Q4 2019 Earnings Call
Good morning, and welcome to our remarks fourth quarter and full year 2019 earnings results Conference call. My name is John all of your operator for today's call.
At this time I would like to inform you that this conference is being recorded or rebroadcast and not all participants are in listen only mode.
We will open the conference call for questions at the conclusion of the company's remarks.
And that when I'll turn the call over to police Casella, Vice President Investor Relations and corporate Affairs.
So please proceed.
Thank you and welcome to Aeromar fourth quarter and all your fiscal 2019 earnings conference call and Mike.
This morning, we have to class or hearing from our new Chief Executive Officer, John Stilmar, well, it's Steve Bramlage, our executive Vice President and Chief Financial Officer.
As a reminder, I notice regarding forward looking statement is included in our press release this morning.
He found on our website.
Earnings line.
During this call we won't be making comments on our foreign bucket.
Actual results may differ materially from those expressed or implied that the results are various risks uncertainties and important factors, including those discussed in the rest factored M. DNA.
Other sections of our annual report on Form 10-K .
Our other.
Filing.
Additionally, we will be discussing certain non-GAAP financial measure a reconciliation of these items to U.S. data can be found in this morning Cross really well on our website.
Results are affected by accounting rule changes as well changes to the definitions of adjusted operating income and adjusted net income, which we began to utilize in the first quarter.
Please refer to the Apprenda and the earning five material for a detailed reconciliation.
I'll now turn the call over to John .
Thank you please and thanks to all your for joining us today to discuss era, Mark our fourth quarter and for your results as well as our street, our key strategic areas of focus going forward.
As you know I returned to Arrow, Mark nearly 45 days ago CEO after spending over 23 years, what the company earlier earlier in my career.
Today, there is truly nowhere I would rather be different my passion for the business combined with a many promising opportunities I had asked my team and I offer a path forward for the company that is focused on elevating culture accelerating revenue growth and unlocking the economic potential other business.
I expect our commitment in progress on these three areas will be increasingly evident as the year unfolds, reflecting on waiver Angola positioning earmark for a strong and value creating future.
Before Steve reviews, the specific drivers for our year end performance I would like to provide you with a few initial insights and observations. So it's like a 10 year my immersion with our clients and employees many of whom are familiar faces.
I've spent time in the field over the past weeks and it is clear that we had a lot of talented people working for the company who are committed to doing the right thing for our clients customers and fellow employees.
I do believe there is ample opportunity to reinvigorate our field leaders well the sharper focus on hospitality and customer service.
This translates into empowering our front line to serve our clients ever changing needs by providing differentiated and customized experiences while realizing sizable benefits from organizational scale.
Recognizing how important it just to effectively manage this balance one of my first priority is supposed to appoint a highly respected leader in global supply chain and group purchasing I'm very pleased but John or a bono have returned to era Mark after decades of prior service with a company.
Got it as an industry expert with deep experience strong relationships with our field teams suppliers distributors and client partners complementing the impressive team we already have in place.
Together, we will partner closely with our senior frontline leaders to evolve our supply chain strategy.
Answering the company's growth productivity and product quality initiatives.
I commend the organization for tripling, our procurement scale growing the portfolio and driving free cash flow to both strengthen the balance sheet and enhanced financial flexibility.
The board the leadership team and I firmly believe but is that now is the time to pursue a more accelerated revenue growth strategy, while appropriately balancing other important financial drivers of the business.
I'm confident that we can achieve our objectives, while holistically, serving our clients needs and inspiring and empowering our front line associates, where appropriate we will deliberately increased resources and customize client and field solutions expand and reinforce our sales capabilities and talent as well as pursues select.
Mergers and acquisitions activity.
All of which will fuel our client retention and new business revenue opportunities I.
I would now like to turn the call over to Steve you for a review our of our financial results. Following Steve's remarks, I'll provide my key takeaways before having the opportunity to take your questions Steve.
Thanks, John and on behalf of the entire organization welcome back there Mark.
We're excited to have here and look forward to pursuing the opportunities ahead together.
As 2019 concludes we're encouraged by the overall operational performance across the business, that's going to serve as a solid platform for the future.
Key takeaways from a fourth quarter compared to the prior year included legacy business revenue up 3% with growth across all of our reportable segments.
Good operational performance and synergy capture across the company.
It was offset by significantly higher incentive compensation for employees throughout the organization.
Resulting in a 2% decline and adjusted operating income on a constant currency basis.
Adjusted EPS was up 1% versus the prior year on a constant currency basis again impacted by higher incentive compensation, well also benefiting from lower interest expense.
By yearend, we had reduced net debt by $593 million versus the prior year and improve our leverage ratio to 3.86 times.
This was accomplished through generating $499 million and free cash flow as well as using proceeds from the sale of our health care technologies business.
Turning to revenue in the quarter.
Adjusted revenue grew 4.9% driven by legacy business revenue growth of 3% and 1.9% increase related to an accounting rule change via assay success six.
Adjusted revenue growth reflects approximately $49 million of currency impacts.
FSS the U.S. legacy business revenue was up almost 2%.
Revenue growth in the quarter was led by sportswear user and corrections, which was up 6%.
Capturing both higher per capita consumer spending and good attendance and our major league baseball stadiums and National parks.
Healthcare, excluding the impact of the HCT divestiture grew 4% from record high retention rates and solid base business growth, while business and industry increased 2% with ongoing benefit from notable recent wins, including Dell and credit Suisse.
Segment performance was offset by a 2% decline facilities, primarily related to proactive renewal activities that we had noted earlier in the year.
Education was down 4% from disappointing net new sales as the selling season came to a close and John will review some of the initiatives that we're implementing to drive the education business going forward.
FSS International legacy business revenue increased 6% has continued to exceed our and my expectations. The performance in the quarter was again due to strong new business and very high retention with growth in almost all geographies, including Europe .
Despite last quarter's strategic exit of noncore custodial accounts in that region.
Uniforms legacy business revenue.
Grew nearly 3%.
Driven by price and volume offset by attrition from some legacy Ameriprise business that had previously served our major FSS competitors as those contracts expire.
In the quarter constant currency, I O I was down 2% or $8 million.
The story here is really around higher incentive compensation, which for us as a matter of bonuses retirement contributions and stock based compensation and that was $44 million higher than the fourth quarter of the prior year with a particularly significant impact in the FSS U.S. segment. This way.
As a bit higher than we had expected, but it's a good outcome for the company, especially our employees.
Outside of this item underlying business profitability increased compared to the prior year.
Overall, we executed really well and accounts across most lines of business continue to realize synergies from both of Ventura and Ameriprise.
And finally, there was significantly less of a negative impact from weather in the fourth quarter of this year, primarily in us FSS.
International improvement was led by contributions from our joint venture in Japan, and the exit of negative margin contracts and the non core custodial accounts in Europe .
The narrative around margin follows the framework for ally, while the printed margin does show a decline those numbers are impacted by approximately 15 basis points related to the revenue recognition accounting changes, which primarily affects uniforms.
Driven by the factors that I, just outlined as well as benefiting from reduced interest expense and a modestly lower tax rate adjusted earnings per share was 68 cents for the quarter, which is up 1% from the prior year on a constant currency basis.
In addition to the adjusted operating results our GAAP operating income and net income were further impacted by costs from several notable nonrecurring items in the fourth quarter, including legal settlements the retirement of Eric Foss, our former CEO and advisory fees related to a variety of shareholder and.
Board related matters reconciliations of these items to our GAAP results are included in our press release materials.
Moving to the full year, we saw a balanced improvement in progress across multiple key operating financial metrics.
Legacy business revenue grew 3.6%, so a little better than our initial expectations FSS U.S. and uniforms finished up 2% and 3% on a legacy basis, respectively. Clearly international was the outstanding story here with 9% legacy business revenue growth from that included.
The deliberate account exits in Europe that we had mentioned earlier.
International performance was driven by new business wins, and very high retention rates a stellar results from our international teams.
Constant currency AOAC for the company finished up 5% inclusive of $67 million of higher incentive based compensation expense for the year.
That also means operational performance across the line to the businesses was quite good combined with about $25 million from deal wrap in the first half of the year and over $30 million of incremental synergies realized from a bandra and ameriprise.
Hey, I'm margin for the year was down 13 basis points to 6.67% on a constant currency basis.
But again. Please note that this is after the impact of higher revenue reclassified from the accounting change, which compressed margins by a comparable amount.
Adjusted EPS for the year was $2 in 24 cents and that represents 8% growth on a constant currency basis.
This growth was primarily driven by M&A wrap in the first part of the year higher ally and good based business and synergy performance as well as a slightly lower effective tax rate and share count somewhat offset by higher interest expense for the year. As a reminder, first quarter interest expense was over $20 million.
Higher related to the wrap from financing costs of of vendor and Ameriprise.
Our GAAP operating income and net income results for the full year. In addition to the fourth quarter items discussed earlier, where most notably impacted by the gain on the sale of healthcare technologies and the first quarter.
The amortization of intangibles from our elbow and business combinations merger and integration costs for a vendor and ameriprise and the onetime investments into our domestic workforce via proceeds that we received under us tax reform.
We're pleased with our free cash flow performance printing $499 million. Please note that this does not include $23 million of proceeds from governmental agencies relating to property and equipment that appears elsewhere on the cash flow statements, but that was included in our guidance.
It also reflects approximately $85 million of onetime costs related to spending on integration and the HCT divestiture closing costs.
For the fiscal year, we reduced net debt by $593 million from a combination of free cash flow and approximately $200 million and proceeds from the sale of the healthcare technologies business and that led to a leverage ratio of 3.86 times, that's an improvement of 21 basis points from the prior year.
We end the year with noteworthy financial flexibility and no significant maturities due until 2024.
We will remain opportunistic about extending the balance sheet maturities and lowering our cost of financing as market conditions warrant.
Overall, our performance in 2019 helps build a stronger platform for the future.
We are encouraged about the road ahead as we work to accelerate revenue growth, while remaining cognizant of a longer term opportunities that are still in front of us to improve profitability grow earnings increased returns on capital accelerate pre cash flow and reduced.
We will constantly assess the propriety of the current portfolio of businesses as well with our capital allocation decisions and capital structure and most importantly, we will not be reticent to invest when we have good opportunities to realize and create long term value for our shareholders. Now let me begin with a few items for.
Consideration specific to 2020.
First on revenue, we will take another step forward and simplifying our financials on a year over year basis, starting next quarter revenue growth will no longer be impacted by the accounting change from assay six of sex and Additionally, we will return to using the terminology of organic revenue growth now that we.
We have complete we lapped the acquisitions of of Andrew and Ameriprise.
Second the 2020 fiscal year and fourth quarter results will contain an extra or a 50 threerd week when compared to prior period results. Our guidance provided is based on 52 weeks for year over year comparability purposes, the company's metrics for organic revenue adjusted.
Operating income adjusted net income and adjusted earnings per share growth will be adjusted for the extra week and identified in the non-GAAP reconciliations of financial measures.
Prior to the adjustment the 50 Threerd week is expected to have a full year benefit of approximately 2% on each of these metrics.
However for free cash flow the 50 Threerd week not the full year will be moderately negative has outflows from an extra week of interest and tax payments.
Payroll and client commissions offset additional collections and we will work very diligently to minimize this negative impact over the course of the year.
Finally, our initial outlook for 2020 excludes any significant change to the current set a macroeconomic conditions.
With all that said, we currently expect organic revenue growth of approximately 3% and thats expected to consistently improve as the year progresses.
Adjusted EPS growth that will benefit from the continued business operating momentum we saw in the latter part of 2019.
Productivity improvements and lower interest expense as well as approximately $35 million and further synergy capture from the of Bandra and Ameriprise integrations of which a significant amount is going to be reinvested to propel longer term us growth and pursue opportunities for shareholder value.
Creation.
The pace and the scale of these investments will be determined by John in the board in the months ahead.
Free cash flow generation should be at least $600 million and net debt to covenant adjusted EBITDA of between three and a half to 3.6 times by the end of the fiscal year.
We remain extremely optimistic about our industry's long term outsourcing prospects and air marks future opportunities to create value.
With that I'll turn the call back over to John for his key takeaways before we take your questions John .
Thanks, Dave.
While still early it is clear to me that there is a significant runway to drive that business forward in a way that unlocks meaningful value for all of our shareholders.
My immediate priority is to nurture our hospitality culture and entrepreneurial spirit with our employees that solidifying the foundation for our accelerated growth strategies.
While the overall performance that Steve just reviewed was admirable most notably international sports and business, starting we have an immediate opportunity to further support education as well as our other businesses.
Our areas of focus will center on.
Placing additional field based resources to support new account sales efforts and client retention.
Enhancing our product and service offerings that appeal to a broader audiences.
And value added innovation and technology that improves productivity, while appropriately servicing our clients needs.
As an example, we will be working with our clients where appropriate july's enable our trademark and proprietary cloud based platform that effectively streamlined our food production process, allowing our our teams to spend more time solving for student and other customer preferences.
Our diverse portfolio affords us the flexibility to activate this targeted approach while simultaneously propelling the business I'm confident that our plans will drive future success and we will continue to update you on our progress as we go.
Before we take questions I want to thank our 280000 employees around the world for their dedicated service to the company and our client partners I look forward to meeting all of you as we work together to write the next chapter for this iconic company. Thank you.
Thank you and I'll begin the question and answer session. If you have a question. Please press Star then one on your Touchtone phone.
If you wish to be removed from the Q. Please press the pound signed or the hash key.
If using a speaker phone you may need to pick up the handset first before pressing the numbers.
In order to accommodate participants in the question Q. Please initially limit yourself to one question and one follow up.
And our first question is from Kevin Mcveigh from Credit Suisse.
Great. Thanks, so much and congratulations John welcome aboard.
I Wonder if you could share with this just some initial observations in where you see that the greatest opportunities.
Given.
Yes, it sounds like your immediate priorities tend to elevate hospitality and then drive the business going forward to create shareholder value.
Yes, thank you very much.
I've spent quite a bit of time in the field organization over the last several weeks and I think what's most exciting to me is about as really about that.
DNA that exist in this organization the cultural DNA is very good is intact and very healthy.
People are really love the organization they love what they do they love serving their customers and clients.
And as a result, I think that cultural and a half will enter the cultural.
Reengagement will come very very rapidly people really are excited about about winning again about competing in the marketplace.
I think we have extraordinary opportunities for growth across all the range of businesses that we operate there isn't a single one where we can't compete and win.
Very excited by the quality of our leadership team in the field.
Got it and then I guess, just kind of Steve real quick.
Steve.
As you think about 2020 longer term what are kind of.
The measures you want to hold yourself accountable to and then ultimately.
Organization.
Hey, good morning, Kevin if I start the longer term one first I think you should still expect us.
So to pursue balance improvement over the long term across multiple financial metrics right. We know we have plenty of opportunities across our financial statements.
Consequently continue to improve the results on the metrics, we've talked about revenue profitability cash leverage et cetera.
But you certainly should expect us to continue to invest where it makes sense for us to invest because we have a lot of opportunity and we're going to invest from a shareholder value creation perspective.
Specifically on 2020, I think the moving parts I'd have you keep keep track of here as we definitely enter the year with a lot of operational momentum, we're running the print business day to day pretty well on that.
Came through in the fourth quarter for sure, where we offset a lot of incremental incentive compensation expense.
As you know there's been a lot of effort over the last couple of years around improving productivity in the company those initiatives remain in place around labor and food.
Direct spending those will clearly continue to benefit us.
And I think we feel very good about picking up this extra $35 million are so planned synergies from Ameriprise an event.
There is no doubt 2020 is going to be a year of reinvestment for us on the revenue side and so I think a lot of that synergy will get reinvested over the course the year to help propel the business revenue growth forward as we had talked about we'll continue to benefit from deleveraging for sure on the interest expense side.
And so when you when you put all of that together and.
You look at some of the a gorgeous things we're dealing with here right out of the gate. We've had some clients have some high profile strikes in the first first quarter. There's been some unrest in July which has impacted our business.
Some uncertainty around tariffs I think at the end of the day margins, probably don't move very much either way in fiscal 2020, when you put all that.
Together, but most importantly, we're going to continue to invest very aggressively and to the opportunities that are in front of us to drive long term value and we're going to make the right long term investment decisions for shareholders.
Thanks, so much.
Our next question is from in the CNO from Oppenheimer.
Hi, great. Thank you.
John welcome aboard.
Delve into.
Your strategy going forward I know you've been.
Relatively customer facing customer first type C.
Asked.
So.
That sort of approach.
Basically your clients, helping them succeed.
Has that been translate but you're saying retention.
New client wins is that you're maybe just give us a little more color there. Thanks.
Sure. Thanks, Dan.
Absolutely I do believe particularly in hospitality company that you have to me that you have to be customer facing.
I think one of the steps that will take very quickly is to realign resources in the organization to be more to be more aligned or closer to the customer. If you will repositioning some of the resources from the center of their organization back to the field.
To create.
Line of business and marketplace intimacy and closer customer contact we think that can drive retention and we think it will drive new account business sales.
This business has always been most effective when you have a lineup as a line of business specific team really positioned against the opportunities that they have very intimate knowledge of and so we'll we'll do that some of the investment that will be making over the course of the next year next year will be positioned as resources in the field organization to do just.
Pat.
Okay, Great and then just just one follow up would be you're talking about an investment I understand the Disney's investment.
How many years and investment.
Thank you need is this kind of over one year staying and then.
Yes, the basketball hockey she'd like an acceleration of earnings growth.
As multi year, how do you kind of think about that at horizon. Thanks.
Yes, I think about each individual you're kind of in of itself.
That the annual consider making follow on investments as we believe the investment opportunities are the returns are appropriate.
We believe this level of investments at the board has committed to for this year.
Sufficient to help us accelerate our growth rate.
We'll be making those targeted investments over the course of the year and I'll take a number of different forms as we as we've discussed.
I think in future years, as we look at the new business opportunities and the new marketplace opportunities will make strategic decisions at that point in time I don't have any preconceived planned for additional investment in 2021 or 2020 to 2022.
It really is focused on this year on getting our our growth rate accelerated.
And getting the team really focused on it so I think that would be.
That would be our plan for now.
And our next question is from Gary Bisbee from Bank of America Merrill Lynch.
Hi, good morning, and John welcome.
This venue I got dropped for a few minutes apologies if you've already covered this but I wondered if you could be a little more specific exactly what forms the investment you're planning for this year will will take.
And and.
Yes.
Celebrating growth can obviously come from several places improving retention pricing merchandising new business, I guess, where do you see the most opportunity and where are you initially going to be focused most on.
Moving performance to drive better topline growth. Thank you.
Thanks, Gary.
As a matter of fact will be focused on that that full range of opportunities. We think the fastest way to grow the business is to sell new business sell new accounts and to retain our existing customers solely focused on improving both of those metrics inside the organization.
Part of that investment will will be.
Adding additional sales resources to targeted businesses, where those opportunities are most.
Prioritized, adding additional field based operational resources, where it makes sense. So we can serve the customer a better and adding additional retention resources to the organization. So we can improve retention rates in the in key businesses.
Last year retention did improve significantly over the prior year. There is there is continued opportunity there.
I believe the two levers that most impact our ability to grow more rapidly our retention and new business gross growth. So that's what we'll be focused on.
Okay. Thank you.
Our next question is from Toni Kaplan from Morgan Stanley .
Thank you.
John in the in the past the company's give and take a long term guidance.
Let's take a 4% on your again expecting three for next year.
You are focused on growth now.
Very focused and putting investment behind.
Which is really long term.
I guess, how how high do you think growth can get.
How long does it take pick up there I guess just what are what are your thoughts on long term growth.
Yes, Thanks, Tony I, I, frankly think we can accelerate performance and be the leading organization in this marketplace. I think we can achieve revenue growth, but it's consistent with our major competitors.
We will be competing and winning in the marketplace on the basis of performance in the basis of capability.
And relationship.
And so I believe that the marketplace will reward us for that.
We were projecting 3% for next year as result of additional.
New sales wins and improve retention that will increase over over time, we'll start a little bit slower and we'll work our way up towards the end of the year as a selling season matures.
And then we'll take it from there I do believe we have.
An opportunity and the quality of I think the quality of the people the quality of the company is.
Very very strong and as a result will be able to accelerate but the new business wins going into going into next year I would hesitate to predict what the numbers can be but I do believe we can we can outcompete.
And and will drive revenue growth very significantly at least.
Beat our competitors.
Got it and then.
Quarter, the incentive comp was a little bit high then.
Expecting.
If we think of vessels.
Recurring investment.
Okay.
The business to help drive better attention and growth.
Or should we view it as a little bit more of a onetime.
One quarter. Thank you.
Yeah, Hey, Tony Good morning. This is Steve I'll address that so the incentive comp that we talked about in the quarter and for the full year is really part of the normal course.
Bonus payment program and the annual grants the stock based compensation. So I would say those are annual cadence items in total.
For the year the payouts, obviously in aggregate our significantly more than what they were in the prior year I think the cash bonus payout.
For this year is going to actually be the largest pool. We've had in the last five five years or so from a cash compensation standpoint, but they are not.
Connected to any kind of one time action that the company took right. We clearly made some onetime tax reform reinvestments earlier in the year, but the stuff that we're talking about here in the fourth quarter would be normal course incentive compensation program design in earnings versus targeted.
Outcomes.
Our next question is from Seth Weber from RBC capital markets.
Hey, good morning.
Steve I just wanted to circle back on a comment you made earlier just margins you don't think move a lot either way is that.
Pretty consistent across the three segments or do you think there could be some variability across across the three.
Three categories. Thanks.
I don't think set that's going to be.
On a radically radically different I would expect you probably will continue to see modest improvement in the uniform space just because obviously the majority of the Ameriprise synergies will fall on that line item. So I would expect that will that will be positive I think international because of the momentum they have.
And just the lack of having the losses in the businesses that we got out of they probably also will be positive a lot of the reinvestment.
We've referenced here earlier, we'll we'll at least initially be oriented to improving growth in the U.S. FSS business and so they probably will not see much margin improvement because I think the bulk of that spending will show up in that segment.
Okay. That's super helpful. Thanks, and then just on the.
Are you doing anything to sort of change this sales incentive.
Picture United to maybe push.
Hi towards higher changing the program towards higher and higher retention rates or anything that you're doing that you're implementing to try and change sales behavior. Thanks.
Yes. Thanks, Seth this is John .
We are considering all kinds of changes in side the sales organization, both from a resource perspective, as well as a process perspective, and then certainly sales incentive.
Is being evaluated as well we think we do have a very good sales incentive program in place not sure that we need to to make major changes to it.
And we firmly believe that retention as the Java.
The entire operating organization as well as the sales organization. So.
I think our people are adequately incented to retain the business the customers what they currently operates.
And we will reap, but we will refocus and reevaluate the incentive comp programs to see if theres any tweaking that we can do.
To further enhance our our results.
Perfect. Thank you very much.
Our next question is from Manav Patnaik from Barclays.
Thank you good morning, and let me add my welcome John as well.
Hi level it sounds like in the to accelerate the revenue growth in the there was a lot of talk about reinvigorating the culture and still fighting you said a lot of repositioning span of hiring new seals.
The only issue I guess that you've seen that side. It was not enough focus on the cost I was just hoping for a little bit more growth.
The couch it today with his way you want it to be.
Yes, I would say frankly the.
The culture inside the organization is very healthy.
People inside the operating units of this organization have a very strong customer focus on hospitality focus I think in many ways the company.
Created a barrier to achieving better results because we went on them. We went on a march for the last several years of reducing.
Cost of enhancing profitability enhancing profit margins.
Expensive resources in the field to some degree and as a result, we cut sales resources and we cut frankly operating resources as well.
Some of those some of the programs that we initiated initiated were extraordinarily helpful and will make us.
A better organization as we go to as we go forward, but we did the end up taking away some muscle I think.
From the organization over the last couple of years. So now are our investment strategy is to add that muscle back to the organization in the form of people in the farmer selling resources and in the form of operating resources as well field marketing.
To minus an area that will focus on calling area expertise that we'll continue to focus on so we'll add multiple elements to this but but.
Please understand that the vast majority of employees in this company chose us business, the hospitality business because they love it.
And they really know how to do it right, we just need to given the tools in the resources to make it happen.
Got it Thats helpful and then.
I guess Youre 10 year prior dire Mike was mainly on the FSS side and I guess I was just hoping for a quick some quick thoughts on your views on the state to uniforms within the business in this kind of the same strategy needs reply to that business to get it going as well.
Okay.
Yes, I my experience with my prior experience with our Mark was focused on food and support services, but as you know I did spend.
Several years working in both a solid waste industry as well as the chemical distribution industry both.
Organizations that had very similar distribution models to uniform services, so I do have background and experience and ways to optimize those kinds of businesses.
I think there is significant runway and significant opportunity to improve the uniform services business.
I have not spent a significant portion of my time yet.
There with Brad and his team and we'll be doing so soon.
Im not ready to make pronouncements in terms of what I think the long term implications are for uniform services, but I do believe we run a great company, we've got good people and it.
And there are opportunities to improve it and close the gap between us and our competitors in that segment.
Okay. Thank you.
Yes.
Our next question is from Stephen Grambling from Goldman Sachs.
Thanks for taking the questions welcome John .
Just two follow ups on some earlier questions. The first maybe for Steve.
This is kind of Gary earlier question asked another way I guess walking through the math behind your 600 million dollar target and free cash flow is about 100 million year over year and you cited a bunch of items on the call. I think was 85 and one time topline growth of 3% with flat margins could you above that before even considering synergies so is there.
Any thought around significant reinvestment in capex or am I missing some other component in that guidance. Thanks.
No I don't think there I don't think you're missing anything Stephen I mean, our year over year math is not meant to be more complicated than we printed.
Before 99.
There was about 23 million that was on a different line and you add back the 80 some of the nonrecurring stuff you get to 600. So it seems like a very safe starting point for us to have at least 600 there.
There's no doubt the level of reinvestment in 2020 will partially offset some of the benefit of the synergy and operational pieces, but I feel very good.
600 isn't appropriately conservative starting point for us.
And but I guess to asking the question more specifically is there any need to invest more in either contract acquisition costs or capex as part of that drive to accelerate the topline.
Ultimately if you think of the where we will invest to grow and certain lines of business, Yes, we will spend capital where it makes sense for us.
Spend capital and drive longer term shareholder value I think as it relates to 2020. When you just think of the cadence of that pipeline and how that spending occurs in the seasonality of when you spend it in terms of winter seasons around when schools are out I don't think we're going to have a radically different outcome than somewhere around.
3.5% revenue number for fiscal 2020, but I think thats more again pipeline and seasonably determined as opposed to us putting a cap on it we're certainly not trying to put a cap on it I. Just don't think we would realistically spend much more than that given where we are right now.
Okay, and then as a second follow up for John I guess, how do you think about the uniforms segment.
Place in the broader business and benefits that could be from.
Maybe joining that together synergies to think about with the.
Food service side. Thank you.
Thank you.
First of all I think that there are.
There are historic synergies that have been realized in the business by having the two organizations aligned.
Not the lease of which has the opportunity to serve.
Those thousands of clients, we have in their uniform needs across the enterprise. So while the operational synergies may not be as prevalent there are certainly marketing and sales based opportunities. So we'll continue to focus on and take advantage of.
As I said, there are significant opportunities for improvement in the business and this is.
As a company that has produced significantly higher margins on the foodservice business over the years.
And we see it as I.
Core part of our portfolio.
But that doesn't necessarily mean that we wouldn't make a different decision at some point in the future and the board will always be considering.
The best value, creating opportunities for the organization I'm not ready to be prescriptive today.
But it's certainly something that we'll evaluate going forward.
Adding just a comment with respect to the investment strategy I want to make sure people understand that we will make a very we will have a very disciplined investment return requirement for all the businesses that we operate in so this investment and growth does does not imply that we will go out and lower price.
Yes, or throw capital around to go ahead and accelerate growth, we'll do it in a very disciplined way.
We will be selling on capability will be selling on.
Competence and will be selling on relationship.
With our customers and clients.
And it's our intention to compete that way not on the basis of price and capital deployment.
That is super helpful color. Thanks, so much and best of luck.
Thank you.
And we have a question from Andrew Steinerman from JP Morgan.
Welcome John all that sounds very refreshing what are the colors. You just stood up was improving client retention I believe the company has said they've consistently had mid ninetys client retention and I just wanted to confirm that.
And my question really is quite a company will lift to really improve past the mid nineties.
Yes, Thanks, Andrew I believe it can I think the company has at various points in it and its history.
And certainly in certain businesses had significantly higher retention rates spend the mid ninetys and it would be our desire to continue.
To improve it incrementally.
I think there's a there's an opportunity here to move it.
Last year I think our stated number was around 95%.
I think it's certainly possible timing and to improve it by at least a percentage point to 96, maybe 97.
I think if we're doing the job for our customers.
There's no reason why we cat continued to improve retention.
We operate these businesses most of them on very short term contracts that can be castle with or without cause and so clients choose to stay with us not on the basis of the contract structure, but on the basis of performance and that's what we're going to be driving towards improved performance in all the businesses, which.
Should lead to significantly higher retention over time.
Maybe I would just add to in terms of the retention just just use the experience we had in international this year or this year being fiscal 19, I mean their retention was a couple hundred basis points higher than it had been historically and you clearly saw the result on the revenue side, so it's possible not not necessarily easy across the whole.
Entity, but theres a real life example of it happening here in the international business in fiscal 19.
Thanks for taking the time.
Thank you.
Our next question is from Andrew Wittmann from Baird.
Great. Thanks, I just wanted to.
Actually going to update on the acquisition integration, Steven and you can it sounds like things are on track I was kind of hoping that you could give maybe the realize synergies for the year in the quarter.
As well as just update us on the run rate do you think has been effectuated as you enter here 2020, just to give us a little bit more detail about high standards that 30 to 35 million cost synergy target this year.
Yes, I think we Andrew good morning, I think we picked up I think we realize 32.
Million dollars and fiscal 19 is a good realized number in terms of how much we got and so.
You probably picked up a vendor is relatively ratable, so 13 or $14 million that as the vendor of the remaining piece would be ameriprise.
I would expect will get at least 35 in fiscal 20 again, the vendor number won't change a lot. So thats, probably 13 or $14 million of incremental and you continue to get increasing amount of synergy on ameriprise as we move into things like route optimization and handling.
Some of.
The facility piece and then I would expect as we move into 2020 line, we still have a full year of synergy realization from the Ameriprise transaction to go because that was kind of a four year run rate for us anyways, and so kind of two years still to go.
As planned on Ameriprise, and then a full year of both here in fiscal 20 and that should be at least $35 million realized incremental synergies.
Thank you for that and then I guess, John just talking about just the portfolio and what you have here I.
I mean, even in 2019, the janitorial exits in Europe .
CTG sale I mean, there's been things that we're kind of addition by subtraction.
The business and so I'm, just wondering it's kind of you're going through.
What the companies doing today, if theres any more of that semi things that come to mind.
Lease from my observations would be some of the lower margin lending businesses or even some low margin national account business in the uniform rental segment things that like are clearly weighing on your margins maybe or your your returns that you're realizing is there anything else like that that that you're looking at or is under consideration today.
Yes, I entered thank you for asking I would say there are always we're always in the process of portfolio review across all the businesses not just uniform services, but across all looking for low margin.
Contributors and looking for ways to fix.
To either to fix them.
Repair them or to exit them and that includes the foodservice businesses, our customers that we serve today.
They're not additive in terms of the value of the company and so we'll always look for opportunities to.
Reevaluate the portfolio and where it makes sense pulling those operations that are costing the shareholders money at this point.
I don't have any specific plans on the uniform side today to discuss.
But it certainly as the business that has a high degree of focus from the board.
From a leadership team and we'll continue to evaluate that business going forward for those kinds of opportunities as well.
Thanks.
And then when I'll turn the call back over to Air Mark CEO .
John Stilmar.
Thank everybody I appreciate the time in the effort.
Put into the call we.
We love this organization, we feel very strongly about its future ads.
Possibilities that exist for all of our stakeholders our employees our shareholders our investors.
We are absolutely.
Committed to doing the right things for all of our constituents and look forward to serving you in the future and to talking to you individually. Thank you very much.
Thank you.
Ratings concludes today's conference.
May now disconnect.