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Aramark Corporation (NYSE:ARMK)
Q3 2018 Earnings Conference Call
Aug. 7, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to Aramark's third quarter 2018 earnings results conference call. My name is Christine and I will be your operator for today's call. At this time, I would like to inform you that this conference is being recorded for rebroadcast 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 Kate Pearlman, Vice President of Investor Relations. Kate, please proceed.

Kate Pearlman -- Vice President of Investor Relations

Thank you and welcome to Aramark's conference call to review operating results for the third quarter of fiscal 2018. Here with me today are Eric Foss, our Chairman, President and Chief Executive Officer and Steve Bramlage, our Executive Vice President and Chief Financial Officer. I would like to remind you that our notice regarding forward-looking statements is included in our press release this morning, which can be found on our website at www.aramark.com in our earnings slide deck.

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

Before I turn the call over to Eric, I wanted to mention that our third quarter is a full quarter of AmeriPride and Avendra results. We are quickly losing the ability to distinguish earnings related to the deals as we integrate, but we will continue to track revenue separately for the next few quarters. With that, I will turn the call over to Eric.

Eric Foss -- Chairman, President and Chief Executive Officer

Thanks, Kate. Good morning, everyone. This morning, we reported record third quarter results driven by strong execution across the portfolio. These results were balanced on both top and bottom line and broad-based across sectors and geographies.

Adjusted earnings per share was $0.48 in the quarter, an 18% increase from last year on a constant currency basis. Total company constant currency sales were up 9%. Our legacy business delivered broad-based growth of 4%, driven by both strong net new wins and solid, base business growth. Adjusted operating income was $254 million, up an impressive 20% on a constant currency basis.

Adjusted income margins expanded 60 basis points as we drove productivity improvements and lowered overhead expenses across the business. Building on this momentum, we are affirming our adjusted EPS outlook of $2.20 to $2.30 per share, which would be the fifth consecutive year of double-digit adjusted earnings-per-share growth. We are also increasing our revenue outlook for our legacy business to approximately 3.5% for full-year 2018. We have a clear line of sight to achieving the 100-basis-point margin target we set at our 2015 Investor Day. Net-net we expect another record year of results.

Before we review our third quarter results, let me speak to our unwavering commitment to deliver performance, purpose, and promise. These are the keys to Aramark that distinguish us as an exciting company that delivers value to our shareholders, our customers, our employees, and the communities we live and work. It really begins with our ability and track record to drive unparalleled financial performance like I just highlighted and will discuss in more detail in a minute.

The foundation of our performance is the passion of our 270,000 associates, united by uncompromising values and purpose-driven mindset to enrich and nourish lives every day. Through our commitments to improve health and wellness, by giving back to the communities we serve, and by reducing our environmental footprint, as demonstrated by our recent pledge to significantly decrease single-use plastics across our portfolio by 2022. Taken together, performance and purpose really fuel our promise, which is really about the unmatched position we are creating at Aramark and our very bright and strong future.

Let's now move from the philosophy that guides us to how our relentless focus on our strategic framework is enabling us to deliver these strong results. Our first strategic imperative is accelerating growth. As I mentioned, our legacy business grew 4%, which was broad-based across sectors and geographies. Our U.S. business delivered 3% growth, led by sports, leisure, corrections, education, healthcare, and facilities.

Our international segment delivered 7% constant currency sales growth, with strong performances across all of our regions: Canada, Europe, as well as emerging markets. Revenue increased 39% in uniforms, of which 2% was growth from our legacy uniform business. We've continued to drive solid improvements in overall consumer satisfaction through our consumer-centric product portfolio and relentless obsession with service excellence. Because our business begins and ends with the consumer, we remain laser-focused on meeting the needs across four key dimensions: quality, health, convenience, and personalization. Rising levels of consumer satisfaction are a leading indicator of growth, so they are encouraging results that further bolster our confidence in our future growth prospects.

Today's consumer also is increasingly demanding innovation, so we are continually updating our menus to deliver on-trend options that appeal to their ever-evolving consumer appetites. This quarter, we expanded our relationships with FarmLogix to increase local and sustainably sourced products. Consumers also crave the basics, like a great pizza. Today, we're announcing our exclusive partnership with Oath Pizza. Oath has a cult following for its signature pizzas that feature ethically sourced ingredients. We are delighted to introduce this brand to consumers across our portfolio.

Of course, innovation extends far beyond our menus. We're also enhancing our brand strategy in both core and premium offerings, while also creating new technology solutions that improve speed of service. In fact, we partnered with Apple to launch Business Chat at Citizens Bank Ballpark, home of the Philadelphia Phillies, that allows fans to order from their seats so they won't miss a minute of action on the field.

We look forward to discussing our enhanced brand strategy and innovative technology solutions at our Investor Day in December. With regard to health and wellness, I'm proud to report that our Healthy for Life 20 by 2020 campaign with the American Heart Association was awarded North America's highest honor for corporate social initiatives and cause marketing, and continues to track above target levels for our menu commitments and consumer engagement. We've also joined the Hispanic Heritage Foundation and CVS Health to support develop of smart student health and wellness centers in K-12 schools that improve student health and academic outcomes.

Looking ahead, I'm pleased with our growth momentum, our solid mid-90s retention rates, and strong broad-based new business pipeline. As I mentioned, we're leveraging this momentum to increase our full-year '18 sales outlook for our legacy business to approximately 3.5%.

With regard to our second objective, activating productivity, our adjusted operating margins in the quarter increased 60 basis points on a constant currency basis, driven by strong base productivity of 80 basis points. This was offset by 20 basis points of reinvestment in technology and capabilities. Looking ahead to the fourth quarter, we remain confident in our ability to deliver productivity enhancements offset that inflation and to delivering on our 100-basis-point AOI margin target.

Turning to our third objective, attracting the best talent. We've once again welcomed a new class of recent college grads to Aramark as part of our Accelerate to Leadership program. This class is almost 70% diverse, which supports our efforts to develop diverse leaders that drive results. I'm also proud to report that Aramark was recently named one of the best places to work for disability and inclusion, with a perfect score for the second year in a row.

Finally, turning to our fourth objective, achieving portfolio optimization. We're pleased with our integration progress on both acquisitions. We quickly have combined our Aramark and Avendra procurement functions and we already are leveraging Avendra's purchasing capabilities across all of our businesses. We've made significant strides in combining our legacy uniform business with the AmeriPride operations. We've reduced redundant overhead expenses, and we've begun to rationalize our plants and warehouse locations. All of our detailed planning efforts for both deals have confirmed our original synergy targets, which we are confident that we will achieve on schedule.

Before closing, I want to thank all of our 270,000 team members who share our common purpose in delivering service excellence every day to our customers around the world. Let me also reiterate my confidence in Aramark's future growth prospects. There are several reasons for that confidence. The first is that we have established strong business momentum, as evidenced by our solid, broad-based top and bottom line results across geographies and businesses in the quarter that delivered double-digit AOI and EPS growth, as well as strong margin expansion.

The second reason is our proven track record. 2018 will be a record year with top line growth of approximately 3.5% within our long-term framework. We have a clear line of sight to achieving our 100-basis-point margin target that we established at 2015 I-Day, and this will be our fifth consecutive year of double-digit adjusted EPS growth, making us one of only a very few companies in the Fortune 500 to hold that distinction.

Third is that we have two strategic and financially compelling acquisitions that add scale and improve our competitive position with integration progressing well and synergy capture on track that will unlock value going forward.

Finally, a bright future, given the large, growing market with strong outsourcing potential, our established and continuing to enhance our right to win across industry verticals, as well as our proven and resilient business model, and our position of solid financial flexibility.

With that, let me turn the call over to Steve.

Steve Bramlage, Jr. -- Executive Vice President and Chief Financial Officer

Thanks, Eric, and good morning, everyone. Let me begin with the Q3 sales reconciliation. Sales on a GAAP basis were $4 billion in the quarter, an increase of 11%, with currency tailwinds at $52 million, our roughly 2%. This was due to the U.S. dollar broadly weakening against our basket of currencies during the quarter on a year-over-year basis.

Constant currency sales grew by 9%. This increase was composed of 5%, or roughly $185 million from the acquisitions and a majority of that relates to AmeriPride, with the remaining 4% growth generated in our legacy business. Our results did benefit from the timing of the Easter holiday, as we had indicated, and that had roughly a 50-basis-point positive impact in the quarter on the total company. We do not expect currency to be as favorable for us the fourth quarter.

Adjusted operating income was $254 million in the quarter, and that's a 20% increase on a constant currency basis. AOI margins rose 60 basis points, on a constant currency basis to 6.4%. As Eric mentioned, we remain quite focused on driving in-unit food and labor productivity improvements. We've also been successful in further lowering our overhead expenses and all of this sets us up very well for strong expansion in the fourth quarter, where we should also have favorable comparability due to the natural disasters in the prior year.

As a reminder, those events had about a $17 million negative impact on AOI. That was disproportionately concentrated in our uniforms business. This equated to a 45-basis-point negative impact on consolidated AOI margins in the fourth quarter of 2017. As Eric mentioned, we have a very clear path to achieving our 100-basis-point AOI margin improvement target versus our 2015 results.

Adjusted EPS increased to $0.48 or 18% on a constant currency basis, as the 33% benefit from the higher AOI and another 10% benefit from a lower tax rate more than offset the negative impact from higher interest expense. The net dilutive impact from Avendra and AmeriPride deals in the quarter was approximately $0.04 per share. This is reflected across several of the reconciling items in the adjusted EPS waterfall.

I also want to mention that during the quarter we extended the maturity of our accounts receivable facility by 2 years to 2021, further enhancing our already strong financial flexibility. We increased the average size of the facility while also decreasing the pricing on what's already our lowest cost of finance. In addition, the company lowered the pricing on over $3 billion of term loans. This lower pricing will help further minimize our already very low exposure to future interest rate increases.

Now, turning to the full-year outlook. We now expect 2018 revenue growth in our legacy business to approximate 3.5%. We will actually report a larger percentage increase of the company level, of course, due to the acquisitions. We're also affirming our 2018 adjusted EPS outlook of $2.20 to $2.30. The midpoint of $2.25 represents approximately a 15% increase versus 2017. As Eric mentioned, that would be the fifth consecutive year of double-digit adjusted EPS growth.

Furthermore, we're affirming our annual free cash flow outlook of greater than $400 million. Now, as I mentioned last quarter, 2018 operating cash flow is negatively impacted this year by a variety of merger-related expenses and one-time seller obligations that we agreed to pay in exchange for dollar-for-dollar reductions in our cash purchase price. Taking these approximately $135 million of one-time factors into account, our full-year free cash flow conversion would be at least 90% of the midpoint of our EPS range, which is consistent with what we believe this business should be able to generate annually.

Finally, one last comment on the full-year free cash flow expectation. While we're still evaluating the impact of the combination of multiple balance sheets and the seasonality of working capital in the companies that we acquired, it's possible our reported free cash flow could be mostly more positively or more negatively impacted than our current estimates due to changes in working capital as a result of consolidating the acquired businesses at year-end for the first time.

Under any scenario, we continue to expect to drive the leverage ratio below 4.5X by the end of the fiscal year. Our previously communicated assumptions regard the impact of tax reform and M&A remain unchanged. Also, there are no changes to our assumptions around the tax rate, interest expense, or our legacy business capital spending.

Now, as we close a stellar third quarter for the company, we are looking forward to closing a very strong year for Aramark. 2018 will also represent the closure of an exceptional financial performance over the past 3 years, as we strive to deliver our commitments from our 2015 Investor Day. This company will be much more strategically competitive than when we started 3 years ago. Partially because of our recent compelling acquisitions of Avendra and AmeriPride, but also because of the tremendous progress in our innovation and product portfolio, in our consumer-centric capabilities, and our overall focus while we have sustainably improved the cash flow generation of the company and driven consistent double-digit adjusted earnings growth in spite of a variety of challenges.

We retain significant financial flexibility in a very different financial market environment than what existed in 2015. And, of course, our profitability as an organization is going to be substantially higher. I fully expect that the constructive marketplace and our own strong momentum will continue over the next several years. Not only do we still have significant opportunities to drive productivity improvements in our legacy business, but we will also generate sustainable shareholder value through synergy capture as we continue to integrate Avendra and AmeriPride.

When I further consider the ongoing benefit of tax reform and the fact that we're going to be deleveraging, I like our prospects to drive sustainable shareholder value over the next several years. We're looking forward to discussing how our strategy will enable us to deliver on our next set of financial targets at our Investor Day on December 11th of this year. With that, I'll turn the call back over to Eric.

Eric Foss -- Chairman, President and Chief Executive Officer

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

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you have any question, please press * and 1 on your touchtone phone. If you wish to be removed from the queue, please press the # sign or the # key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press * then 1 on your phone now.

Our first question is from Hamzah Mazari of Macquarie Research. Please go ahead.

Hamzah Mazari -- Macquarie Research -- Analyst

Good morning. The first question is just I was hoping if you could sort of walk through any impact from Yosemite in terms of the wildfires and impact of any shutdown or disruption there? I know you had flagged a number of years ago that it's sort of a $45 million revenue per quarter contract, so any color there would be helpful.

Eric Foss -- Chairman, President and Chief Executive Officer

Sure, Hamzah, good morning. It's Eric. I'll start and let Steve jump in and add his thoughts as well. First of all, let me just start with our thoughts are obviously with everybody in California that's been impacted by the fires out there. As it applies to our operations, anytime we deal with anything like this, priority No. 1 for us is really the safety of our guests, the safety of our employees. The good news is we were able to get everybody out and out safely.

Relative to the current situation, we continue to monitor it day-to-day with the National Park Services department. You know from following us, natural disasters, while they're very unfortunate, I think we have become accustomed to dealing with these situations. I would note that we do have insurance for these types of events. I think from where we sit today and what we know today, the EPS guidance that we gave would be able to absorb the impact from Yosemite.

Again, I think it's important for everybody to keep in mind, you hear me talk a lot about the quarter-to-quarter lumpiness of this, and to not get yourself trapped into any kind of analysis or projections on what the impact of that might be. I would say the same thing applies to these types of events. Don't let this distract from the bigger picture here around what's happening relative to our track record that Steve and I referenced, and really what is a really good time for Aramark, just a really good strong, broad-based performance of our business across geographies, sectors, lines of business. Steve, do you want to add anything?

Steve Bramlage, Jr. -- Executive Vice President and Chief Financial Officer

Yeah. Clearly, we're not prescient, so we don't exactly know what the ultimate impact will be financially for us. I think prior to the severity of the California fires, we probably would've actually nudged the range up a little bit from an earnings standpoint, but I think in light of the uncertainty that's out there, we felt it best just to stand pat with where we are. I firmly believe that based on what we know now, our guidance range for earnings and the revenue number for the year reflect what we know around the situation at the park.

Hamzah Mazari -- Macquarie Research -- Analyst

Very helpful. Just second question, maybe for Steve, any other sort of data points you can point to that gets you comfortable with the fiscal Q4 margin ramp? I know you spoke about the hurricanes, but anything else you can touch on, whether it's sort of productivity, synergies, anything else? Because the ramp is much bigger relative to historical seasonality.

Eric Foss -- Chairman, President and Chief Executive Officer

Yeah, it's Eric, Hamzah. I'll start and let Steve add his thoughts again. First of all, we very much knew what the fourth quarter lap was going to look like. So, to the point that you made, if you look at the Q4 one-offs impacted by the hurricanes last year, that math is about 45 basis points in the fourth quarter. The way the math works is if you look at what's happened each and every quarter really all year long, we've had very solid base productivity and performance each and every quarter. That's some of the things Steve talked about in his comments around our obsession around food, labor, in-unit, as well as above-unit SG&A.

So, you saw that play out in first quarter, second quarter, and third quarter. The difference between the flow-through, particularly the first half of the year is that was offset by planned investments, a combination of start-ups, investments in capability, and the fact that we were lapping the uniform price investment. That fell off at the end of second quarter, and so the flow-through you saw in third quarter was indicative of that. As we get into fourth quarter, I also think you'll see some of the investment spending. As we get later in the year, it's typical for the investment spending to lessen. I think if you take what we delivered, consider the 45 basis points of weather overlap in fourth quarter, and then investments lessening slightly, that's what gives us a lot of confidence.

Again, I want to give our team broadly a lot of credit. If you look at not just this year but the last several years, our track record on productivity and margin has been in improvement has been really unmatched in the industry. I want to make sure they get full credit for that. Steve?

Steve Bramlage, Jr. -- Executive Vice President and Chief Financial Officer

Maybe I would add just stepping back because obviously we know this is a quite keen area of focus for folks. I would reiterate the points Eric made around the math. We know it's over a 100-basis-point improvement in the fourth quarter and I think the reality is once you make the adjustments for the weather and the AUS pricing, you're really looking at a very similar level of margin improvement that we already experienced in the third quarter, and you're looking for a very similar level of margin experience in the fourth quarter that we've had the last couple of years.

I think we are exactly where we expected to be in terms of the margin journey this year. We certainly have not tried to message anything differently there. I feel very good because the underlying performance required to deliver those numbers is so consistent with what we've already done and already experienced. I feel very good about our prospects of getting it across the line.

Hamzah Mazari -- Macquarie Research -- Analyst

Great, thank you.

Operator

Thank you. Our next question is from Toni Kaplan of Morgan Stanley. Please go ahead.

Toni Kaplan -- Morgan Stanley -- Analyst

Hi, good morning. I thought food service's international growth was very strong in the quarter and I was wondering if this was a result of some competitive wins. I know you said that growth was broad-based across a number of vertical and geographies, but could you give us any color on which might have been particularly strong? Thanks.

Eric Foss -- Chairman, President and Chief Executive Officer

Sure. Well, as you mentioned Toni, we were very pleased with the 7% revenue growth. It was solid growth across geographies. We saw good growth in Canada. I think both in Europe and emerging markets we saw high single-digit growth. We had a really good quarter in Germany, another strong quarter in China. So, fairly broad-based across our international footprint. Again, about half of that was base business growth and the other half was new business wins.

Toni Kaplan -- Morgan Stanley -- Analyst

Okay, great. On margins, I was thinking international margins would be a little bit higher just because of the Easter timing. Could you give us a sense if there were maybe some higher start-up costs related to the wins in the quarter. And similarly, in the U.S., if you could just give us an update on what you're seeing in terms of labor and food cost inflation and if they're having any meaningful impact on profitability? Thank you.

Eric Foss -- Chairman, President and Chief Executive Officer

Sure, I'll start with the latter and ask Steve to comment on your first question. I think relative to inflation, I think we have seen kind of an uptick in labor inflation. The good news is we were very proactive and we saw that coming and we were able to deal with it very proactively upfront in the year. Again, we feel comfortable with our ability to deal with a variety of inflationary environments based on the pricing power, as well as a fairly comprehensive development approach to productivity.

As we look at the full-year margin, to your question on international, we will see margin growth across our North America business, across our international business, and across our uniform business. We feel good about not just in total, but how each of the sectors have been able to deal with a more labor inflationary environment.

Steve Bramlage, Jr. -- Executive Vice President and Chief Financial Officer

I think, Toni, I would add by my math, our AOI and international was up over 20% and there's no deal benefit in the international numbers and our margins were up almost half a percent, almost 50 basis points year-over-year. I think that's darn good performance coming out of that segment. It certainly has met our expectations of what we thought it should deliver in the quarter.

Toni Kaplan -- Morgan Stanley -- Analyst

Thank you.

Operator

Thank you. Our next question is from Manav Patnaik of Barclays. Please go ahead.

Greg -- Barclays -- Analyst

Hi, this is actually Greg calling in. Just wanted to ask about your confidence in getting to the 3.5% organic growth with Yosemite, and it seems like on the baseball side you've had weaker attendance at some of the stadiums. So maybe you can just talk about some of the areas that have been upside surprises so far in the year and how you're thinking about that?

Eric Foss -- Chairman, President and Chief Executive Officer

Sure, well, let me make a couple of comments. I think related to growth, there's a series of things we've done strategically and continue to do executionally, Greg, to allow us to raise, as you referenced, our full-year revenue growth to about 3.5%. I think first and foremost you've heard us talk a lot about how encouraging some of the leading indicators of growth were. And that really centers around consumer satisfaction and the heavy lifting we've done on branding, the overall customer experience, and in particular, what we do to deliver a quality food offering, conveniently available, personalized to their needs, and increasingly healthy, fresh, better for you.

We feel really good about that work. We'll share a lot more work on the branding front when we get to the Investor Day in December. But I think all of that has set us up, and obviously has led to strong retention for the year, really good new business results, and a really solid base business performance across almost every one of our lines of business.

Related to baseball, again, let me make a couple of points there. First of all, our sports business is going to grow and is growing this year. As it applies to baseball, the real driver of anything that happens on the attendance front is really all driven by team performance. As you look at our baseball performance right now, in addition to what happens on the fan attendance side, it's very important to watch the per-cap metric and we're seeing our per-caps up broadly across baseball in almost every ballpark we do business in.

If you look at what's happened in total, I think if you take our teams, about 60% of our teams are seeing revenue growth year-over-year, about 40% are down low single-digit. Again, most of that driven by team performance. Again, I would just say don't let the baseball focus distract from the bigger picture here, which is we have the ability, based on the diversity of the portfolio, to deal with declines in attendance based on team performance or other dynamics and I'd go back up to just kind of the broad-based across sector, across geography, across line of business growth momentum and overall momentum we have right now.

Greg -- Barclays -- Analyst

That's helpful. Maybe hitting on the consumer experience as well as the potential increased labor inflation. Just wondering if that changes how you think about investments on some of the consumer-facing technologies and self-help kiosks and things like that?

Eric Foss -- Chairman, President and Chief Executive Officer

Well, really, again, we like to use the saying that all of our decisions start and end with the consumer and the marketplace sets the table. I think in particular as you think about the consumers' orientation around convenience, anything we can do to take out activities that get in the way of that and allow them either increased speed of service or increased product portability, those are things that really drive how we think about not just the product portfolio, but the technology solutions available to us to do that. I referenced something we're testing here in Philadelphia with the Phillies with Apple that certainly does that on the sports side.

Greg -- Barclays -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question is from Andrew Steinerman of J.P. Morgan. Please go ahead.

Andrew Steinerman -- J.P. Morgan -- Analyst

Hi there. I wanted to ask the specificity of that 3-year goal. So, I wanted to make sure Aramark is on track to reach the 7.15% operating margin goal for this fiscal year without considering Avendra and AmeriPride.

Steve Bramlage, Jr. -- Executive Vice President and Chief Financial Officer

Let me start. The answer is yes. We will absolutely measure our success against that metric with the business portfolio that we had at the end of 2015, which would obviously exclude the two deals. We will do our best to ensure people clearly see an apples-to-apples comparison without the two deals included in them.

Andrew Steinerman -- J.P. Morgan -- Analyst

Okay, thank you. My follow-up is about the EPS guide. By reiterating the full-year EPS guide, it's just kind of a broad range for the fourth quarter on EPS where on revenue you were a lot more specific. I just ask your philosophy there on keeping the full-year range, which implies a big range for one quarter.

Steve Bramlage, Jr. -- Executive Vice President and Chief Financial Officer

Yeah, sure. Listen, I won't totally regurgitate what we said on Yosemite. Obviously, we would have otherwise narrowed it and raised it a little bit and felt it's best just to stay where we are. I believe we had communicated the last call that our most likely outcome was going to be somewhere around the middle of that range, give or take a penny either side. I don't think that has changed. I fully expect us to be somewhere around the middle of the range as we sit here right now.

Andrew Steinerman -- J.P. Morgan -- Analyst

Makes sense. Thank you.

Operator

Thank you. Our next question is from Najet El Kassir of Berenberg. Please go ahead.

Najet El Kassir -- Berenberg -- Analyst

Good morning, everyone. Could you please quantify the impact from Avendra and AmeriPride on your EBIT?

Steve Bramlage, Jr. -- Executive Vice President and Chief Financial Officer

This is Steve. The answer is no. What we will be communicating is we've quantified the revenue impact for those deals in the quarter. It's about $185 million. It's actually included in our disclosure. We estimate what the EPS impact will be. They've been about $0.08 a share dilutive so far in the year. I think that's a pretty good run rate for the fourth quarter. We said somewhere between $0.10 and $0.15 dilutive and I think we'll probably be about in the middle of that by the time we're finished.

As it relates to the margin impact, the profile of Avendra is that ultimately Avendra is going to be an accretive transaction for us because of the nature of their business. AmeriPride will come in as a dilutive transaction for us just because of their historical level of profitability. I would just take you back to Kate's opening comments where we're merging these businesses very quickly and so our ability to fine tune exactly what side of the fence a particular synergy dollar, etc. falls on is already becoming very gray. We will stick with making sure people understand revenue and continuing to get a sense of what the EPS impact is.

Najet El Kassir -- Berenberg -- Analyst

Thank you. Can I just have a quick follow-up regarding your top line organic growth, which was 4% in Q3. You mentioned that you had pretty strong wins and base growth. Could you please quantify those, respectively?

Eric Foss -- Chairman, President and Chief Executive Officer

I think if you look at the 4% growth we saw in Q3, the way to parse the components of growth would be about half of that growth was driven by strong new business wins and about half of that good was driven by good momentum across our base business.

Najet El Kassir -- Berenberg -- Analyst

Thank you very much.

Operator

Thank you. Our next question is from Dan Dolev of Nomura. Please go ahead.

Dan Dolev -- Nomura Instinet -- Analyst

Thanks so much for taking my question. I've got two questions. The first one is I saw that the [inaudible] has increased dramatically in the second quarter year-over-year, but it also goes versus what you did in the first quarter. Can you maybe elaborate on that? And then I have a follow-up.

Steve Bramlage, Jr. -- Executive Vice President and Chief Financial Officer

I'm presuming, Dan, it was a little bit unclear that you're referencing the change in stock-based compensation that company the reports.

Dan Dolev -- Nomura Instinet -- Analyst

Correct.

Eric Foss -- Chairman, President and Chief Executive Officer

Okay. So, there has been no change in our granting pattern related to stock broadly across the organization. We generally grant somewhere in the neighborhood of $70 to $75 million of value each year. That is unchanged.

What we did in the quarter as part of our commitment to strong performance-based alignment and compensation and broad, good governance, a large part of our long-term incentive plan equity grants have a performance-based component and performance shares. Half of our grants are performance shares. And so the grants that were made in 2016 and 2017 have EPS metrics associated with those and so, based on where we currently are forecasting, I expect those performance share grants will pay out at higher levels than we originally thought they would because we've had a stellar run of earnings-per-share growth performance.

And so we did true up several years worth of performance share payout accruals in the quarter and the change in stock-based comp is exclusively due to that. So, again, no change in granting and because of our alignment with performance-based payout in our equity plan, we have trued those up.

Dan Dolev -- Nomura Instinet -- Analyst

Okay, great. Thanks for elaborating. My follow-up is on the uniform business. I know you've expressed commitment to the uniform. But now you seem to be on track to making your margin target. Is there any reconsideration on whether or not you really need to be in that business? Obviously, the sum of the parts here is very compelling for a tax-free spin-off. Thank you.

Eric Foss -- Chairman, President and Chief Executive Officer

No, Dan, we've declared this a business we love. The reason we love it is it's got attractive margins, strong cash flow. We feel it's a business that can be accretive both in terms of growth and profitability. We've had very, very strong performance out of that business until really 2017 when we made the price investment that we talked about to defend our competitive position. But we couldn't be more excited about this business, which is why we put the capital to work that we did with the AmeriPride deal. We're very pleased with what we see. AmeriPride has a ton of talented people. It definitely adds scale to our business. It extends on geographic footprint into Canada on the uniform side. It just gives us more scale. It's a business we love and is here to stay.

Dan Dolev -- Nomura Instinet -- Analyst

Great. Thank you and congrats again.

Eric Foss -- Chairman, President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from Shlomo Rosenbaum of Stifel. Please go ahead.

Shlomo Rosenbaum -- Stifel Nicolaus -- Analyst

Good morning. Thank you for taking my questions as well. I want to follow up on something that Andrew touched on. The 100-basis-point improvement that you talked about at Analyst Day. On the one hand, you're pointing to that being on the base business and on the other hand you're saying it's becoming increasingly hard for you to separate the margins from the acquisitions. Just to be clear, the 7.15%, are you expecting this year to come out above that or below that on an all-in basis after you factor in the acquisitions? How are you going to present that in a way to kind of show what's going on?

Eric Foss -- Chairman, President and Chief Executive Officer

I think the way we've presented it and reported on it and talked about it all along is on the base business. Our accounting and our math that we talk about each and every quarter, this quarter being a good example, right? When we talk about 60 basis points of margin improvement, that is on the base business. And we've talked about that each and every quarter and been very specific to our base business performance.

So, there has been no mixing or matching of anything related to the two deals since we bought the business. There won't be in fourth quarter. Therefore, to Steve's point earlier, between when we gave the guidance in 2015 and 2018, there won't be any impact of anything other than the base business. There will be nothing in there.

Steve Bramlage, Jr. -- Executive Vice President and Chief Financial Officer

I think the practical reality, just because of the timing of the transactions and the various things like amortization, etc. that goes against us, I don't think we're going to have a significant impact on reported margin from the deals anyways. I think you'll get to the same impact. The only thing that could move a little bit would be currency. The currency impact, we'll have to obviously true that up vis-à-vis the currencies that existed at the time we put out guidance. But it should be very close. The reported number should be a pretty good comparison to the starting point.

Eric Foss -- Chairman, President and Chief Executive Officer

Maybe just to take us back up to kind of a higher level, I think it's not just since 2015. You could really go back to 2012 and certainly 2013 when we did the IPO. I think the strategic significance of this, just to make sure it doesn't get lost in the shuffle here, is to really go back and to see what has been really industry-leading margin improvement that has taken us from a pretty significant competitive gap to basically almost closing that gap entirely.

And so, I just thing strategically and financially, but certainly strategically, it just puts us in a very different position and that's why you heard us, since we went public, talk about the game we were trying to play. The game wasn't necessarily the same game as others, but it was a very important priority for us. I think the fact that the organization will achieve this is really something to be commended.

I think one of the things that you have heard Steve and I talk about and certainly have heard us reiterate today is as we look at this business, we have now strategically repositioned it. We've got an excellent track record of results. We've got very strong business momentum. We've got two financial accretive acquisitions that we're in the midst of integrating. And we have a very bright future as we go forward. So, I just want to make sure that as we talk about the margin, and the margin is a detailed business, right? That's why Steve and I assess about it each and every day, and have the organization doing the same. But it really does, I think, need to be called out how we've repositioned this business to be much stronger today than it was 3 years ago or 5 years ago.

Shlomo Rosenbaum -- Stifel Nicolaus -- Analyst

Great. Thank you for the color. The follow-up I wanted to ask you a little bit more about was the commentary about the free cash flow. Reiterating greater than $400 million, but giving more variability around that, could you just give us a little bit more detail on what's creating some of that variability? Why the $100 million of the assumed obligations went to $135 million? And just how we're supposed to be thinking about that? The implication is that you should have close to a $700 million free cash flow quarter and it's a big jump. If you could just give us a little bit more color on what's going into your calculation.

Steve Bramlage, Jr. -- Executive Vice President and Chief Financial Officer

Yeah, sure. It is indeed a big jump from where we ended the third quarter. There's no doubt about that. A couple of timing-related things. Let me just start there. First and foremost, all of our merger-related payments are already out the door, so you're not going to have those in the fourth quarter. The timing of capital spending, we are about $100 million ahead in terms of having spent $100 million more through the first three quarters of this year than last year. That is on purpose. We spent a lot in the fourth last year and we have tried to more equitably distribute that. We will not have the same year-over-year amount of capital spending going out the door.

From a working capital standpoint, the calendar has been a little bit challenging for us in the second and third quarter. Third quarter specifically, whereby the end of our quarter is not actually the end of the calendar month. The months falls on weekend so it becomes a little more difficult to make sure our DSO management is where we would like it to be. I do expect a significant improvement on that particular metric as well.

Then finally, we will really, from a cash flow standpoint, start to see the benefits of tax reform and the lower tax-related spending coming through in the fourth quarter. Just the timing of how we make estimated payments and we file returns is going to give us a really significant bump in the quarter. I think that's what's giving us the confidence of where we ultimately will land. But I acknowledge, we need certainly need a strong fourth quarter performance.

Then on the uncertainty question around the working capital, it's purely a function of we have two new significant balance sheets that we acquired mid-year that have some seasonality to them. That's different than what we've had previously. I just want to make sure we acknowledge that the physical combination of all of these balances and the working capital balances, it'll be the first time through for us. I feel very good about delivering greater than $400 million, but I think our margin around the working capital outcome as it prints is just going to be a little wider the first time through.

Shlomo Rosenbaum -- Stifel Nicolaus -- Analyst

Okay. Thank you.

Operator

Thank you. Our last question is from Gary Bisbee of Bank of America Merrill Lynch. Please go ahead.

Gary Bisbee -- Bank of America Merrill Lynch -- Analyst

Hey, guys. I'll start just following up on that last one. Is there any significant tail in terms of the merger-related costs and integration charges and whatnot into next year? Or should we think that the cash flow should more likely approximate that conversion that you discussed earlier? And as part of that, that 90% that you mentioned, should we think of that as a longer-term yardstick to think about or is there still room to improve that over time and you work through whatever it is, working capital, etc.?

Steve Bramlage, Jr. -- Executive Vice President and Chief Financial Officer

I personally view the 90% yardstick as at at-least kind of a number. Yes, we can improve on that but I think we certainly should have that as a minimum expectation of what the business currently should be able to generate. Then on the one-time aspect. The $135 million of really purchase price adjustments, because of the way we structured the deals, those will not repeat. Those are a 2018 phenomenon. Those won't happen in the fourth quarter and they won't happen in 2019.

We also continue to have, though, integration-related spending to combine the two deals into Aramark. We talked about over the next 3 years, we'll have $135 million or so. It happens to be the same amount, but it's a different $135 million of integration-related investment. We'll continue to make those investments. Year-to-date those investments have been a little closer to kind of the $50 million number, so those will continue. But the $135 million that we reference in the press release, which is just a function of how we structured the deal, that will not repeat in the fourth quarter, nor will it repeat in 2019.

Gary Bisbee -- Bank of America Merrill Lynch -- Analyst

Okay, great. Then, I guess, more importantly, both of you stressed how strategically much stronger a position the company is in today versus a few years ago. What does that mean practically in terms of how you run the business day-to-day? Does this mean when you're competing for new business, you're better able to stack up against Compass or someone? What are the implications of the stronger margins and the strategic position of the business today? Thank you.

Eric Foss -- Chairman, President and Chief Executive Officer

Gary, it's Eric. I think it's a variety of things. When I say we're in a stronger position, it certainly is indicative relative to the margin structure in that we have a more profitable business and therefore it allows us to compete in a different way than we have maybe historically. I think the addition though of stronger position affords us the ability to invest. Certainly, our portfolio is in a stronger position relative to the brands and products that we're offering. Far more innovative, much higher quality, much healthier.

My point is that based on the hand we were holding at the time, it was very important for us to prioritize improving our margin structure. When we get to Investor Day in December, we'll talk a lot more about what that next changer looks like, but I would tell you that it's a chapter that Steve and I, and I think the organization very much are looking forward to pursuing. I think it's indictive, given the results we just put up, that our strategy is working. We're excited by the business momentum that we have right now.

Gary Bisbee -- Bank of America Merrill Lynch -- Analyst

Great. Thank you.

Operator

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

Eric Foss -- Chairman, President and Chief Executive Officer

Thanks, Christine. Thanks, everybody, for your time and interest in Aramark. We very much look forward to talking to you at the end of fourth quarter and hopefully seeing many of you at our Investor Day in December. Thank5 you.

Operator

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

Duration: 57 minutes

Call participants:

Eric Foss -- Chairman, President and Chief Executive Officer

Steve Bramlage, Jr. -- Executive Vice President and Chief Financial Officer

Kate Pearlman -- Vice President of Investor Relations

Hamzah Mazari -- Macquarie Research -- Analyst

Toni Kaplan -- Morgan Stanley -- Analyst

Greg -- Barclays -- Analyst

Andrew Steinerman -- J.P. Morgan -- Analyst

Najet El Kassir -- Berenberg -- Analyst

Dan Dolev -- Nomura Instinet -- Analyst

Shlomo Rosenbaum -- Stifel Nicolaus -- Analyst

Gary Bisbee -- Bank of America Merrill Lynch -- Analyst

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