Ian M. Bailey - Vice President-Investor Relations Eric J. Foss - Chairman, President & Chief Executive Officer Stephen P. Bramlage - Chief Financial Officer & Executive VP.

Anjaneya K. Singh - Credit Suisse Securities (USA) LLC (Broker) Andrew J. Wittmann - Robert W. Baird & Co., Inc. (Broker) Sara Rebecca Gubins - Bank of America Merrill Lynch Manav Patnaik - Barclays Capital, Inc. Gary Bisbee - RBC Capital Markets LLC Stephen Grambling - Goldman Sachs & Co. Dan Dolev - Nomura Securities International, Inc. Jeffrey D.

Goldstein - Morgan Stanley & Co. LLC.

Good morning and welcome to Aramark's Third Quarter 2016 Earnings Conference Call. At this time, I would like to inform you 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 prepared remarks.

In order to accommodate all participants in the question queue, please initially limit yourself to one question and one follow-up. I will now turn the call over to Ian Bailey, Vice President of Investor Relations. Mr. Bailey, please proceed..

Thanks, Caylin, and welcome to Aramark's conference call to review operating results for the third quarter of 2016. Here with me today are Eric Foss, our Chairman, President and CEO; and Steve Bramlage, our Executive Vice President and CFO.

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. It is also detailed on page 2 of 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 risk factors, MD&A and other sections of our SEC filings. Additionally, we will be discussing certain non-GAAP financial measures. The reconciliation of these items to U.S.

GAAP can be found in this morning's press release, as well as on our website at www.aramark.com. With that, I'll turn the call over to Eric.

Eric?.

Thanks, Ian, and good morning. I'm happy to report strong third quarter financial results. We posted organic sales growth in the quarter of 4%, net of about a point of strategic actions that we discussed on our last earnings call. Said differently, our underlying business grew in the mid-single digits for the quarter.

Solid productivity gains drove meaningful profitability expansion on a constant currency basis. Margins increased 50 basis points, adjusted operating income grew 15%, and adjusted EPS was $0.34, a 17% increase from prior year. Our outlook for the full-year remains unchanged, so all in, a really good quarter on multiple fronts.

Not only were our financial and operational results strong, we were also busy in the marketplace. We hosted and serviced multiple major sports playoff events, launched an innovative celebrity partnership that really enhances our product offerings. We hit the ground running in Yosemite National Park.

Provided food service to both the RNC and DNC conventions, and also received more external recognition awards. Also, in early August, we acquired HPSI, a company that will help strengthen our group purchasing capabilities, particularly in healthcare and the education sectors.

And I'd like to thank the 270,000 strong Aramark team members that are clearly rallying behind our focused strategy, which is driving increased customer and employee satisfaction and accelerated financial performance, which in turn is creating meaningful shareholder value.

So let me dive a bit deeper on our third quarter results, looking at revenue, and as I mentioned a moment ago, third quarter organic growth was 4% net of about 150 basis points in previously identified (3:30) 100 basis points of strategic actions and roughly 50 basis points of energy pressures.

The quarterly sales momentum was driven by our base business expansion, new business growth, we continue to see solid retention, and to a lesser degree about a 0.5 benefit from the timing of Easter.

For the full-year, both retention rates and new business wins are tracking consistently with the past few years, which indicates mid-90s retention, and roughly $1 billion in new business wins for the year. Our North America business showed solid 5% organic sales growth in the quarter.

New business wins remained strong, including the Rock & Roll Hall of Fame, the University of Pennsylvania and the Tennessee Department of Corrections.

Notable performances were turned in by our education, as well as our sports and leisure sectors as we scaled up our operations in Yosemite and saw a strong playoff performance in both the NBA and the NHL.

Into that end, I'd like to congratulate our partners, Pittsburgh Penguins on their win of the NHL's Stanley Cup, as well as the Cleveland Cavaliers on their win of the NBA Championship. We've now proudly served just about every major professional and college champion this past season.

We started off the season with a Major League Baseball World Champion Kansas City Royals, followed by the Denver Broncos in the NFL, and then the Penguins and the Cavs.

In NCAA Football, the University of Alabama; NCAA Basketball with Villanova Wildcats, Men's and Women with Cross Champions from the University of North Carolina and the NCAA Baseball Champion, Coastal Carolina University.

While our playoff spot for a client does not generally influence our quarterly financial results in a material way, it was quite an impressive run this year, and we are thrilled to serve and be the partner of champions.

Our International segment grew organic sales by 1%, net of about 200 basis points attributed to our exit of non-strategic geographies. Absent those strategic decisions and energy headwinds, our underlying International segment continues to experience solid base sales growth, led by China and Mexico, which were both up solid double digit.

We also saw good mid-single-digit growth in Europe, led by Ireland, Germany and Spain. The Uniforms segment performed well in the quarter, and continues to benefit from our recent investments in capacity expansion, but did experience a modest slower demand from our energy clients, which resulted in organic sales growth of 2% in the quarter.

Innovation and quality continue to be a major focal point for us across the entire business, particularly, in the important area of health and wellness.

During the quarter, we announced a strategic partnership with TV personality, restaurateur and Iron Chef, Cat Cora, to develop an exclusive concept called OLILO by Cat Cora, which focuses on healthy, made-your-way Mediterranean cuisine.

We're also testing a healthy micro-market concept featuring 80% better-for-you offerings, which we expect to roll across our portfolio in the near future.

These initiatives and many more to come really support the goals of our Healthy for Life 20 by 20 partnership with the American Heart Association, and stay on point with consumer market trends related to healthy eating. Moving on to productivity, I'm pleased to report that our margin march continues. We continue to attack food and labor costs.

On food, these gains are driven by focusing on reducing waste as well as complexity across our supply chain. We're doing that by simplifying our menu offerings, and streamlining our supply chain with fewer SKUs.

On the labor front, our ongoing efforts are focused on driving head count productivity while ensuring we continue to reduce overtime and agency hours. And as we've mentioned previously, we continue to roll out new technology solutions, a natural way for us to reduce complexity in the supply chain.

In our Ariba pilot accounts, we've been able to trim the number of recipes by 30% and reduce the number of SKUs by more than 50% while simultaneously improving electronic invoicing and payments by 40%.

Finally, we continue to ensure our above unit costs are appropriate by continuing to look at (08:28) and layers to facility clear roles and responsibilities.

These productivity gains are tangible, and in the third quarter, they helped drive a 17% increase in North America constant currency adjusted operating income, which led to a 50-basis-point increase in North American constant currency AOI margin.

Our International segment delivered a 7% increase in constant currency AOI and 30 basis points of constant currency margin expansion. And in Uniforms, we saw a 5% increase in AOI coupled with a 50 basis points of margin expansion.

As we communicated to you at our Investor Day, we are committed to expanding our margins 100 basis points over a three-year timeframe, and we're certainly on track to do so. One important driver of this opportunity is leveraging our purchasing power through both scale and technology.

With this strategic goal in mind, the HPSI acquisition, we announced a few weeks ago, gives us access to industry-leading and complementary supply chain management and technology in the group purchasing space, particularly in healthcare and education.

In the area of attracting and retaining talent, we continue to make gains and achieve external accolades. During the quarter, we were named to LATINO Magazine's LATINO 100, an annual listing that spotlights companies providing the most viable business opportunities for Latinos.

Aramark support of its diverse family includes its many employee resource groups. In a final note for the quarter, one of which I think helps illustrate the breadth of our business, TripAdvisor, the world's largest travel site, awarded 28 Aramark-managed lodges, restaurants, and attractions their 2016 Certificate of Excellence.

A few of our locations that were recognized include the majestic Yosemite Hotel, Park Lake Crescent Lodge in Olympic National Park, and the Wahweap Campground at Lake Powell. So all in, I feel good about both the quarter and our year-to-date progress. For the first nine months of fiscal 2016, we've grown organic revenue by 3% net of strategic actions.

AOI constant currency is up 9% year-over-year and constant currency adjusted EPS is growing double-digit by 11%. The business is performing consistently with the multiyear goals that we identified in Investor Day, and we remain very encouraged with our transformative progress.

With that, let me turn the call over to Steve who will go a little more detail into the numbers..

Thanks, Eric and good morning, everyone. As Eric just described, we delivered both strong operational and financial quarter, and we continue to make steady, solid progress against our targets. I'm going to start on slide 4 and walk through the Q3 revenue reconciliation versus the prior year.

We reported third quarter sales of nearly $3.6 billion in 2016. As you can, this is $100 million more than the $3.5 billion we reported in the third quarter of 2015, which equates to a 3% increase on a GAAP basis. As we get further into the year, we are seeing the headwinds from a stronger U.S. dollar start to dissipate.

In the third quarter, translated revenue from our international countries was reduced by $45 million, or approximately 1%. This compares to about a 2.5% headwind in the first half of the year from currency. Moving down the reconciliation, we recorded approximately $16 million in revenue from our Irish acquisition which was disclosed last quarter.

We exclude material acquisition-related results from our calculation of organic for the first year of ownership. In the case of Avoca, we expect to record over $50 million in GAAP revenue by the conclusion of the fiscal year. Our organic revenue, therefore, increased approximately $130 million in the quarter, or 4%.

The revenue influences regarding Easter, energy and our strategic portfolio actions that we identified on our last call remain unchanged. Therefore, the 4% organic sales growth for the total company is net of about 100 basis points of strategic portfolio actions and 50 basis points of energy headwind year-over-year.

But it is benefiting by about 50 basis points from the timing of Easter. Taking all of this together, the underlying base business grew in the mid-single digits. Specific to the base business in North America, FSS, we had notable revenue gains in our sports, leisure and entertainment, and higher education businesses.

In the quarter, we on-boarded a number of new higher-ed accounts, benefited from the first quarter of full operations at Yosemite whereby we recorded approximately $45 million of revenue, and picked up about a 0.5 of sales from incremental year-on-year sports activity, largely driven by the NBA and the NHL playoffs.

Underlying sales in the International segment continued to grow nicely, and were offset by previously announced strategic portfolio actions, which impacted the sector by about 200 basis points in the quarter. Our Uniforms segment recorded 2% growth in the quarter.

Lower employment levels among certain clients in the energy-related industries reduced our revenue in this segment by approximately 1%. Let's move on to slide 5 to discuss the changes in adjusted operating income and profitability during the quarter.

In general, we continue to make excellent progress in this regard, led by productivity initiatives, and our strategic portfolio-pruning actions. Third quarter 2016 adjusted operating income was $202 million, which is approximately 14% higher than the prior year's $178 million.

However, we did incur a modest 1% currency headwind on earnings during the quarter which is consistent with the revenue discussion of a few minutes ago. Therefore, on a constant currency basis, our adjusted operating income improved 15% year-over-year.

Our AOI margin increased to 5.6%, which is a record level of profitability for us as a public company in the third quarter. All three segments reported solid improvement in adjusted operating income, with North America FSS up 17%, International FSS up 7%, and Uniforms up 5% on a currency-neutral year-over-year basis.

Broad productivity initiatives favorably impacted all of our segments, while specific portfolio pruning further benefited North America and International. Slide 6 provides a roll forward to help bridge our adjusted EPS year-over-year.

Our adjusted EPS increased to $0.34 per share in the quarter versus the $0.29 per share we reported in the third quarter of 2015, and that's an increase of 17%. Currency translation was not material to the adjusted EPS calculation in the quarter.

Adjusted interest expense was essentially flat for the quarter year-over-year, and the adjusted effective tax rate was modestly higher than the prior year quarter. As is our typical practice, our non-GAAP disclosures are reconciled in this morning's press release in the quarter.

Standard adjustments were made for LBO-related amortization, stock-based compensation and transformation charges which primarily consists of severance from the prior year's previously announced actions.

Two items of note here in the quarter, consistent with our past practice, we have excluded the benefit of $11 million in gains related to our fuel hedging program. And in the calculation of adjusted net income, we've excluded $31 million in one-time costs related to the $1 billion refinancing transaction that was executed in May.

Moving to slide 7, our balance sheet and our financial flexibility continues to get stronger each and every quarter. We ended Q3 with almost $200 million of cash on hand and our revolver was completely undrawn. Together, these provide over $900 million in available liquidity to us.

Our leverage ratio, as measured by total debt to adjusted EBITDA, improved approximately 40 basis points year-on-year in the quarter to 4 times. Total debt was lower year-over-year by $185 million.

As I referenced earlier, we did execute $1 billion worth of refinancing in the quarter, through the reopening and upsizing by $500 million our 5.125% notes that are due in 2024 in conjunction with issuing a new $500 million 4.75% 10-year note due 2026.

The average effective interest rate on the transaction was 4.6%, and I'm happy to report that's the best outcome in terms of coupon in the company's recent history for a long-term unsecured bond issuance.

In early August, as Eric mentioned, we closed the acquisition of HPSI for approximately $140 million, and we funded that transaction with cash on hand. We continue to expect our debt-to-adjusted EBITDA ratio at the end of the year to be a touch below 4 times. On slide 8, I'll make a few comments regarding our outlook for the remainder of the year.

To be succinct, our outlook for the year related to EPS is unchanged, in the range of $1.65 to $1.75 per share. Given that we have three quarters of the year behind us, we would now expect to be approximately at the middle of that range by the time we close the year.

Note, this will be after we've incurred a $0.03 headwind from currency versus the expectations we had at the time we gave guidance. Therefore, the underlying business performance will be at the higher end of our beginning-of-the-year expectations.

We often speak to the diverse nature and geographic mix of our client portfolio as a point of resiliency for our business model, and this mitigator concentration risk holds true for us in the context of Brexit as well, while there is no doubt the UK is an important geography for us.

Sterling-denominated sales represent about 3% of the total company sales. Therefore, at current sterling rates, we would expect about an annualized $60 million revenue reduction, several million dollars of lower EBIT, all of which would equate to about a penny.

However, due to its timing in this fiscal year through the remainder of 2016, I would not expect direct Brexit impact to be material to our results. I continue to expect capital spending for the year to be approximately 3.5% of sales at this point.

We continue to see, and we will continue to invest in growth-generating opportunities while remaining cognizant of the need to continue to drive higher returns on the capital that we invest. Our free cash flow is now expected to be at least $225 million, which would be 20% greater than our 2015 free cash flow.

A number of factors were influencing this improvement. But in general, I can say we remain very focused on meaningfully impacting the various levers that are available to us to improve both working capital and free cash flow conversion as we look out into the future.

Our segment expectations for the second half of 2016 are on the right, and you will see they're unchanged from the last call, and they remain directionally consistent with our longer term algorithm expectations for both broad-based and balanced improvement in the business, both in terms of revenue growth as well as margin expansion.

At current exchange rates, currency translation should not be material to us for the remainder of the year. On a full year basis, our underlying organic revenue growth should be right in the center of our long term framework.

However, what we report as organic revenue for the year will be reduced by the 150 basis points of previously discussed strategic portfolio actions and energy headwinds.

Looking into 2017, even after incorporating the uncertainties that exist in the global macroeconomic situation, it is certainly our expectation that the business' momentum is sustainable and supportive of both our multi-year framework and the three-year margin expansion goal that we laid out this past December.

We're currently working through our 2017 budget process, but at this point in time, our expectations for the 2017 will be largely consistent with our multi-year framework, and we will provide a more detailed view of 2017 expectations in November. I'll now turn the call back over to Eric for some closing remarks in advance of Q&A.

Eric?.

Thank you, Steve. So, in summary, we continue to execute against our focused strategy. That strategy is driving stronger client relationships, moving us as a company to a best-in-class employer and improving our financial results across businesses and geographies.

I think as our momentum illustrates, we've got the right people executing the right strategy, and that strategy balances the continuously improving financial performance with prudent reinvestment to maximize long-term shareholder value.

So taking our progress together, with the promising dynamics of the industry and our upside potential, we continue to remain confident in our right to win and are really energized by the prospects going forward. So, with that, Caylin will open the lines, and we're happy to take any questions..

Your first question comes from the line of Anj Singh. Your line is open..

Hi. Good morning. Thanks for taking my questions. I was hoping you could touch on your SG&A spend this quarter. It seems like you had a marked decline year-over-year and sequentially. Is that step-down just from ongoing productivity initiatives, or was there something specific that impacted the spend there this quarter? Thanks..

Yeah. This is Steve. I'll start with that one. I certainly wouldn't read very much into quarterly SG&A.

On the financial statements that we disclosed a lot of the non-GAAP, or the items that we adjust out are rolled in through that line, so that line will be affected by, on a GAAP basis, the gas hedges, positive number of gas hedges that we recognize this year slightly offset by the severance number.

So the underlying SG&A spend of the company is quite consistent. We continue to have year-over-year, we will have lower SG&A spending as we continue to look at the initiatives that Eric referenced earlier, but the quarter-to-quarter sequence of SG&A is going to be largely consistent. There has been no significant change in that..

Okay, got it. And Eric, could you talk a little bit about HPSI? I was hoping you could perhaps discuss some terms of the deal, multiples paid versus other deals that you normally do.

And what is the purchasing power of this GPO or volume today? Where do you think it could go under your ownership, and any thoughts on how much of an impact this could have on your margins, near term and longer term? Thanks..

Well, I think as we said from really from the beginning, certainly, recently is we look at M&A opportunities strengthening our position in the purchasing space with something that we wanted to do. HPSI really from my perspective is an industry leader with industry leading management and systems.

They buy about over $1 billion in annual purchasing, about $1.4 billion. They've been privately held. They've got thousands of largely clients in the healthcare and education space.

And, again, what our objective is, is to take this, combine it with our own purchasing power, which we think allows us to strengthen our purchasing capabilities and ultimately, obviously, add scale immediately, but further exploit that scale over time. So, more to come relative to the upside potential.

But I would say that strategically, this was a very important move for us to strengthen our purchasing capabilities, and one that we really think is a leverageable asset for us..

Your next question comes from the line of Andrew Wittmann. Your line is open..

Great. Guys, maybe I missed it.

Did you quantify what the year-over-year benefit was from your strong playoffs, not just for the quarter but year-to-date, or could you if you didn't?.

Yeah. This is Steve. Within the third quarter, it's going to be less than – somewhere in the neighborhood of 0.5% or so on a year-over-year basis just by having obviously both of the champions who we serve go all the way through, go all the way through. So somewhere in the neighborhood of slightly plus 0.5%..

Year to-date?.

No, no. Revenue on the quarter, in the third quarter we benefited by about 0.5% of revenue year-over-year due to playoff activity..

Yeah. Can you give the year-to-date number too, because I think the baseball season was pretty good for you guys as well..

It would be less than that on a year-to-date basis. We obviously got a slight benefit in the first quarter, and there is no demonstrable benefit in the second half, so certainly less than 0.5% on a full-year basis..

Yeah. As Steve said in his opening comments. I think it's important to note out. Within a given quarter, it can have a little bit of an impact, but I don't think there's ever been a year where the playoff activity from our sports business has had any meaningful impact on our full-year revenue results. So I wouldn't want to have anybody (27:48).

Great. And then I just was hoping maybe you could give a little bit more detail on the drivers of the organic growth between how price trended if you're getting any like-for-like, or deeper penetration from your customers as well as retention versus last year's trends in those areas. (28:10).

North America, International, Uniforms. I think if you look at the composition of that growth, you're going to see about 70% of that growth be our base business performance, both the combination of our ability to sell adjacency selling opportunities in our existing clients plus pricing.

And then you've got the remaining amount that is really driven by our new business performance. So, again, strong performance, we continue to see, obviously, the North America business was really, really good. Education, sports, our parks and leisure business was very strong. In International, we saw really good growth.

China, Korea, Mexico, all double digit; good growth in Europe, Ireland, Spain, Germany. So broad-based, and balanced is the way I would describe it. And then on your retention question, we saw in the quarter year-to-date and expect on a full-year basis to be right in that 94% to 95% retention, which is where we've been historically..

Your next question comes from the line of Sara Gubins. Your line is open..

Hi. Thank you. I was hoping you could give us an update on where you are on the rollout of the key initiatives, just to – sometimes you give us a detail on the percentage that has been rolled out for the key areas like Kronos and others. Thanks..

Well, I think, Sara, as I mentioned in my comments, the big emphasis for us has been this focus on the pilot on Ariba. So I think if you look down the various systems relative to where we are in terms of deployment, we're fairly far along as we've told you in the past on Kronos and PRIMA WEB.

And then if you look at really I would say Ariba is the big one now that is in pilot and the one that we think has a meaningful upside, as I mentioned in my prepared comments relative to our ability to simplify our menu offering, streamline the number of SKUs and ultimately really help us relative to our food costs..

And when do you expect Ariba to be fully rolled out?.

Well, we're just in – we're in pilot right now. So our timing on that will take place as we come out of pilot, we'll make a decision on both the pace of play and the breadth of that rollout..

Yeah..

So more to come (31:05).

That will be certainly be a multiyear rollout across the organization. And there's no reason to expect it will happen faster than over the course of several years..

Got it. And then just a quick follow-up on the HPSI acquisition.

Does that bring revenue that we should be baking in, and where would we see that? Or is it more of a potential margin benefit over time as you consolidate some of the food buying?.

(31:37) This is Steve. I'll answer first. We will record some revenue from this type of business. We have a small purchasing arm today that mainly supports our Canadian business, and so, it does generate some revenue for us really in the form of commissions that we earn on behalf of purchasing for other parts of the organization.

And so, we will record that. I don't believe in the first year, relative to the entire organization, that it will be a material number for us. And then, we would expect certainly it to be margin accretive for us vis-à-vis the average of the entire company.

But again, I would not expect it to be a material number for the company certainly in the very near future. It's a first step for us. It's a really good strategic step for us, but it's, nevertheless, a relatively small one in the scale of the entire company..

Thank you..

Your next question comes from the line of Manav Patnaik. Your line is open..

Yeah. Hi. Good morning, gentlemen. So just a quick question to just try and gauge the level of progress in this quarter. So in the first quarter, I guess, what seemed like a surprise to us was pretty much as expected for you guys.

But the positive surprise this quarter – is it fair to say from your commentary that maybe you guys probably did better than what you had expected to which is why the positive comments on maintaining the long-term guidance?.

No. I would say that the quarter – we were encouraged by the quarter, but as we said all along, there is a lumpy nature to this business. And so, reading any particular quarter and trying to play that through to the upcoming quarter is not something I would recommend anybody do.

But I think the quarter, for the most part, was fairly much in line with our expectations. We saw good growth, we saw good margin expansion, and it was consistent with the financial expectations we had for the business. So I'd say both the quarter and the year-to-date, the business is performing exactly as we kind of planned for and had forecasted..

Okay. Fair enough. And then on the Uniforms side, I guess the energy impact seemed a little bit higher than we had expected. Maybe if you could just help refresh us with what the exposure to energy is in Uniforms, catering, and then how we should think about lapping those energy headwinds..

Well, again, I think as we said in the past, if you take the entire energy sector, it's a fairly small percentage relative to the impact on the overall company. Now, where it will impact us more significantly is in our South America mining business, which obviously affects the emerging market business.

But I think specific to your question on Uniforms, you've seen not only ourselves but I think a lot of our uniform peers talk about how that slowdown has affected sites and therefore jobs and uniform wearers, and that's where I think the sector has begun to feel a bit of a headwind.

All-in, again, I think there is probably some continued pressure in the uniform business as we look to the next couple of quarters. But from our perspective, it's pretty much focused on the energy slowdown..

Yeah. Broadly based across the company. I'd remind you that our entire kind of energy exposure across all the segments of the company is less than 5% of our total business, and then that encompasses both the Uniforms customers, as well as obviously the direct support we provide on the food and the facilities side globally.

So it remains a relatively small portion of the total portfolio..

Got it. All right. Thanks a lot, guys..

Your next question comes from the line of Gary Bisbee. Your line is open..

Hey, guys. Good morning..

Good morning, Gary..

Good morning, Gary..

(36:06) last quarter, I think there was some sense coming out of some of your comments that maybe the margin focus that you've had has impacted the amount of new business you were bidding on, or at least winning and walking away from stuff that didn't – wasn't in line with your long-term goals. Can you help us frame that commentary.

Does that in any way mean that the number of or size of the potential market you're going after is diminished in any way? And I guess really what I'm getting at is an update on the competitive environment, how you're looking at that versus the big players and small players? Any thoughts to help us flush that out. Thank you..

Sure. Well, I think specifically to answer your question, I don't think it's changed the size of the price or the opportunity that we're pursuing, Gary. I think, for the most part, the competitive environment is rational. Certainly, those comments were not intended to change anything relative to our multiyear framework.

I think as we look at the business, what we were trying to say is there's no debate in 2016 that we have a couple of headwinds. One of those headwinds are the strategic decisions that we made to either exit unprofitable geographies or unprofitable accounts.

Second, like every company out there, there's no doubt that a second headwind has just been the global macro environment. I think third is there's no doubt the energy sector has been under some pressure. And so as we talked about our top line focus, we continue to remain very, very positive about the pipeline, which looks very good.

We continue to be confident in our growth prospects going forward. I think what we were trying to say is that our focus will be on profitable growth. And strategically, if forced to choose, and I think there will be isolated instances when we're forced to choose, we will lean into margins and returns, and kind of play our game.

That was really the core of the message that we were trying to send..

That makes a lot of sense. I appreciate that. And then just a follow-up question, Steve, on the cash flow, I think you alluded to your continued efforts on working capital and other things.

Any update there on how you're thinking about cash conversion potential over the next couple of years?.

I think it's consistent with what we've been telling folks, on a medium-term basis we remain – I think we have opportunities in front of us to just consolidate, control over some of the larger working capital leverage.

I think the historical decentralization of the company has put us in a position where we don't have a single source or a single point of contact where we collect all the money that's due to us or where we even disperse all of the funds.

And so as we roll out a lot of the systems that we've alluded to earlier, that will provide greater transparency for us and will allow us to consolidate control over both receivables and payables that we don't have today.

And now having said that, certainly in the short term, a continued general focus on things like DSO, DPO, et cetera, create opportunities for us, and we've made some progress there. And that's partially reflected in the year-over-year improvements we've had thus far in working capital.

So I continue to think we have both short-term and medium-term opportunities for us, but they're going to be, to some extent, dependent on the timing and that we roll out systems and consolidate functions behind the scenes..

Great. Thank you..

Thanks..

Your next question comes from the line of Stephen Grambling. Your line is open..

Hey. Good morning, It's Stephen..

Good morning..

Two quick follow-ups. First, you mentioned that 2017 will largely be in line with the longer term or intermediate term outlook provided at the Analyst Day.

Was acquiring a group purchasing organization part of that outlook?.

It will be part of that outlook in terms of what we expect 2017 to be at the time we get specific about it.

The HPSI acquisition, as I had referenced before, it won't be material to our results in the very near term, so while certainly the results will be incorporated and we get specific about 2017, we're not going to fundamentally say anything different given the onboarding that we're going to have to do, and the relative size of that organization..

Fair enough. And then a follow-up on the comment about the lumpiness, is there anything specific driving the wider range of guidance outcomes for fourth quarter and any additional color you can provide on expectations by segment in the fourth quarter that could go into that? Thanks..

Yes. Stephen, what I would say about fourth quarter is we'll continue to deal with three headwinds I mentioned earlier in Gary's question, right, the strategic actions, the global environment and the energy volatility.

I think the fourth thing that will have a little bit of an impact again in a quarter is last year in the fourth quarter, we benefited from two of our Major League Baseball teams going all the way to the World Series. That is not something that we're forecasting as part of fourth quarter.

So I think it's the three things we've been dealing with all year plus that one that really goes into play relative to the top line in the fourth quarter. But again, we continue to feel encouraged by the way the business is performing, and would expect us to finish the year in good shape and set our sights on 2017 with really good momentum..

Great. Thanks. Best of luck closing out the year..

Thanks..

Your next question comes from the line of Dan Dolev. Your line is open..

Hi. Thanks for taking my questions. I've got two questions. The first is on Uniforms. If you look at the competitive landscape, your biggest competitor accelerated about 20 basis points in their most recent quarter. Another competitor that has a lot of exposure to energy actually saw growth improve by about 50 basis points.

So is the deceleration just energy, or is there something else to be read into that? Thank you..

Well, I think – let me just make sure you understand when I say deceleration. This was purely top line deceleration.

So I think if I look at the sector peers, our performance in the quarter and our performance year-to-date is really right square in the middle of the peer group, with one maybe performing better and a few others performing worse at the top line.

Relative to the margin expansion, we've continued post – if you remember early in the year in Uniforms, we did have some capacity issues that we needed to address on the West Coast.

But I think if you look at third quarter and even as we look at fourth quarter and beyond, that's a business that has continued to see its margins grow 40 or 50 basis points, and that's something we have seen and (43:43) So the slowdown relative to energy is really top-line pressure not middle of the P&L pressure..

Yeah. That's what I meant. I meant from a top-line perspective if there is something more than energy that led to the deceleration, not from a margin (43:57).

No. No. No. Not at all..

Got it. Second question, Steve, in the past you've said that there was perhaps an opportunity to improve the tax rate. Can you give us an update on what you see there? Thank you..

Yeah. Just to reiterate what we've said previously. We, obviously, our tax rate is kind of in the mid-30%s at the moment, and obviously that a lot of our business is domiciled here in the U.S. with the highest marginal rate in the world, generally.

Our medium term opportunity, certainly I think we can do some structuring around ownership of entities and how we tend to finance some of the entities that we have within the organization. That will be a multiyear initiative for us.

So I would not expect any material change in the tax rate in the short term, but I would expect this to show slow but steady progress over the next couple of years, as we continue to take advantage of the rules that do exist today and get a little smarter with how we're organized..

Is there a number that you can quote?.

We've not provided specific guidance as to where we think the ultimate, end state ultimately will be. I mean, the nature of our business, unlike some of the companies you read about in the headlines with significantly lower rates, we don't tend to be – we tend to be a very local business.

As a general rule, we don't move a lot of product or intellectual property across borders per se. And so the opportunities available to us are a little bit less than some other companies they have.

But that doesn't mean there's not a chance for us over time to take several hundred basis points out of that rate, though, again, that won't happen all overnight..

Excellent. Thank you so much..

Your next question comes from the line of (46:00) Your line is open..

Hi, guys. Thank you for taking my questions..

Good morning..

Good morning. The first question is about Yosemite. I wanted to know how that contract is doing relative to your prior expectations of $90 million in the back half, if there are any updates on the contribution that you're expecting..

Yeah. I think, first of all, we're very pleased with the start-up connected to Yosemite. I think it was a seamless transition. I think we continue to develop and bring innovative programs and services.

I think as we look at the performance of the business, while it's pretty much in line, I'd say, if anything, it's trending slightly better than we had expected. I think the majority of that is there wasn't as much disruption at the changeover point.

The traffic has been, from a guest standpoint, has continued to be very, very strong, and our team is really executing well, and I think the parks system is very happy with our performance. So I'd say slightly better than we had expected relative to the performance to-date..

Okay. That's great to hear. Another question is about leverage and capital allocation.

With the goal to get under 4 times by the end of the year, as we inch closer to the target of 3.5 times leverage, how do you start thinking about buybacks, maybe the timing of when we should start to see some buybacks?.

Yeah. This is Steve. I don't think our thinking around that has changed, certainly, again absent strategic transaction our HPSI where we would direct some funds to the primary use of capital in the near term here will remain deleveraging.

I think we've been clear on that, and I don't think that has changed now as we get closer to kind of a mid 3 times sort of a number, we certain will have more flexibility around how we would choose to allocate that capital.

So my sense is if you look at just the rate of EBITDA improvement, in general, and the rate of free cash flow generation, you're probably looking into largely deleveraging-focused initiative into the next fiscal year.

And beyond that, if we achieve the objectives that we set out for ourselves, I think we start to enter into a period where we'll have a little more flexibility around how we deploy that capital, but it's probably 12 months out..

Completely fair. And just one last question to follow up on HPSI. Thanks for providing that color on the size of the acquisition.

Can you give us a little bit of a sense of what proportion of their business has historically been in food service as opposed to non-food clinical products and the like?.

Well, I think the majority of the portfolio is in the food space, although they purchase everything. So they purchase a complete basket of goods..

Okay. Got it. Thanks. I appreciate that. Thank you, guys..

Your next question comes from the line of (49:16) Your line is open..

Good afternoon, everyone – good morning, sorry, for you. Just a quick question, can you please quantify the impact of your strategic action that you have carried on the EBIT margin? And then my second question is regarding HPSI, their profitability.

Can you share with us the profitability level, please?.

I'll answer the second one. We aren't going to disclose any of the financials associated with HPSI. It's not a material transaction for us. So you shouldn't expect us to show very much there. Though we will say the nature of that business, again, consistent with the business that we have internally.

It will be accretive to the overall margin of the organization, but we're not going to be specific as to how we do that.

As it relates to the quarter impact to some of the strategic initiatives we've taken on the productivity front, as we have said several times, our investments – we pull productivity out of the business in terms of the initiatives we have, and then we'll reinvest a portion of that back into capabilities either on the growth side or new business generation.

Our investments tend to be front-end loaded if you're looking at our fiscal calendar.

And so if we are showing about a 50-basis-point improvement on a year-over-year basis, if you just look at the productivity initiatives in the first half of the year, we would have reinvested probably about half of the productivity that we pulled out of the business, so kind of yielding about 50%.

Our yield is up to somewhere two-thirds, 75% of the productivity that we realized in the third quarter as the intensity of some of the investments starts to tail off in the second half of the year. So we're yielding about two-thirds of what we're pulling out of the business in the quarter..

And I think to get to your question on the strategic shift relative to – I'm assuming part of that question dealt with the exit of accounts and geographies.

I'd say the majority of our productivity and margin expansion is really driven by food, labor and, to a lesser extent, SG&A, and I think the overall impact of those actions on our margin today has been fairly minimal..

Thank you very much..

Your next question comes from the line of Jeff Goldstein. Your line is open..

Hi. Good morning..

Hi Jeff..

Hi.

Can you comment on International growth you're seeing across particular industry verticals, and if there's any trend there worth calling out? And then just what are the puts and takes really for what it would take us to see International really accelerate to the top of your 3% to 5% long-term revenue guidance?.

Well, if you look at our performance in International, I'd say a couple of things. Again, the business is performing very consistently with our expectations. You're continuing to see our core markets, emerging markets, as I've said, China, Korea, Mexico grow at double digit. Europe has performed well both in the quarter and year-to-date.

I think if you look at lines of business within our International geography, you really have to go country by country. So, obviously, the South America has been under a bit of pressure given the mining situation connection to the energy sector. Our China business is largely a facilities business in the healthcare space.

It's continued to perform very, very well, and then our business in Europe is largely – it's a little more broadly mixed. But again, you have to look at it within Ireland and Germany. But that's going to be more business dining education. We have a big sports business in Germany. So again, it's almost on a country by country basis.

We'd have to walk you through that. But I'd say our International business continues to perform very much consistent with our expectation with the real pressure point being the mining business in South America..

And maybe the one piece I would add to there, once you – if you start with some of the headwinds we've described for the total company levels, specifically the strategic – a good portion of the strategic portfolio steps that we've taken will provide a headwind specifically against our International portfolio and a good portion of our broad energy exposure beyond the mining is also in the International portfolio and the UK with some of the offshore.

So the International – the base business International was growing where we would really expect it to do which is kind of that mid-single-digits. The headwinds that we've referenced once you get to the segment level are a little bit more disproportionately influencing what we actually show on our international revenue line..

Okay. That's very helpful. Thank you.

And then I just want to ask on the big picture trend, on the shift to outsourcing, is there something you've been seeing recently in your new business wins for example, are you able to provide a rough percentage of the mix of your new business wins that are actually coming from self operated facilities as opposed to just from other large competitors? Just really any color on where your new business wins are coming from would be helpful..

Yes. I don't think there's been any shift relative to the percentage of new business that we pick up from self-op conversions versus competitors. That mix has stayed fairly steady. We're obviously very encouraged by the fact that still over half of this business is self-operated, but there's been no major shift.

I think the facilitators that we continue to see driving some of the outsourcing is – with labor pressures and rising healthcare costs, and just the importance of the experience to the student, the patient, the fan, the employee relative to their food service experience. Those are the things that drive self-operators to consider outsourcing.

And I'd say, as I mentioned in my earlier comments, the pipeline continues to be robust, but no significant shift relative to the mix..

Okay. Thank you..

Caylin, any more questions?.

There are no further questions in queue at this time..

Great. Well, thank you, Caylin, and thanks, everyone, for their time and your continued interest in Aramark, and we look forward to talking to you on our fourth quarter call. Have a great day..

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