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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.
I will now turn the call over to Kate Pearlman, Vice President of Investor Relations. Kate, please proceed.
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, www.aramark.com, and 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 will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found in this morning's press release, as well as on our website.
Before I turn the call over to Eric, I wanted to mention that our third quarter includes the full quarter of AmeriPride and Avendra results. We are quickly losing the ability to distinguish earnings related to the deals as we integrate them, but we will continue to track revenue separately for the next few quarters.
With that, I'll turn the call over to Eric.
Thanks, Kate, and good morning, everyone. This morning, we reported record third quarter results, driven by strong execution across the portfolio. These results were balanced on both the 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 operating 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 growth outlook for our legacy business to approximately 3.5% for full year 2018. And 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 we'll discuss 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 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, these 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. And 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 regards to health and wellness, I'm proud to report that our (sic) Healthy for Life 20 by 20 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 development of the 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 2018 sales outlook for our legacy business to approximately 3.5%.
With regards 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 that offset 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.
And 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. And 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, and 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 are established in continuing to enhance our right to win across the industry verticals, as well as our proven and resilient business model and our position of solid financial flexibility.
So, with that, let me turn the call over to Steve.
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. This represents an increase of 11% with currency tailwinds of $52 million, or 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 the 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 in 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 margin 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 and 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 a 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 two years to 2021, further enhancing our already very 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 at the company level, of course, due to the acquisitions. We are 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. And 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 modestly 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 4.5 times by the end of the fiscal year. Our previously communicated assumptions regarding 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 three 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 three years ago, partially because of our recent compelling acquisitions of a vendor in AmeriPride but also because of the tremendous progress in our innovation and product portfolio and 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 of Avendra and AmeriPride.
And 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. And 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 11 of this year.
With that, I'll turn the call back over to Eric.
Thanks, Steve. And with that, Christine, I think we'd be happy to open up the line and to take any questions.
Thank you. Our first question is from Hamzah Mazari of Macquarie Research. Please go ahead.
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.
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 number one for us is really the safety of our guests, the safety of our employees and 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, I mean 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. And 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.
And, 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 business and to not get yourself trapped into just 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 kind of strong broad-based performance of our business across geographies, sectors, lines of business.
Steve, do you want to add anything?
Yeah. I would just – I mean, 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 have 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 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.
Very helpful. And 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.
Yeah. It's Eric, Hamzah. I'll start, and let Steve add his thoughts again. I think 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 points – 45 basis points, I'm sorry, in the fourth quarter. And so, I think 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 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. And 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, 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. And as we get into fourth quarter, I also think you'll see some of those – the investment spending as we get later in the year, it's typical for the investment spending to lessen. So, 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.
And 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 an improvement, has been really unmatched in the industry, so I want to make sure they get full credit for that. Steve?
Yeah. I mean, maybe I would add, just stepping back because obviously we know this is a quite keen area of focus for folks, and I would reiterate the points Eric made around the math. We know it's an over 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 that experienced in the fourth quarter that we've had the last couple of years.
So, I think we are exactly where we expect it to be. And in terms of the margin journey this year, we certainly have not tried to message anything differently there, and 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.
Great. Thank you.
Thank you.
Thank you. Our next question is from Toni Kaplan of Morgan Stanley. Please go ahead.
Hi. Good morning.
Hi, Toni.
I thought food service – (sic) Food and Support Services International growth was very strong in the quarter. And I was wondering if this was a result of some competitive wins. And I know you said that growth was broad-based across a number of verticals and geographies, but could you give us any color on which might have been particularly strong? Thanks.
Sure. Well, as you mentioned, Toni, I mean we were very pleased with the 7% revenue growth. It was solid growth across geographies. I mean 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. And again, about half of that was base business growth and the other half was new business wins.
Okay, great. And on margins, I think I was thinking International margins would be a little bit higher just because of the Easter timing. So, like, could you give us a sense of 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.
Sure. I'll start with the latter and ask Steve to comment on the – on your first question. I think relative to inflation, I think we have seen kind of an uptick in labor inflation. I think the good news is, is that we were very proactive and we saw that coming and we're able to deal with it very, very proactively upfront in the year. So, 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.
So, as we look at the full year margin, I mean to your question on International, we will see margin growth across our North America business, across our International business and across our Uniform business. So, 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.
Yeah. I think, Toni, I would add, by my math, I mean our AOI in International was up over 20%. And there's no deal benefit in the International numbers and our margins were up almost 0.5%, almost 50 basis points year-over-year. I think that's a darn good performance coming out of that segment. And it certainly has met our expectations of what we thought it should deliver in the quarter.
Thank you.
Thank you. Our next question is from Manav Patnaik of Barclays. Please go ahead.
Hi. This is actually Greg calling in. I 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 kind of upside surprises so far in the year and how you're thinking about that?
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 go deliver against a quality food offering, conveniently available, personalized to their needs and increasingly healthy, fresh, better for you.
And so, 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 just a couple of points there. First of all, our sports business is going to grow and is growing this year. And as it applies to baseball, the real driver of anything that happens on the attendance front is really all driven by team performance.
If 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. And so, 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.
And again, I would just say that 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.
That's helpful. And then maybe on – 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?
Well, I think it really again – we like to use the saying that, all of our decisions start and end with the consumer and kind of the marketplace sets the table. So, 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. And I referenced something we're testing here in Philadelphia with the Phillies with Apple that certainly does that on the sports side.
Okay. Thank you.
Thank you. Our next question is from Andrew Steinerman of JPMorgan. Please go ahead.
Hi there. I wanted to ask the specificity of that three-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.
Yeah. 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. So, we will do our best to ensure people clearly see an apples-to-apples comparison without the two deals included in them.
Okay. Thank you. And 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. Can I just ask your philosophy there on kind of keeping the full year range, which implies a big range for one quarter?
Yeah, sure. Listen, I won't totally regurgitate what we said on Yosemite. So, obviously, we would have otherwise narrowed it and raised it a little bit, and felt its best just to stay where we are. I believe we had communicated for last call that our most likely outcome was going to be somewhere around the middle of that range, give or take, $0.01 either side. I don't think that has changed. So, I fully expect us to be somewhere around the middle of the range as we sit here right now.
Makes sense. Thank you.
Thank you. Our next question is from Najet El Kassir of Berenberg. Please go ahead.
Good morning, everyone. Could you please quantify the impact from Avendra and Ameripride on your EBIT?
This is Steve. The answer is No. So, what we will be communicating is we've quantified the revenue impact for those two deals in the quarter. It's about $185 million, and that's actually included in our in our disclosure. And we do quantify, or 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. So, we said somewhere between $0.10 and $0.15 dilutive, and I think we're probably about in the middle of that by the time we're finished.
And then 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, and I would just take you back to Kate's opening comments, where we're merging these businesses together very, very quickly, and so our ability to fine-tune exactly what side of the fence in particular synergy dollar, et cetera, falls on – is already becoming very, very gray. So, we will – we will stick with making sure people understand revenue and continuing to get a sense of what the EPS impact is.
Thank you. Can I just have a quick follow-up with 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?
Yeah. 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 growth was driven by good momentum across our base business.
Thank you very much.
Sure.
Thank you. Our next question is from Dan Dolev of Nomura. Please go ahead.
Thanks so much for taking my question. I've got two questions. The first one is, I saw that the stock comp has increased – the add-back has increased dramatically in the second quarter year-over-year, but also both – versus what you did in the first quarter. Can you maybe elaborate on that? Then I have a follow-up.
Yeah. I'm presuming, Dan, it was a little bit unclear that you're referencing the change in stock-based compensation that the company reports.
Sure.
Yeah. 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 million, $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 that's what 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.
Okay, great. Thanks for the elaboration. And then, my follow-up is on the Uniform business. I know you've expressed before the commitment to the Uniform. But now that 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, that some of the parts here is very compelling for a tax-free spin-off. Thank you.
No. I think, Dan, we've declared this is a business we love, right? And the reason we love it is it's got attractive margins, strong cash flow. We feel it's a business that can be a creative both in terms of growth and profitability. We've had very, very strong performance out of that business up until really 2017 when we made the price investment that we talked about to defend our competitive position.
But, I mean, 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 our geographic footprint into Canada on the Uniform side. It just gives us more scale. And we – it's a business we love and it's here to stay.
Great. Thank you. And congrats again.
Thank you.
Thank you. Our next question is from Shlomo Rosenbaum of Stifel. Please go ahead.
Hi. 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 from – that you talked about at the Analyst Day, on the one hand, you're pointing to that being on the base business. And then, on the other hand, you're saying it's becoming increasingly hard for you to give – to separate the margins from the acquisitions. Just to be clear, the 7.15% is, are we – are you expecting this year to come out above that or below that on an all-in basis after you factor-in the acquisitions? And how are you going to present that in a way to kind of show what's going on?
Well, I think the way we've presented it and reported on it and talked about it all along is on the base business. So, 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 have 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, right. There'll be nothing in there.
Yeah. I think the practical reality just because of the timing of the transactions and that the various things like amortization et cetera that goes against this, I don't think we're going to have a significant impact on reported margin from the deals anyways. So, I think you'll get to the same impact.
The only thing that could move a little bit would be currency, right. The currency impact, we'll have to obviously true that up, vis-à-vis the currencies that existed at the time. We put out the guidance, but it should be very close to kind of the reported numbers should be a pretty good comparison to the starting point.
And 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 to 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 think strategically and financially, but certainly strategically, it just puts us in a very different position. And that's why you've heard us since we went public talk about the game we were trying to play, and the game wasn't necessarily the same game as others, but it was a very important priority for us. And I think the fact that the organization will achieve this is really something to be commended.
And 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 financially 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 – it's a detail business, right. That's why Steve and I obsess 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 three years ago or five years ago.
Great. Thank you for the color. Just the follow-up I want 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 $35 million – 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 a 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?
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 a $100 million ahead in terms of having spent a $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. So, 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 month falls on the weekend. And 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.
And then finally, we will, really, from a cash flow standpoint start seeing 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. So, I think that's what's giving us the confidence of where we ultimately will land. But I acknowledge, we certainly need a strong fourth quarter performance.
And 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. And so, I just want to make sure we acknowledge that, the physical combination of all of these balances and the working capital balances. It will 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.
Okay. Thank you.
Thank you. Our last question is from Gary Bisbee of Bank of America Merrill Lynch. Please go ahead.
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 will 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 as you work through whatever it is, working capital, et cetera?
I personally view the 90% yardstick as an at least kind of a number, right, 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. And 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 and 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, right? We've talked to combine the two deals into Aramark. We've talked about over the next three 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 little closer to kind of the $50 million number. So, those will continue, but the $135 million that we referenced in the press release, which is just a function of how we structure the deal, that will not repeat in the fourth quarter, nor will it repeat in 2019.
Okay, great. And then I guess more importantly, both of you stressed how strategically much stronger 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? So, does this mean when you're competing for a new business, you're better able to stack up against Compass or someone, or what are the implications of the stronger margins and strategic position of the business today? Thank you.
Well, Gary, it's Eric. I think it's a variety of things, right? I mean, when I say we're in a stronger position, I mean it certainly is indicative relative to the margin structure and that we have a more profitable business and, therefore, it allows us to compete, I think, in a different way than we have maybe historically. I think the addition, though, of a stronger position, it 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.
So, 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. And I think when we get to Investor Day in December, we'll talk a lot more about what that next chapter 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 indicative given the results we just put up that our strategy is working and we're excited by the business momentum that we have right now.
Great. Thank you.
Thank you. I will now turn the call back over to Eric Foss for closing remarks.
Thanks, Christine and thanks to 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. Thank you.
Thank you. And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.