Q2 2021 Aramark Earnings Call
Good morning, and welcome to Earmarks second quarter, 2021 and earnings result conference call.
My name is Justin and I'll be your operator for today's call at this time I would like to inform you that this conference is being recorded for rebroadcast and that all participants on a listen only mode.
We will open the conference call for questions at the conclusion of the company's remark I will now turn the call over to police cars out Vice President of Investor Relations and corporate Affairs Ms. Kissell. Please proceed.
Thank you and welcome to Aramark second quarter fiscal 'twenty, One earnings conference call and webcast and.
And it is lessening aren't doing well.
Morning, we will be hearing from our Chief Executive Officer, John Zillmer as well as our Chief Financial Officer, Tom on dress.
Reminder, on notice regarding forward looking statements and zinc.
<unk> and our press release, this morning, which can be found on our website.
During this call we will be making comments that are forward looking and actual results may differ materially from those expressed or implied as a result, and various risks uncertainties and important factors.
Clothing, those discussed and the risk factors and DNA and other sections and poor.
And on form 10-K, and our other SEC filings and.
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 on it.
And website.
So with that I will now turn the call over to John.
Thank you Felicia.
Good morning, everyone and thank you for joining us today the strategic.
Actions, we have recently executed combined with our financial results released this morning reflect our ongoing commitment to drive the business to new heights of success and a man.
And are of weeks, we've announced and Upsized revolving credit facility and debt refinancing.
Proactive $500 million debt repayment and and acquisition that creates an additional revenue channel and a rapidly growing senior living industry.
This morning, I look forward to reviewing our second quarter performance and discussing the current state of the business as we advanced strategies and aligned with our commitment to deliver value for stakeholders.
The transformation occurring has resulted and newly awarded clients, including northeast, Georgia Hospital, and a self op conversion and the BMI sector with the addition of Corning incorporated a fortune 500 company and leading innovator and material science.
We also expanded our role at the University of Hartford, where we earned and facilities business another self op conversion.
With the higher and selling season underway, we were extremely pleased to be entering into new agreements with nine universities on and Pennsylvania State system of higher education, the largest provider of higher education and the Commonwealth.
But these new agreements, we will be serving 11 states on colleges and universities with them and the state system.
We're excited by these recent wins and remain highly optimistic about the extensive pipeline of opportunities.
Turning now to the second quarter revenue was in line with our expectations articulated on last quarter's earnings call and subsequent disclosures with organic revenue down 26% year over a year and improving compared to the first quarter and laughing when we began to experience a significant impact from COVID-19 and the prior year.
The team's unwavering efforts to thoughtfully reopen client sites throughout the organization led to social and led to sequential quarterly revenue improvement across all segments.
And sales volumes and the business began to reemerge more meaningfully we maintained extraordinary cost discipline and effectively managing the AOE and drop through rate to 15%.
Better than our outlook of 18% to 22% and returning to positive on our operating margins.
While we continue to invest and growth oriented resources, a O Y performance was driven by improved operating efficiencies.
This disciplined approach contributed to strong free cash flow generation of nearly $260 million and the quarter, representing an improvement over and over of over $150 million compared to the prior year.
Cash availability totaled $2 6 billion at quarter end and providing the financial flexibility to execute the strategic actions I just articulated.
Such as enhancing our capital structure and pursuing opportunistic mergers and acquisitions.
I'd now like to review the performance by business segment and the quarter.
U S food and facilities reported solid sequential quarterly improvement with key drivers and each business sector.
<unk> gained momentum as more students entered in person and learning environments compared to the fall and.
And higher education, we're enhancing the on campus experience to offer University communities added stability and flexibility connection like mindedness any innovation, our unique approach to creating a hospitality and ecosystem was recently highlighted and food management magazine.
And the K through 12 sector, approximately 70% of school districts across the U S offered greater in person or a hybrid learning with the USDA continuing its universal meal program just extended through June of 2020 two.
Sports leisure and corrections improved modestly with anticipated spring season, just underway and the second quarter, the NBA and NHL introduced fans at partial capacity based on the local regulation.
These are maintained steady performance with solid early attendance and national parks and corrections reported year over year growth.
And in recent weeks, we've seen and encouraging opening and major league baseball with our portfolio and collectively operating at approximately one third of attendance capacity at this time, and we expect increasing sand counts over the course of the season.
We've implemented innovative technology, including saltwater and kiosks mobile ordering and grab and go markets just to name a few.
And leisure, we are experiencing and record reservation demand for the upcoming and recreational season.
And business and industry additional client locations opened throughout the quarter, while companies adopt evolving return to work strategies, we arent experiencing early signs of success and solutions that extend the traditional office setting including months mail, our home delivery offering launched last quarter that has already experienced increased online ordering trap.
And with conversion rates doubling.
Quick eats our award winning walk in and walk out digital concept utilizing artificial intelligence is and other business offering that is strongly resonating with our clients and has applicability to other areas on the business.
Facilities and other demonstrated success in selling more frequent and comprehensive services as clients remained heavily focused on safety and hygiene, particularly as locations began to increase in person activities.
We continue to anticipate particularly heightened demand and this business.
Healthcare continued to report gradual improvement as visitor restrictions ease and elective procedures increased the team has worked tirelessly to create unique automated patient care experiences from the time of admission through discharge that include customized post care and meal delivery options to best serve ongoing dietary needs.
Yes.
International and demonstrated modest improvement quarter over quarter dogs, and strong performance from health care, and China, and Extractive services, and Chile with government imposed restrictions and other geographies, particularly in Europe and Canada. The team continues to impressively pursue growth now having won over 150 million.
And broad based new business since we started the fiscal year, while simultaneously delivering record retention rates.
I am also extraordinarily I'm pleased to announce the addition of Chris Carr side of CS and foodservice industry executive and many of you likely know.
Chris joins US next week to lead our international growth strategies.
Uniform reported improved quarter improvement quarter over quarter, while aggressively managing areas of the business that were affected by government and government imposed restrictions, particularly in Canada.
We continue to focus on value enhancing initiatives, including adjacency services expansion, which once again delivered double digit growth and the quarter.
Strong productivity from investments and growth resources that have resulted in improved retention rates and improved closure rates.
And ongoing progress and our ABS integration with this capability enhancing system on track to reach nearly 75% of revenues by year and with the remaining market centers. Shortly to follow these efforts collectively contributed to record high customer satisfaction scores.
And supply chain, we continue to optimize our spend pools and refine our relationships with the right suppliers to provide the best economics and access to innovative products.
We're also focused on our commitments to diverse suppliers and local and regional suppliers and sustainability are leveraged.
In addition, our simplification efforts was fueled procurement technology and process optimization are making considerable progress.
We launched our employee stock purchase plan to all eligible U S employees and early April with a goal of expanding globally and program delivered very strong participation in its first enrollment period with over 85% of those and rule set to become first time aramark shareholders.
And this initiative aligns our people values and performance, while reinforcing and ownership mindset within the organization.
Before turning the call over to Tom I'd like to take a moment to review our recent agreement to acquire next level hospitality announced two weeks ago.
And next level will strategically expand our presence and health care within the high growth senior living industry specializing in skilled nursing and rehabilitation facilities.
Provides an opportunity to immediately participate and are largely on penetrated highly self operated category with significant untapped potential to best serve this growing demographic there.
And the business commands comparable margins to us driven by culinary innovation quality and service offerings and client excellence.
We know the team extremely well and are excited to work together and driving our combined capabilities and expertise.
Lastly, I would like to share that Jeff Gilliam, who leads our health care Division will retire at the end of this calendar year I want to thank Jeff for his many contributions to the company.
I'm also pleased to welcome Bart character as our President and CEO for healthcare BARDA as a healthcare veteran with over 20 years of industry experience throughout his career. Bart has played an instrumental role in driving significant growth improving closure rates and building a culture focused on growth, we look forward to Barnes meaningful contra.
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Tom will now provide a detailed financial review of the business.
Thanks, and good morning, everyone.
As John mentioned during the quarter and specifically over the past few weeks, we continue to execute strategies and strengthen the business.
Whether it's bringing in new talent and acquiring new businesses, driving operating efficiencies or repaying debt.
We're committed to positioning the company for profitable growth and providing exceptional service to our clients and customers.
While our performance remains affected by COVID-19 revenue and the quarter reached over 70% of physical and 19 levels.
Increased business activity throughout the portfolio.
Strong client retention rates and attributed to improved revenue performance across all segments.
U S food and facilities reported and organic revenue declined 31% in the quarter.
Moving to a 45% decline and the first quarter with.
And with all sectors contributing to the improvement.
Solid quarter over quarter result, even as we begin to overlap the effect of COVID-19.
As a reminder.
Starting towards the end of the second quarter last year.
Progress was led by the education sector, which benefited from greater and personality.
And the heightened demand and facilities and other higher frequency of services as well as increased project oriented activity.
International organic revenue was down 26% compared to the prior year.
Reflecting a modest improvement from the previous quarter.
The team continues to tactically and navigate the government imposed restrictions.
And in Europe, and Canada.
Simultaneously driving growth initiatives.
We're extremely excited about the addition of Chris car side as John mentioned.
<unk> background and the industry further and complement the strong and experience and international team.
Organic revenue and uniform decreased 9% versus the prior year, a slight improvement over the first quarter.
Early signs of accelerated client re openings from areas of the business and have been heavily impacted by COVID-19.
Well as continued growth and revenues from the adjacency services.
Were offset by continued Lockdowns, and Canada and U S West Coast operations.
Adjusted operating income was $30 million and the quarter.
<unk> sales volume combined with unit operating efficiencies and above unit cost discipline led to a positive adjusted operating margin of one 1% and.
Oh, a drop through of 15% of the corresponding revenue decline.
Bottom line performance was better than the previously.
Articulated expectation of an 18% to 22% drop through for the quarter.
And including continued investment and growth resources and the a b S route system rollout and the uniform segment.
Corporate expenses increased year over year, primarily due to higher personnel and benefit costs.
Including the impact of equity based compensation awards, maybe late last fiscal year.
Expense related to the rollout and the new employee stock purchase plan.
Okay company cash cost and bonus accrual compared to the same quarter last year.
Adjusted EPS was a loss of 24.
Due to our proactive $1 1 billion debt repayment.
S revolver and receivables and facility interest expense and the second quarter was $4 million less and and the first quarter.
On a GAAP basis, Aramark reported revenue of $2 8 billion operating income of $5 million and.
Diluted loss per share of <unk> 30.
Now, let me turn to cash flow.
And positive operating income performance as well as effective management of working capital and capital expenditures and company generated 259 billion and free cash flow during the quarter.
Reflecting a $151 million improvement compared to the prior year period.
Note that the quarter included and 94 million federal income tax refunds due to the NOL carry back to fiscal 2020 associated with the cares Act.
Smaller crude expenses within the SME business and lower deferred income payments within higher Ed also contributed to the favorable year over year free cash flow result.
In addition, we continue to participate and the appropriate country specific government assistance programs, including benefits from the cares Act and the U S.
For these global programs, we received approximately $42 million of labor and credits and the second quarter to offset the cost we incur globally related to the retention of our employees.
And for absorbing 100% of amount of debt.
Costs associated with furloughed employees we.
We will continue to pursue opportunities to optimize the available stimulus programs.
Propylene.
Strong free cash flow performance resulted in cash availability and $2 6 billion at quarter end.
Finally, we made strategic use of capital to advance our priorities and included and debt repayment as well and refinancing to extend maturities and executing and Upsized revolver.
Collectively the actions taken on capital structure will reduce net annual interest expense by over 14 million on.
Of which approximately $4 million net savings benefit and the remainder of the year.
Going forward, we will continue to look at additional deleveraging opportunities.
But balance that with a disciplined use of capital investment to facilitate new business wins.
Drive results and existing client accounts.
As well as pursue selective accretive M&A.
M&A.
On the topic of mergers and acquisitions.
I want to share additional insight regarding our recent announcement of an agreement to acquire next level hospitality.
Founded less than five years ago. This business has quickly grown to over $160 million and annual revenues highlighting the growth potential and.
And the 16 billion and highly Underpenetrated and senior living industry.
New contracts require minimal startup cost and have a strong profitability ramp.
This has generated high single digit operating margins and is focused on providing a premier culinary experience and high quality environmental services.
Next level will continue to be run separately under its own brand.
But we will leverage the full scale their remarks resources, where appropriate to help accelerate the businesses growth.
We expect next level to be accretive to Aramark 's earnings early fiscal 'twenty, two and the.
Deal is expected to close later this quarter.
Customary conditions closing conditions and regulatory approval.
We continued our commitment to return value to shareholders.
The announcements this morning or on a quarterly dividend of <unk> 11 per share payable on June nine to shareholders of record on May 26.
And.
And finally, let me wrap up with an update of our view of the second half of the fiscal year I appreciate it and the pace and exact timing of recoveries and evolving.
We're encouraged by the current momentum of the business and we'll continue to leverage our resilient and variable cost operating model, while maintaining a growth oriented long term mindset.
Based on our current expectations, we anticipate continued organic revenue improvement over the course of the fiscal year.
Adjusted operating income margin of 4% to four 5% and the second half of the fiscal year with incremental quarterly progression.
And free cash flow neutral to $250 million for fiscal 2021.
Dependent on the timing of underlying revenue recovery.
Raised by $50 million on the top end of the range.
And this will include efficiently managing working capital Capex investments associated with re emerging business activity and the pipeline of the new opportunities, we have and profit.
Thanks for your time this morning, and now I'll turn the call back over to John.
Thank you Tom before taking questions I want to reiterate that the actions. We are currently undertaking and not only position aramark as a key enabler and a broader recovery, but also provide a strong platform to drive long term sustainable growth and success.
The immense opportunities and originally brought me back to the company are materializing led by our vision to be the most admired employer and trusts and hospitality partner.
And that's rooted and service to do great things for our people partners communities and planet.
Thank you very much for your time. This morning, operator, we'll now open the call for questions.
Thank you we will now begin the question and answer session EPS.
I have a question. Please press Star then one on your Touchtone telephone if you wish to remove yourself from the queue. Please press the pound key or the hash key.
If you will use the speakerphone you may need to pick up the handset first before pressing the numbers.
And in order to accommodate participants and the question queue. Please limit yourself to one question and one follow up.
And first online with a question.
Kevin Mcveigh from Credit Suisse. Your line is now open.
Great. Thanks, so much and congratulations on the results.
I guess this would be for China com.
Obviously really really good result.
For example, we started that Aramark portable are really encouraging thesis was the potential to accelerate the organic growth.
Given some of the balance sheet actions, obviously, coupled with next level things like that how should we think about the potential to accelerate the organic growth and even coming out of COVID-19. It seems like clearly youre going to be a share gainer, so any thoughts on.
Accelerating organic growth I guess, even within the context is kind of the two or how should we think about that longer term.
Well I mean, we're.
I think Kevin Hodges.
And stay on the question.
We are trying to get ourselves and a position where we've got flexibility.
We want to pursue organic growth and have the capital available to do that.
Where it's needed.
We want to be able to reinvest in our numbers.
Our sales force.
Training and.
And the number of people that we have out there.
So I think we're taking a balanced approach.
And we look at.
And how we how our balance sheet is fixed.
And we'll supplement with.
We don't want next levels on opportunistic and strategic M&A.
And so again provided and flexibility.
And for Us so that we can we do.
And not miss opportunities and our problems.
And I'll add.
All the investments we've made over the last.
Even during COVID-19 and over the last 12 to 18 months had been focused on organic growth and the additional sales resources and focus on foodservice sector as well as the uniform sector, you additional and leadership development activities and the leadership additions to the company have all been focused on creating.
And our growth environment, and really focusing on that.
As a key aspect of the company's value creation proposition.
And we see organic growth as the key to our future success, and we're making those investments because we believe in it and we're enjoying significant results.
As a result of that investment.
And new wins that we've described over the course of the last year and significant opportunities with a very robust pipeline.
Very encouraged by our.
And our organic growth on both the foodservice and the uniform side as well.
That's helpful. And then maybe a comment just on the dynamics of the facilities and other business across the other end markets. I guess just are you seeing more linkage between education sports leisure business and industry and then ultimately health care.
Post COVID-19.
And then more linkage across <unk>.
Facilities from a cross sell perspective and.
How should we think about that and just relative to the uniform business as well.
Yes, we are absolutely seeing higher levels of activity and the facilities services area across multiple segments with increased outsourcing and taking place.
And B and I higher Ed.
And our healthcare and life and Hawaii. So we arent, we arent experiencing that very strong demand as we mentioned in the script for those services as companies come back and increasingly in person and activity in most locations. So it is touching all of the various business units.
And we're very encouraged by that activity of the business that particular business has performed very well during the pandemic throughout and we expect it to continue to have a.
Very strong growth prospects going forward.
Additionally, on the uniform side, we're seeing additional requirements for cleaning and sanitation services, there as well and.
On the ancillary or adjacent to services offerings that we bring to bear.
And so we believe that that will continue to have an impact on the growth rate for a U S.
Thank you and our net.
Next question comes from Richard Clarke from Bernstein. Your line is now open.
Thanks for taking my questions and.
And so on the good set of numbers today, just as a starting here just wondering you're talking about incremental performance improvement through the rest of the year, whether you could give a sense of how the quarter look and maybe how April has looked and how youre looking into the Iot bits of Mei and <unk>.
And the organic growth and where maybe you're seeing that incremental improvement to this stage.
Well the improvement as you said fairly consistently across the board.
And we're pleased by that everybody is moving forward.
On April continues the trend.
And just looking at those numbers.
Literally as we speak and.
And we.
We expect.
And we don't see anything different at the moment.
And that would cause us to not continue to move forward and in the manner that it's been going for the last couple of quarters. So we're encouraged by that.
You know.
Looking forward further than that.
Don't know yet.
And we're staying cautious and impaired.
And for whichever way things move on more sharply.
Paired to reopen.
And pay.
Pace.
And if it accelerates.
So I'm encouraged by the trend at the moment and what we've seen in April.
But still.
Not quite.
And I need to say that things are going to reopen it.
And fast pace yet.
Maybe just a follow up on your property related to that you've raised the top end of your free cash flow guidance.
But kept the bottom.
At the same as it was for flat.
And part and usually I guess to widen our range with one more quarter of information all day scenario and maybe you can talk about what might drive you towards the lower end of that range or are you expecting and just try to be trending towards more to hire and.
Yeah. It's a good question and we did talk about that a bit and and I think and full transparency. There is a couple of scenarios.
With us on each and.
The low and is really a piece that scenario where.
Things progress.
Decently throughout the summer and and theirs.
And it was sharp reopening.
Reopening.
Right at the end of the year, so that would be and about working capital outlay.
Really.
Real debt the NFL stadiums coming back full.
Higher Ed coming back full and sort of that that push right. There at the end of this fiscal.
And that would create a working capital outflow to prep, but not having the benefit of the revenues and profitability and the year. So it really just a timing issue.
That's debt scenario.
The other the <unk>.
Upper end of the scenario, which is our biased.
At this point.
He is a more linear and take care.
And <unk>.
Reopening as we've seen over the last couple of quarters.
And Richard This is John I would just add a couple of comments on that you are the original part of your question as well and that is that the pace of recovery we are prepared to.
Advanced the ball, regardless of what happened and so I think we've been able to demonstrate over the course of the last year and that the management team can quickly respond to a changing environment.
And so if the pace of recovery accelerates will be well positioned to take advantage of that it really will be driven by our clients' interactions and decision, making with respect to how fast they bring back.
Employees or or associates and it will also be driven.
And by rates of vaccination at rates of.
Improvement in the sports and entertainment sector, So, we're well positioned and we see we see.
And as many do we see some light at the end of the total a little bit early yet to make the call in terms of how that will unfold over the course of the next.
A few months, but we're excited by the opportunity in front of us.
Thank you and our next question comes from Ian Zaffino from Oppenheimer. Your line is now open.
Hi, great. Thank you very much and Theyre very good quarter very good performance.
Wanted to just maybe expense and pilot and higher Ed you know I know you had a big win there just walk us through that.
And how competitive was it what was your your competitive advantage.
And in that win and I believe you've been hiring a bunch and in higher Ed and education. So is that sort of one of the fruits of the move there or how should we be thinking about that thanks.
And you know and we are certainly encouraged by our selling season and higher education and I think our operating team is doing a.
A great job.
And the sales team are doing and extraordinary job of building on the pipeline and the and the opportunities that.
And that are coming to the market.
You know that particular wind I think at.
All of our all of the business success, but we typically enjoy across a range of businesses. Because we have developed a proposal on a customized solution that fits the needs of that particular customer and so on and the case of the patchy and when I think our team and demonstrated to the Pennsylvania system that we.
Understood their needs and.
Very effectively.
And then we've had a strong partnership and the past and some of the universities that we had already served and so are the result of that both.
Very good performance as well as I think on extraordinary proposal resulted in and they're selecting aramark for that for that win so.
We're always focused on the quality of the solution and the customization and the.
On a solution set that best fits that customers' needs and that's what typically drives our wins.
Not only on higher education, but across our various businesses and.
So yes, we are out there and the market are we strongly believe.
And that we're gonna have a very strong selling season, and a very strong fall as businesses continue to reopen and higher education reopen fully and so we're out there hiring people very very rapidly.
Okay, Great and then a question for Tom how should we be thinking about.
Inflation labor labor availability of shortages.
And maybe what you're seeing there thanks.
Yes. It certainly is top of mind right now for all of US on the food side as you know.
Model is such that we're able to.
Flex menus and Chad.
And move through.
And.
Inflation inflation issues on.
On certain products.
So we'll leave that to the units and to our supply chain to get opportunity buys and and really create menus.
And that helped mitigate that for us and for our clients.
Contractually in many cases, we're able to pass that along and particularly in this environment.
More of a cost plus based environment.
Same thing on labor.
Probably a little bit more and more pressure, but as I've said before.
And the one certainty and my 20 plus years and the industry is there is there is labor inflation and labor pressure. So it's not anything we haven't dealt with.
But we do see opportunity.
Cities to mitigate those costs.
But also we will feel the labor pressures.
Over the next couple of quarters.
And as things settle down.
But we'll manage through that.
Day, we schedule the way we hire on the way we can reopen and then ultimately.
Through contractual.
Rights.
Thank you and our next question comes from farm stories from Exane B and peak. Your line is now open.
Hi, Good morning, everyone and thank you for the H two margin guidance States. That's helpful and it looks like you're going to deliver H two margins in line with global peers expect to do.
And maybe even a bit ahead. So I just wanted to maybe go back to Q1, and Q2, where I think it's fair to say you were behind peers in terms of operating margins, let's called your margin Brody breakeven and.
You said previously that you could have been higher and.
But you chose to invest and the business. So I'm curious if you're now able to quantify the investments you've made into the business over the last six months.
In dollar terms and help us understand how you're thinking about the all rely on those investments things like the.
The router system and your sales team members and both divisions et cetera, how much was it in total and how does it eventually or pay for itself.
Yeah, and that's a level of granularity and probably not.
Wanted to go into.
But certainly the cause and effect is as you as you've mentioned and.
We've been very resolved through the past year.
Continue on with the investment as John mentioned.
Primarily with sales both in uniforms and.
And.
Facilities work.
Building that debt.
Capability.
As we go further along and uniforms and started a little earlier.
And that and certain productivity areas like the ABS investment.
And we will reap the benefits of that over certainly the quarter. We are and will continue to force on the next.
Couple of years and beyond.
And we feel very comfortable with the return on investment and will get from it.
And and are very committed to and both John and I have seen.
And the model work and.
Our confident and then we can deliver this year too.
Yeah, I would just add.
And very consistent in terms of our discussion with respect to these investments that we've made over a period of time, beginning even last year with it.
The additional salespeople added and Ian.
Food and support services and we continue to make strategic investments in terms of adding additional salespeople and additional sales resources and capabilities and so.
And so where we're taking a very disciplined approach I think you are beginning to see as you saw on this quarter you are beginning to see that improvement and.
And we're seeing record retention rates across the enterprise not only and food, but also again and going.
On a farm services and those are a direct result of the investments and those.
Areas and so I think the long term payback from those investments.
They are becoming evident.
And we're continuing to be disciplined from a cost management perspective, but we're focused on the long term growth of this enterprise as being the real driver of long term.
A shareholder value creation and.
So we're we're disciplined but focused and it will continue to be.
Thank you and and I guess as a follow up you're seeing the results of those investments on the new business side, and you've mentioned a few of those wins, but just for the sake of transparency could you talk about any contract losses debt, we'd need to be aware of.
Ceded compass will be operating.
Central Michigan University from June one so a huge one but that's one that's going away. So maybe just the other side of the net new business picture.
Well I would I would tell you that we're and we're not going to we're not going to talk about specific.
Losses.
Although you mentioned one that's obviously one that we're.
Not happy about losing but that does happen and our business as it as it does for our competitors some of our recent wins have come from them as well.
And but I will tell you that we are enjoying record high retention rates across the enterprise and <unk>.
Food and support services as well as and uniform services. So I think the net new numbers will bear that out as we as we closed the year we're on.
Obviously in the midst of the selling season, so hard to say what the what the actual number will be at year end, but we're very encouraged by the results year to date, and where we're positioned and the wins, we've been able to recognize.
So far so.
And we're very very pleased with the net net result.
And thank you and our next question comes from Stephen Grambling from Goldman Sachs. Your line is now open.
Hey, Thanks on the senior living side some of your peers have been and this segment for a while with some success what are the competitive barriers to entry as you contemplated the acquisition versus perhaps building something yourself and one of the biggest benefits aramark brings to the transaction.
And our.
First of all this is a very underpenetrated segment and its obviously there is $16 billion worth of a revenue potential and this sector, it's an area where we.
Haven't participated for many years and we were not focused on that segment.
And and frankly, they are larger competitors haven't really been focused on this segment either they have relatively small positions and it as well.
And next level was very attractive because of the quality of the management team. The organization that they had been able to build and ever and a very short period of time and their focus on our high and culinary solution and a segment.
And you know that they traditionally didn't didn't have that as a solution and so they've been able to grow the business very very rapidly.
Offering a great combination of management and talent as well as our culinary capability and.
And that's why we've selected.
And to operate that brand independently on next level management team will continue.
Net growth focus.
And we're excited about those prospects.
Really it's an area that we believe we compete very weak and compete very aggressively and and grow very rapidly.
And it does have significant self op conversion potential and.
And the business is much more oriented towards systems kinds of sales now than it has been historically and instead of one off facility sales or system sales with large chunky opportunities. So that's what attracted us not only to the sector, but to Max level as a company.
Mostly.
Quality of the management team and the significant growth potential.
And that's there in that segment.
And I got to add in terms of what Aramark brings to the table and wanted it and think it was exciting for both next level on ourselves and besides the obvious at net benefit as they continue to grow.
And you get to that point and time, where you're going to have to add a lot of them.
And administrative support.
And for us and having to do that they can leverage.
Our base.
And we bring procurement opportunities for them.
Of course, so those are the two basic sort of blocking and tackling benefits, but I think theres also a culinary innovation and level of resource that we bring.
That we can add to what they've already brought to the industry and then facility technology.
We've got a very.
Advanced group and an advanced set of technologies and in our cleaning and environmental services and we will.
Pair that up with theirs.
Hopefully make.
Both better and.
And advance those I think there is some good overlap, even though there'll be run under their own brand.
We will again very thoughtfully put together.
Businesses, and the right ways and the right timing.
Fair enough and then maybe a follow up for you. Tom you gave a number of items in the quarter and year to date on free cash flow that were impacting the numbers that were reported and you've raised the top end of the expected range for the year, how much of that is incremental confidence and the business versus upside in the quarter from some of the.
Factors that you cited.
It's a bit of both.
So that is certainly the.
Some of the factors I mentioned.
Have helped to the upside and I think the business is also operating very effectively and efficiently and just core working capital receivables payables inventory, which is lifted so some confidence.
You know on a range as we've as we've moved through the first half of the year.
Thank you and our next question comes from Andrew Steinman from JP Morgan. Your line is now open.
Hi, I just wanted to talk a little bit about the operating efficiencies that you've invested against those.
And those are things like the supply chain and enhancement of systems upgrades and other operating efficiencies.
Wonder if you'd be willing to quantify what level of revenue Aramark has to re achieve to return to the pre COVID-19 operating margins Aramark had at the time.
I've said less.
And I will stand by that and how much less.
Not quite ready to put a number on it but certainly less we can and will get to our pre COVID-19 margin before we get back to the $16 billion ish.
Revenue level.
And maybe just one more comment obviously on the system upgrade which is within you know within the uniform business. When do you get back to prior peak revenues on on uniform, you know where do you feel like the margin trajectory going for uniform.
Yes.
Good morning, Andrew I think.
We've consistently talked about significant margin improvement as a result of the ABS implementation.
And we expect that as we as we complete and implementation.
Margin trajectory will be significantly improved.
We've talked on the past about a couple of hundred basis points of margin improvement as a result of that implementation coming from a variety of areas. We don't see anything during this rollout that leads us to change that.
And in total over that expectation so.
We believe that will have a very strong margin improvement as a result of.
Both the ABS and womens implementation as well as well as the secondary benefits from that come from that by improving retention rates and improving closure and closure rates on new account wins.
And thank you and our next question comes from James Ainley from Citi. Your line is now open.
Yeah, good morning, everybody.
I just wanted to pick up on the comments that you made earlier about very high levels of retention.
And it feels that the industry has seen some stalling and processes over the last year.
Helps support retention.
Are you now seeing evidence that those price. This is it being kind of kicks dog food and hence why you're starting to see some more new wins coming through and ease.
And that kind of driver of those new wins.
And from here. Thanks.
Yeah, I would I would say the level of new account activity use back to pretty much normal pace.
And companies that had deferred decisions have gone back into the mode of going ahead and going through bid processes, but.
And we've enjoyed very strong proactive retention efforts throughout our business and.
We are seeing.
Yeah.
Lot of proactive renewals of contracts.
And given the organization. So I would say, it's a combination of two things improve retention has come as a result of that proactive effort.
And as well as it is and as.
As the recognition of many organizations and the quality of the job that Aramark had done.
During both pre and during.
The pandemic, so I think that's driving retention more than anything else, but we are seeing.
Increased activity across this across the various business units.
In terms of bid processes that pipeline is very active across all segments, both domestically as well as internationally.
Okay. Thank you and maybe as a follow up could you could also give us some maybe some similar color on on the M&A pipeline.
There was some thoughts that you want on the pandemic there may be some opportunities to pick up distressed operators and are.
Are you seeing vast or is that kind of faded and how competitive a little.
Bidding price this is and in an M&A transaction.
You know I would I would say that early on and there were a couple of opportunities to look at companies that were in.
Rather than use the term distressed I would say and look at companies that were.
And that we're looking for strategic partners.
And we passed on.
Several of those opportunities because it wasn't a good business fit and it wasn't a strategic.
Tension of capabilities for us and in some cases are those companies had on what I would characterize as low margin low margin profiles and certain sectors. So.
So we did look at some opportunities and I would say that that has been relatively quiet.
And the kinds of opportunities, we're looking for a really strategic extensions into markets that represent a bulk new opportunities from a self op conversion perspective.
As well as kind of capability and service extension opportunities.
And our core business so we.
We do have a very active.
Our pipeline of opportunities that we're always considering but we will be very disciplined and M&A is not our primary growth strategy organic growth as our primary strategy. So we'll be opportunistic, but we'll also be very selective in terms of those things that we pursue.
Thank you and our next question comes from Manav Patnaik from Barclays.
Your line is now open.
Thank you I was just hoping you know the four to four and 5%.
And I imagine you have you know what what kind of dropped two have you baked into that number.
We're now that we're coming into the other side.
Of COVID-19.
And we're.
Obviously moving away from that and as a.
Benchmark.
On a metric.
On the upside so.
And we really looked at and from that angle.
We're looking at margin now back to sort of the traditional.
Healthy upside way to look at the business.
Okay Fine and then just on the free cash so I apologize if I missed this but how much was the cares act kind of tax benefit either this quarter or what's baked into the into the ear and you know if we should think about that kind of rolling off the falling year on how we should try and try.
Try and do that.
Yeah. So you know the cares Act, we've got two major things going on one is the reimbursement of carrying cost for furloughed employees and.
And.
Government reimbursements internationally.
And we're offsetting so they don't they really don't they are not a help or hurt this year that they are just there to offset cost carrying cost. So it won't be a detriment next year.
The NOL carryforward, the refund and that we received for that through the cares Act.
It wasn't cash flow benefit this quarter and.
And this year.
We will not have next year.
As one of the reasons, we do on them.
To call that out.
Thank you and our next question comes from Shlomo Rosenbaum from Stifel. Your line is now open.
Hi, Good morning. Thank you for taking my questions. My first question has to do with kind of the new wins and the prospects in the coming quarters, John you've talked in the past about some of the no programmers, becoming programmers and could you talk a little bit about what we should expect over the summer because we're coming into a pretty.
Big.
Sales season for tour and higher Ed should we see a lot more of that kind of coming through and.
Really validating and illustrating that the pandemic and net net it's going to be a benefit for the industry and and Aramark in particular.
Yeah, I would I would say we are seeing.
Yes, significant self op conversions and multiple business segments.
Okay, and facilities and P&I and higher Ed there there are.
We're seeing that and we've got some up and we're working on some opportunities today that are very non traditional in nature.
And.
And which I really can't disclose because because of the strategic value of that and those opportunities. So I.
I would say, yes, we do see.
And increasing trends towards outsourcing, we do see that evidenced and both of our wins. So far this year Corning for example.
One of the last really big self op at me and I opportunities was a great win.
And it would be and I team and again on the facility side.
And so yes.
And as the short answer we are seeing more.
Self op conversion and we expect it to continue.
Okay and.
And then can you talk a little bit about what you're hearing from the higher education clients of yours in terms of their plans for reopening and the fall like what what are they looking at right now what kind of visibility are they expecting you know how much more.
In person are you really expecting to see any material hybrid how should we think about debt.
Yeah, I would say.
I would say work and we are anticipating a very robust fall season with with virtually all universities being in person on site.
On the discussions have been very.
Pointed.
With respect to their intentions I.
I would say that.
Never know things could evolve over the course of the summer, but yes, if we continue to see the current trajectory of improvement.
And Ian vaccination rates and lowering of infection rates.
Et cetera, I think youll see a very robust higher education season, and frankly, a back to school environment and the case through 12 sector as well.
And all of our conversations lead us to believe that that will likely be the case and it is sunny.
And in some institutions there are actually projecting housing shortage is based on a very high student demand for in person opportunities. So.
I would say, we expect a full hire and season come fall.
Thank you and our net.
Next question comes from Toni Kaplan from Morgan Stanley. Your line is now open.
Thank you.
And then you could get a little bit more color on what's going on with uniform on your growth was pretty similar to the last two quarters and Meanwhile, Tim and the public competitors have been improving and you mentioned the government imposed restrictions on Canada.
But just help us understand if you think that you're losing share or.
And if that's not the case and and whether you think it will improve through the year.
Yeah, I know I would say, we're definitely not losing share and in fact.
I'd say based on the level of new closures and.
And high retention rates that we are maintaining or improving share and large and and.
And large part I think there are two phenomenon and that are occurring that that caused that variation and one of which is.
The geographic presence in Canada and our.
Our orientation in terms of the West coast and as you know the restrictions and California had been very stripped.
Strips and so that business has been slower to respond. So I think our geographic orientation has been a part of the issue in terms of the comp.
And as well as our focus on hospitality and food and linen and get in the hospitality sector.
Both domestically and in Canada. So there are those two those two issues really account for the vast majority of the difference.
And as we see that business and.
We see restrictions ease and.
We can see the rate of sales and the rate on average weekly rental volumes.
Up almost instantaneously, so as the as the state of California Normalizes and.
We will see a significant improvement there and.
Canada is the same way there and it's been very restrictive and Canada. So our business operations. There are working very very hard just to maintain.
On the level of service and.
The sales that day.
And that they have so I would say those are the two reasons.
And we we do a very deep dive operating review in the business.
Literally every month.
And as we walked through the data as we look through the day that those are the two areas that are.
Net are.
Evident to us.
That's really helpful and earlier in the call you mentioned and that's a quick each program was resonating with clients and that there were some aspects applicable to other areas of the business I was hoping you could just expand on what those.
It might be what opportunities you could get from that thank you.
And yeah, it really quickie says and as a hybrid artificially intelligent concept, where you're literally walk in the room.
And in Europe.
And select products off the shelf and you walk out and your build automatically.
And to your credit card, so it's a contactless environment.
And you know many employers look at that as being a very significant addition to their potential convened.
Convenience store strategy.
And that that had.
As applicable applicability across all of our business units.
It's one that is pretty.
Exciting that was award winning last year and we're very excited about the implementation of that.
About debt of that concept.
And that really is a.
And then touchwood solution.
And that people really respond very positively to.
Thank you and our next question comes from Hamzah <unk> from Jefferies. Your line is now open.
Hi, This is Mario <unk> filling in for Hamzah.
And sorry, if I missed this earlier on the call, but could you just talk about your mix of cost plus versus P&L contracts and what that looks like today and then maybe even going forward should we expect that mix stay pretty consistent.
And then I guess just for reference just remind us on how that's changed versus pre COVID-19.
Yes, if you think back to our previous discussions.
Net.
The mix of cost plus contracts changed dramatically as a result of the implementation and.
Particularly on the P&I sector.
And that type of contract and we haven't seen a significant shift back towards P&L, we do anticipate that as companies come back.
And reach and reach.
Their employees back and operations that we will transition and those contracts over time.
But today I would say there hasnt really been a significant shift we're still operating at very high levels of management fee agreements.
Our cost plus agreements and the P&I sector and the other and the other businesses higher education, we've transitioned back to our normal agreements under most circumstances.
So it's really more of a b and I phenomenon than anything else and that will take time.
And to convert as employees come back into their work environments.
Great. Thanks, and then my follow up is on.
On just a turnaround and you talked about the investments being made over.
The past few months and years, and I and Youre not quantifying the exact amount that you're investing but.
But maybe you can just give a sense for what inning, you're in and that U S. Core FSS business and then maybe how much you think COVID-19 has masked the work that you've been doing underneath the hood and and are there any milestones that we should expect at.
And at least over the next year or two and that turnaround.
Yeah, I would say certainly COVID-19 has masked the impact of the work that's been done.
We continue to and we continue to invest and people.
And Ian.
And resources in order to accelerate the organic growth rate across all the businesses and so on each of the business units has developed.
Three year plan with respect to growth expectations are they're working through those three year plans there is phased investment and each of the years.
And.
We're working very aggressively to to go ahead and achieve those individualized plans at the business units and put together so.
And we won't quantify the dollar amount, but I would tell you. It is and it is a significant investment on the part of the company.
And you'll see it and the earnings.
Over the course of time as we continue to grow the business and.
Accelerate the growth rate and.
The returns are.
Every time, we add resources, we have a high expectation for those to return.
And its profitability and to improve the ROIC and the businesses. So.
It's a disciplined approach and it's a measured approach.
A multiyear approach.
And we're very happy with what we've been able to achieve so far and it will become more and more evident as.
As COVID-19 receipts and you see the new account wins and our retention rates continue to rise.
Thank you.
And just add into your to your latter part of your question is.
The left was heavier and uniform in terms of what needed to be invested in both the growth and productivity initiatives. So probably 56 setting there.
And we did start earlier.
On the food and facility side, primarily focus on the growth investments.
And fourth.
And fourth inning, and we're making good progress, but we've got a.
A ways to go and and.
We're excited about that and the benefits to follow.
Thank you and our next question comes from Stuart Gordon from bearing Burke. Your line is now open.
Yeah. Good morning, just going back to the margin guidance and I appreciate the comments and moving more towards thank you and the absolute margin.
If we just look at where consensus sits and revenues for the sake and that was at $6 $4 billion.
It's going to imply a drop through to get that margin of.
Between six and 9% which is a.
15 meaningful step change day deal and.
So given that its already pretty strong at 15%, it's either that or you are beginning to see.
Reason to believe that the recovery comes much much faster than is currently anticipated by the market. So just wondering if you could give us some color on that.
And whether there was any other moving parts and the second half that's going to make that drove so much better to give you the fourth quarter and 100% margin.
At the store and like I said I Havent spent a lot of time and I'm happy to be getting off drop through rate as a metric.
And given that we're back into positive territory.
So I've been looking and as I said and warranty absolute margin.
And we feel comfortable with.
And the four to four and a half again.
Slightly revenue dependent but.
As we talked about before as long as we continue to progress.
At the at the rate we have seen over the last two or three quarters again April is in line with that expectation.
We feel good about hitting.
Hitting that range.
We.
We don't need we don't expect to need.
And accelerated recovery and the second half of the year to achieve it.
<unk>.
And so.
I think that's probably the best color I can give you at the moment.
And it's not that net margin range isn't dependent on anything different than we've seen over the past few quarters.
On the top line.
Thank you and our last question comes from Gary Bisbee from Bank of America. Your line is now open.
Hey, guys good morning.
A lot of comments and optimism around new business trends and I realize the selling season is still ongoing but if we just take a step back and look at the last year.
Wins of which there have been many you've called out.
Does this compare to at least selling season to date to pre pandemic year are you are you ahead.
Is it in line and is that is that a win given the environment or just how would you think about that and and and then the second part of the question.
Given the success with the self op conversions is there any risk that the whole industry, which is talking about that being a very positive trend today sort of pulling forward some of the future demand potential.
It's a difficult environment.
More than the normal level of people to make that make that decision.
Any thoughts on either would be helpful. Thank you.
And it's it's interesting the way you phrased the question because it's very accurate.
Probably in line and the new business is probably in line with past years, which is a wind and the environment because as John referred to.
A lot of processes have been paused on the lab.
Last year or so so.
And that's sort of a win in and of itself and.
And a testament to the teams we have in place and.
And the growth culture.
The challenge, we reinstituted here over the last 18 months.
So we think we then leverage off that.
As the RFP processes.
Get back more towards normal cadence.
Yeah, Yeah, and it's hard to say how much of this business is pulled forward and there certainly are certainly a heightened level of activity from from a self op conversion perspective.
And many companies, who never considered and evaluating it as a possibility so.
But I would say the market is the market is so big and so and there are so many opportunities I don't really see it as a detriment to future years.
In terms of opportunity yet.
Yeah.
Might change the percentage of where the business comes from.
And any given year, but but I would tell you that they're on.
Plenty of pipeline opportunities that are not self op that are really.
And customers, who are already outsourced looking too.
The quality of their services from other providers.
And I don't know that pulling it forward is something on that I would be concerned about and we talked about this before.
Yes.
We don't see and prior.
And comparable to what we've seen last year, but but in other instances when it was only one nine.
Or non.
And on 11, Sars all of that before.
There was there was always a little uptick and and the move to outsourcing out of those and.
We're seeing that and start to play out here, where theres not some massive rush and it's just it's and all.
And as people look at it more because it is again, a very emotional decision to go from selling fob to outsource and and that's still tends to hold people back and getting comfortable with the whole process. So.
Phil talked to be on to the impressions versus mass rush to two.
To outsourcing it.
Inc, and <unk>.
And Ed and anticipated it.
It's a nice bump up and.
Debt against the big runway that we have and this industry.
And a nice place to be but it's not sacrificing long term growth.
Thank you I would now like to turn the call back over to Mr. Zelnick for closing remarks.
Again, thank you all for joining us. This morning really appreciate the interest and on the questions and look forward to the opportunity to chat further.
Has the days unfold and as I said, we're very encouraged by the results on.
The quarter and I want to say, thank you and all of those Aramark associates around the world.
Just last week, we had our employee appreciation day and the senior leadership team took the opportunity to express our gratitude towards the entire organization and so again I want to say, thank you and all of the people of Aramark for your hard work great effort and.
And your love for this company. So thank you very much.
Thank you for participating this concludes today's conference call you may now disconnect.
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Okay.
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Every day.
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