

As an example, we will be working with our clients where appropriate to utilize enable our trademark and proprietary cloud-based platform that effectively streamlines our food production process, allowing our teams to spend more time solving for student and other customer preferences.

Our diverse portfolio affords us the flexibility to activate this target approach, while simultaneously propelling the business. I’m confident that our plans will drive future success and we will continue to update you on our progress as we go.

Before we take questions, I want to thank our 280,000 employees around the world for their dedicated service to the company and our client partners. I look forward to meeting all of you as we work together to write the next chapter for this iconic company. Thank you.

[Operator]

Thank you. Now we will begin the question-and-answer session. [Operator Instructions] And our first question is from Kevin McVeigh from Credit Suisse.

[Kevin McVeigh, Credit Suisse]

Great. Thanks so much, and congratulations. John, welcome aboard. John, I wonder if you could share with us just some initial observations in where you see the greatest opportunities given kind of just it sounds like your immediate priorities kind of elevate the hospitality and then drive the business going forward to create shareholder value?

[John Zillmer, Chief Executive Officer]

Yes, thank you very much. I’ve spent quite a bit of time in the field organization over the last several weeks. And I think what’s most exciting to me is about – is really about the DNA that exists in this organization. The cultural DNA is very intact and very healthy. People really love the organization. They love what they do. They love serving our customers and clients. And as a result, I think that cultural enhancement or the cultural reengagement will come very, very rapidly.

People really are excited about winning again, about competing in the marketplace. I think, we have extraordinary opportunities for growth across all the range of businesses that we operate. There isn’t a single one where we can’t compete and win, and I’m very excited by the quality of our leadership team in the field.

[Kevin McVeigh, Credit Suisse]

Got it. And then I guess, just turning to Steve real quick. Steve, what kind of – as you think about 2020 and longer-term, what are kind of the key measures you want to hold yourself accountable to and then ultimately, the organization?

[Steve Bramlage]

Hey, good morning, Kevin. If I start with the longer-term one first, I think you should still expect us to pursue balanced improvement over the long-term across multiple financial metrics, right? We know we have plenty of opportunities across our financial statements to continue to improve the results on the metrics we’ve talked about, revenue, profitability, cash, leverage, et cetera. But you certainly should expect us to continue to invest where it makes sense for us to invest for – because we have a lot of opportunity and we’re going to invest from a shareholder value creation perspective.

Specifically on 2020, I think the moving parts, I’d have you keep track of here is, we definitely enter the year with a lot of operational momentum. We’re running the print business day-to-day pretty well and that came through in the fourth quarter for sure, where we offset a lot of incremental incentive compensation expense.

As you know, there has been a lot of effort over the last couple of years around improving productivity in the company. Those initiatives remain in place around labor and food, direct spending, those will clearly continue to benefit us. And I think we feel very good about picking up this extra $35 million or so of planned synergies from AmeriPride and Avendra.

There is no doubt 2020 is going to be a year of reinvestment for us on the revenue side. And so I think a lot of that synergy will get reinvested over the course of the year to help propel the business revenue growth forward as we had talked about, and we’ll continue to benefit from deleveraging for sure on the interest expense side.

And so when you put all of that together and you look at some of the exogenous things we’re dealing with here right out of the gate, we’ve had some clients have some high-profile strikes in the first quarter. There has been some unrest in Chile, which has impacted our business, some uncertainty around tariffs.

I think at the end of the day, margins probably don’t move very much either way in fiscal 2020 when you put all that together. But most importantly, we’re going to continue to invest very aggressively into the opportunities that are in front of us to drive long-term value and we’re going to make the right long-term investment decisions for shareholders.

[Kevin McVeigh, Credit Suisse]

Thanks so much.

[Operator]

Our next question is from Ian Zaffino from Oppenheimer.

[Ian Zaffino, Oppenheimer & Co. Inc.]

Hi, great. Thank you. John, welcome aboard. I just kind of want to delve into your strategy kind of going forward. I know you’ve been relatively customer-facing, kind of customer-first type of CEO in the past. So how are you going to take that sort of approach basis [ph] your clients helping them succeed? How has that been translated, would you say, into retention, new client wins, et cetera, maybe just give us a little more color there? Thanks.

[John Zillmer, Chief Executive Officer]

Sure. Thanks, Ian.. Absolutely, I do believe, particularly in the hospitality company that you have to be customer-facing. I think one of the steps that we’ll take very quickly is to realign resources in the organization to be more aligned or closer to the customer, if you will. Repositioning some of the resources from the center of the organization back to the field to create line of business and marketplace intimacy and closer customer contact.

We think that, that can drive retention and we think it will drive new account business sales. This business has always been most effective when you have a line of business specific team really positioned against the opportunities that they have very intimate knowledge of. And so we’ll do that. Some of the investment that we’ll be making over the course of the next year will be positioned as resources in the field organization to do just that.

[Ian Zaffino, Oppenheimer & Co. Inc.]

Okay, great. And then just one follow-up would be, you’re talking about investment, I understand the business needs investment. How many years of investment do you think you need? Is this kind of a one-year thing, and then the investments start rolling off and you see, like an acceleration of earnings growth. It is multi-year? How do you kind of think about the horizon? Thanks.

[John Zillmer, Chief Executive Officer]

Yes. I think about each individual year and kind of in and of itself, that the – and we’ll consider making follow-on investments as we believe the investment opportunities where the returns are appropriate. We believe this level investments that the Board has committed to for this year is sufficient to help us accelerate our growth rate. We’ll be making those targeted investments over the course of the year and they’ll take a number of different forms as we’ve discussed.

I think in future years, as we look at the new business opportunities and the new marketplace opportunities, we’ll make strategic decisions at that point in time. I don’t have any preconceived plan for additional investment in 2021 or 2022. It really is focused on this year on getting our growth rate accelerated and getting the team really focused on it. So I think that would be our plan for now.

[Operator]

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

[Gary Bisbee, Bank of America Merrill Lynch]

Hi, good morning. And John, welcome to this venue. I got dropped for a few minutes. So apologies if you’ve already covered this. But I wondered if you could be a little more specific in exactly what forms the investments you’re planning for this year will take? And accelerating growth can obviously come from several places, improving retention, pricing, merchandising, new business. I guess, where do you see the most opportunity and where are you initially going to be focused most on improving performance to drive better top line growth? Thank you.

[John Zillmer, Chief Executive Officer]

Yes. Thanks, Gary. As a matter of fact, we’ll be focused on that full range of opportunities. We think the fastest way to grow the business is to sell new business, sell new accounts and to retain our existing customers. So we’ll be focused on improving both of those metrics inside the organization.

Part of that investment will be adding additional sales resources to targeted businesses, where those opportunities are most prioritized, adding additional field-based operational resources where it makes sense, so we can serve the customer better and adding additional retention resources to the organization, so we can improve retention rates in key businesses.

Last year, retention did improve significantly over the prior year. There is continued opportunity there. I believe the two levers that most impact our ability to grow more rapidly are retention and new business growth. So that’s what we’ll be focused on.

[Gary Bisbee, Bank of America Merrill Lynch]

Okay. Thank you.

[Operator]

Our next question is from Toni Kaplan from Morgan Stanley.

[Toni Kaplan, Morgan Stanley]

Thank you. John, in the past, the company has given sort of long-term guidance of 2% to 4% and you’re again expecting 3% for next year. You’re focused on growth now, very focused and putting investment behind it. Just really long-term, I guess, how high do you think growth can get? How long does it take to get there? I guess, just what are your thoughts on long-term growth? Thanks.

[John Zillmer, Chief Executive Officer]

Yes. Thanks, Toni. I frankly think we can accelerate performance and be the leading organization in this marketplace. I think we can achieve revenue growth that is consistent with our major competitors. We will be competing and winning in the marketplace on the basis of performance and the basis of capability and relationship. And so, I believe that the marketplace will reward us for that.

We are projecting 3% for next year, as a result of additional new sales wins and improved retention, that will increase over time. We’ll start a little bit slower and we’ll work our way up towards the end of the year as the selling season matures. And then we’ll take it from there.

I do believe we have an opportunity and the quality of – I think the quality of the people and the quality of the company is very, very strong. And as a result, we’ll be able to accelerate the new business wins going into next year. I would hesitate to predict what the numbers can be, but I do believe we can outcompete and we’ll drive revenue growth very significantly and at least beat our competitors.

[Toni Kaplan, Morgan Stanley]

Got it. And then this quarter, the incentive comp was a little bit higher than what we we’re expecting. Should we think of this as more of a recurring investment that is in the business to help drive better retention and growth, or should we view it as a little bit more of a one-time – one quarter thing? Thank you.

[Steve Bramlage]

Yes. Hey, Toni. Good morning. This is Steve. I’ll address that. So the incentive comp that we talked about in the quarter and for the full-year is really part of the normal course bonus payment program and then the annual grants to stock-based compensation. So I would say those are annual cadence items.

In total, for the year, the payouts, obviously, in aggregate, are significantly more than what they were in the prior year. I think the cash bonus payout for this year is going to actually be the largest pool we’ve had in the last five years or so from a cash compensation standpoint. But they are not connected to any kind of one-time action that the company took, right?

We clearly made some one-time tax reform reinvestments earlier in the year, but the stuff that we’ve been talking about here in the fourth quarter would be normal course incentive compensation program design and earnings versus targeted outcomes.

[Operator]

Our next question is from Seth Weber from RBC Capital Markets.

[Seth Weber, RBC Capital Markets]

Hey, good morning. Steve, I just wanted to circle back on a comment you made earlier, just margins, you don’t think move a lot either way. Is that pretty consistent across the three segments, or do you think there could be some variability across the three categories? Thanks.

[Steve Bramlage]

I don’t think, Seth, it’s going to be radically different. I would expect, you probably will continue to see modest improvement in the Uniform space, just because obviously, the majority of the AmeriPride synergies will fall on that line item. So I would expect that will be positive.

I think, international, because of the momentum they have and just the lack of having the losses in the businesses that we got out of, they probably also will be positive. A lot of the reinvestment that we’ve referenced here earlier will at least initially be oriented to improving growth in the U.S. FSS business. And so they probably will not see much margin improvement, because I think the bulk of that spending will show up in that segment.

[Seth Weber, RBC Capital Markets]

Okay, that’s super helpful. Thanks. And then just on the – are you doing anything to sort of change the sales incentive picture into maybe push towards higher – changing the program towards higher retention rates or anything that you’re implementing to try and change sales behavior? Thanks.

[John Zillmer, Chief Executive Officer]

Yes. Thanks. Seth. This is John. We are considering all kinds of changes inside the sales organization, both from a resource perspective as well as a process perspective. And certainly, sales incentive is being evaluated as well. We think we do have a very good sales incentive program in place, not sure that we need to make major changes to it. And then we firmly believe that retention is the job of the entire operating organization, as well as the sales organization.

So we think our people are adequately incented to retain the business, the customers that they currently operate. And we will reap – but we will refocus and reevaluate the incentive comp programs to see if there is any tweaking that we can do to further enhance our results.

[Seth Weber, RBC Capital Markets]

Perfect. Thank you very much.

[Operator]

Our next question is from Manav Patnaik from Barclays.

[Manav Patnaik, Barclays Capital]

Thank you. Good morning, and let me add my welcome to John as well. On a high level, it sounds like to accelerate the revenue growth, there was a lot of talk about reinvigorating the culture. And so far I think, you said a lot of repositioning sales, hiring new sales, was that the only issue, I guess, that you’ve seen thus far that there was not enough focus on the customer? I was just hoping for a little bit more of the culture today versus where you want it to be?

[John Zillmer, Chief Executive Officer]

Yes, I would say, frankly, the culture inside the organization is very healthy. People inside the operating units of this organization have a very strong customer focus and hospitality focus.

I think, in many ways, the company created a barrier to achieving better results, because we went on a march for the last several years of reducing costs, of enhancing profitability, enhancing profit margins at the expense of resources in the field to some degree. And as a result, we cut sales resources and we cut frankly operating resources as well.

Some of those – some of the programs that we initiated were extraordinarily helpful and will make us a better organization as we go forward. But we did end up taking away some muscle, I think, from the organization over the last couple of years. So now our investment strategy is to add that muscle back to the organization in the form of people, in the form of selling resources and in the form of operating resources as well, field marketing, and it comes to mind as an area that we’ll focus on, culinary expertise that we’ll continue to focus on.

So we’ll add multiple elements to this. But please understand that the vast majority of employees in this company chose this business – the hospitality business, because they love it and they really know how to do it right. We just need to give them the tools and the resources to make it happen.

[Manav Patnaik, Barclays Capital]

All right, got it. That’s helpful. And then, I guess, your tenure prior to Aramark was mainly on the FSS side. And I guess, I was just hoping for a quick – some quick thoughts on your views on the state of Uniforms within the business and if kind of the same strategy you need to apply to that business to get it going as well?

[John Zillmer, Chief Executive Officer]

Yes, my experience – my prior experience with Aramark was focused on Food and Support Services. But as you know, I did spend several years working in both the solid waste industry, as well as the chemical distribution industry, both organizations that had very similar distribution models to Uniform Services. So, I do have background and experience in ways to optimize those kinds of businesses.

I think there is a significant runway and significant opportunity to improve the Uniform Services business. I have not spent a significant portion of my time yet there with Brad and his team and we’ll be doing so soon. So I’m not ready to make pronouncements in terms of what I think the long-term implications are for Uniform Services. But I do believe we run a great company, we’ve got good people in it and there are opportunities to improve it and close the gap between us and our competitors in that segment.

[Manav Patnaik, Barclays Capital]

All right. Thank you.

[Operator]

Our next question is from Stephen Grambling from Goldman Sachs.

[Stephen Grambling, Goldman Sachs]

Thanks for taking the questions. Welcome. John. I guess, two follow-ups on some earlier questions. The first, maybe for Steve. And I think this is kind of Gary’s earlier question asked another way. I guess, walking through the math behind your $600 million target in free cash flow, it’s about $100 million year-over-year. And you said a bunch of items on the call, I think, it was $85 million in one-time, top line growth of 3% with flat margins get you above that before even considering synergies. So is there any thought around significant reinvestment in CapEx, or am I missing some other component in that guidance? Thanks.

[Steve Bramlage]

No, I don’t think there – I don’t think you’re missing anything, Stephen. I mean, our year-over-year math is not meant to be more complicated than we printed the $499 million, there was about $23 million that was on a different line, and you add back the $80 million, some of the non-recurring stuff, you get to $600 million. So it seems like a very safe starting point for us to have at least $600 million there. There is no doubt the level of reinvestment in 2020 will partially offset some of the benefit of the synergy and operational pieces. But I feel very good that at least $600 million is an appropriately conservative starting point for us.

[Stephen Grambling, Goldman Sachs]

And – but I guess to ask the question more specifically, is there any need to invest more in either contract acquisition costs or CapEx as part of that drive to accelerate the top line?

[Steve Bramlage]

Ultimately, if you think of where we will invest to grow in certain lines of business, yes, we’ll spend capital where it makes sense for us to spend capital and drive longer-term shareholder value.

I think as it relates to 2020, when you just think of the cadence of that pipeline and how that spending occurs and the seasonality of when you spend it in terms of when seasons are out and when schools are out, I don’t think we’re going to have a radically different outcome than somewhere around the 3.5% of revenue number for fiscal 2020. But I think that’s more again pipeline and seasonably determined as opposed to us putting a cap on it. We’re certainly not trying to put a cap on it. I just don’t think we would realistically spend much more than that given where we are right now.

[Stephen Grambling, Goldman Sachs]

Great. And then as a second follow-up for John. I guess, how do you think about the Uniform’s segment place in the broader business and benefits that could be from maybe joining that together or synergies to think about with the food service side? Thank you.

[John Zillmer, Chief Executive Officer]

Yes. Thank you. First of all, I think that there are historic synergies that have been realized in the business by having the two organizations aligned, not the least of which is the opportunity to serve those thousands of clients we have and their uniform needs across the enterprise. So while the operational synergies may not be as prevalent, there are certainly marketing and sales-based opportunities that we’ll continue to focus on and take advantage of.

As I said, there are significant opportunities for improvement in the business and this is as the company that has produced significantly higher margins in the food service business over the years and we see it as a core part of our portfolio. But that doesn’t necessarily mean that we wouldn’t make a different decision at some point in the future and the Board will always be considering the best value-creating opportunities for the organization. I’m not ready to be prescriptive today, but it’s certainly something that we’ll evaluate going forward.

Adding just a comment, with respect to the investment strategy, I want to make sure people understand that we will make a very – we will have a very disciplined investment return requirement for all of the businesses that we operate in. So this investment in growth does not imply that we will go out and lower price or throw capital around to go ahead and accelerate growth. We’ll do it in a very disciplined way. We’ll be selling on capability. We’ll be selling on competence and we’ll be selling on relationship with our customers and clients, and it’s our intention to compete that way, not on the basis of price and capital deployment.

[Stephen Grambling, Goldman Sachs]

That is super helpful color. Thanks so much and best of luck.

[John Zillmer, Chief Executive Officer]

Thank you.

[Operator]

And we have a question from Andrew Steinerman from JPMorgan.

[Andrew Steinerman, JPMorgan]

Welcome, John. All that sounds very refreshing. One of the pillars you just stood up was improving client retention. I believe the company has said they’ve consistently had mid-90s client retention. So I just wanted to confirm that. And my question really is, could a company realistically improve past the mid-90s?

[John Zillmer, Chief Executive Officer]

Yes. Thanks, Andrew. I believe it can. I think the company has at various points in its history and certainly in certain businesses had significantly higher retention rates than the mid-90s, and it would be our desire to continue to improve it incrementally. I think there is an opportunity here to move it.

Last year, I think our stated number was around 95%. I think, it’s certainly possible to improve it by at least a percentage point to 96%, maybe 97%. I think if we’re doing the job for our customers, there is no reason why we can’t continue to improve retention. We operate these businesses, most of them on very short-term contracts that can be cancellable with or without cause.

And so clients choose to stay with us not on the basis of the contract structure, but on the basis of performance and that’s what we’re going to be driving towards improved performance in all of the businesses, which should lead to significantly higher retention over time.

[Andrew Steinerman, JPMorgan]

Right.

[Steve Bramlage]

And, Andrew, maybe I would just add in terms of the retention just used the experience we had in international this year or this year being fiscal 2019, right, I mean, their retention was a couple of hundred basis points higher than it had been historically. And you clearly saw the results on the revenue side. So it’s possible, not necessarily easy across the whole entity, but there is a real-life example of it happening here in the international business in fiscal 2019.

[Andrew Steinerman, JPMorgan]

Thanks for taking the time.

[John Zillmer, Chief Executive Officer]

Thank you.

[Operator]

Our next question is from Andrew Wittmann from Baird.

[Andrew Wittmann, Robert W. Baird & Co.]

Great, thanks. I just wanted to actually get an update on the acquisition integration, Steve, and it kind of sounds like things are on track. I was kind of hoping that you could give maybe the realized synergies for the year and the quarter, as well as just update us on the run rate that you think has been effectuated as you enter here 2020, just to give us a little bit more detail about how you stand versus that $30 million to $35 million cost synergy target this year?

[Steve Bramlage]

Yes. I think we – Andrew, good morning. I think we picked up – I think we realized $32 million in fiscal 2019, is a good realized number in terms of how much we got. And so you probably picked up Avendra is relatively ratable. So $13 million or $14 million of that is Avendra, the remaining piece would be AmeriPride.

I would expect we’ll get at least $35 million in fiscal 2020, again, the Avendra number won’t change a lot. So that’s probably $13 million or $14 million of incremental and you continue to get increasing amount of synergy on AmeriPride as we move into things like route optimization and handling some of the – the facility piece.

And then I would expect as we move into 2021, we still have a full-year of synergy realization from the AmeriPride transaction to go, because that was kind of a four-year run rate for us anyways. And so kind of two years still to go as planned on AmeriPride and then a full-year of both here in fiscal 2020, and that should be at least $35 million of realized incremental synergies.

[Andrew Wittmann, Robert W. Baird & Co.]

Okay. Thank you for that. And then, I guess, John, just talking about just the portfolio and what you have here, I mean, even in 2019, the janitorial exits in Europe, the HCT sale, I mean, there has been things that were kind of addition by subtraction to the business.

And so I’m just wondering as kind of you’re going through, what the company is doing today, if there is any more of that, I mean, things that come to mind at least from my observations would be some of the lower-margin lending businesses or even some of the low-margin national account business in the uniform rental segment. Things that like are clearly weighing on your margins, maybe your returns that you’re realizing. Is there anything else like that, that you’re looking at or is under consideration today?

[John Zillmer, Chief Executive Officer]

Yes, Andrew, thank you for asking. I would say, there are always – we’re always in the process of portfolio review across all the businesses, not just Uniform Services, but across all, looking for low-margin contributors and looking for ways to fix – to either to fix them, repair them, or to exit them. And that includes the food service businesses. There are customers that we serve today that are not additive in terms of the value of the company.

And so we will always look for opportunities to reevaluate the portfolio and where it makes sense, prune those operations that are costing the shareholders’ money at this point. I don’t have any specific plans on the Uniform side today to discuss, but it certainly is a business that has a high degree of focus from the Board and from the leadership team and we’ll continue to evaluate that business going forward for those kinds of opportunities as well.

[Operator]

And I will now turn the call back over to Aramark’s CEO, John Zillmer.

[John Zillmer, Chief Executive Officer]

Thank you, everybody. I appreciate the time and the effort that you put into the call. We love this organization. We feel very strongly about its future and its – and the possibilities that exist for all of our stakeholders, our employees, our shareholders, our investors. We are absolutely committed to doing the right things for all of our constituents, and I look forward to serving you in the future and to talking to you individually. Thank you very much.

[Operator]

Thank you for participating. This concludes today’s conference. You may now disconnect.