Q3 2021 Aramark Earnings Call

August 10, 2021

[music].

Good morning, and welcome to our March 3rd quarter 2021earnings results Conference call. My name is Paul 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 are even listen only mode.

We will open the conference call for questions at.

At the completion of the company's remarks, I will now turn the call over to at least get sell Vice President Investor Relations and corporate Affairs and Steve.

Please proceed.

Thank you and welcome to Aramark 's third quarter fiscal of 2021 earnings conference call and webcast I.

I hope those listening are doing well.

We will be hearing from our Chief Executive Officer, John Zillmer as well as our Chief Financial Officer, Tom on drop off as a reminder, our notice regarding forward looking statements is included in our press release. This morning, which can be found on our website.

During this call we will be making comments that are 4 at looking actual results may differ materially from those expressed or implied as a result of various risks uncertainties and important factors, including those discussed in the risk factors M DNA and of.

There are 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.

With that I will turn the call over to John.

Thanks, Felicia and thanks to all of you for joining us today.

This morning, I'll provide a strategic review of the business as well as highlight the significant opportunities ahead that we believe will contribute to aramark strong and profitable growth true.

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In the third quarter revenue has improved as the quarter progressed led by an accelerated pace of client reopening some of the United States, particularly within our sports and entertainment and leisure portfolios.

This upward momentum continues largely due to our team's dedication to serving clients and focusing on our growth agenda.

Our ongoing commitment to be a trusted partner has led to significant new year to date business and high levels of client retention that exceed 96%.

The selling season in higher education, just finished and we achieved a record number of new account wins driven by historically high closure rates are testament to our investment in leadership sales resources and training.

In the past few months alone we've added numerous higher Ed institutions to the client portfolio, including the University of South Carolina, Beaufort and at St. Peter's University, and we are in the process of finalizing additional contracts that are preparing to begin operations for the fall semester.

We are also extremely proud to announce that we've added 5 historically black colleges and University clients this year, including North Carolina, essentially University and Elizabeth City State University.

We continue to expand and extend our current partnerships and are pleased to announce at we have finalized a 10 year contract with the University of North Carolina at Chapel Hill, extending a 20 year partnership.

Beyond higher education, new business wins occurred throughout the organization, including our BMI sector, adding walmart's headquarters and our sports and entertainment business, gaining the athletics programs for the University of Arizona, and Virginia Tech just to name a few at <unk>.

K through 12, we now provide foodservice to the Fort worth Independent School district of significant self op conversion.

We are seeing greater first time outsourcing activity with nearly half of our wins in the U S segment coming from self op conversions. This fiscal year up from historical levels of approximately 1 third.

In our international segment, we proceeded to win broad based new business across all geographies that most recently includes the addition of the University of Toronto Mississauga.

We're pleased with our overall sale of progress to date and there are additional significant opportunities in our pipeline that we expect to close in the coming months as well as into our new fiscal year.

Turning now to Aramark performance in the third quarter organic revenue increased 34% year over year and reflected ongoing sequential quarterly improvement.

AOI margins grew to 3.6% in the quarter driven by cost discipline and scalable operating efficiencies.

In reviewing the quarter by business segment U S food and facilities drove an organic revenue increase of 52% year over year, resulting in solid sequential quarterly revenue improvement education.

Education began notably recovering before the final bell of the academic year. The team is aggressively preparing for the upcoming fall semester. When we expect essentially all clients to return to in person learning.

K through 12 continues to benefit from Universal government sponsored meal programs that are extended through June of 2022.

And higher Ed, we're providing additional meal flexibility new offerings and digital innovation. This includes the launch of food lab that features rotational menu concepts unique product introductions and seasonal events. In addition to premiering restaurant row in partnership with local restaurant entrepreneurs.

And sports leisure and corrections demonstrated significant improvement, especially at the end of the quarter.

The NBA steadily increase sand counts throughout the playoffs, and all of our major League baseball clients move to full capacity by July 1.

Side from the Toronto Blue Jays, who just returned home last week permitting partial fan attendance.

Leisure kicked off the recreational season that typically begins in late may with strong visitor of frequency following a record reservation demand.

Corrections has already returned to pre COVID-19 levels.

The sector has experienced highly encouraging trends as many of return to typical summer activities attending baseball games concerts and the national parks.

In the coming months, we are also gearing up for full capacity expected throughout our NFL portfolio.

Business and industry experience, an uptick in activity throughout the quarter as companies execute return to work strategies, we expect a greater proportion of our clients to be in person post labor day.

Many clients are offering food services is an added incentive to further attract employees back to the workplace that includes adopting subsidized pricing or offering complimentary meals.

And we've recently implemented our artificial intelligence and touchless payment technologies and many of our client locations to create speed of service and compelling grab and go options.

Facilities and other has outperformed at pre COVID-19 levels, driven by more frequent and comprehensive services. The facilities business had great success in vertical sales extensively expanding its offerings to existing client locations.

Health care steadily improved largely reflecting increased retail activity as visitor restrictions eased the business is expected to greatly benefit from heightened demand in elective procedures that had been delayed due to COVID-19.

Our acquisition of next level of hospitality officially closed on June 4th and has already contributed over $23 million in revenue, which we believe is indicative of the growth opportunities for at ahead.

International continues to effectively manage through various stages of geographic recovery as a team exhibits ongoing agility and responsiveness and addressing of real time client needs.

Organic revenue increased 20, 28% year over year with areas such as China already.

Surpassing pre COVID-19 levels in Chile operating at high capacity driven by mining services, given the very high demand for copper.

From serving the world leaders in delegations at the NATO summit in June to the athletes at the Olympic and Paralympic villages at as a privilege to provide clients the support that they need.

Uniforms continues to make progress on our strategies to optimize new sales resources. In addition to implementing the ABS rollout currently underway organic revenue increased 5% in the third quarter compared to last year as most based volumes rebound.

<unk> seen a slower recovery in our hospitality business approximately 20% of pre COVID-19 revenues in the Canadian market, where government imposed restrictions were still in place throughout the quarter of.

<unk> services, including of first aid and restaurant management once again drove double digit growth and we continue to see a significant opportunity to expand these offerings.

Retention rates have improved 300 basis points and customer satisfaction scores increased to 10% higher than pre COVID-19 levels, a reflection of the transformative actions underway.

In supply chain, our team has been effectively managing through market and category needs working in close collaboration with our clients and supplier partners.

This includes leveraging our significant purchasing scale and a broad bench of cross channel partners.

We're also deliberate in our menu design, given the inflationary environment and apply flexibility on menu of alternatives as appropriate.

While it's not our preference were able contractually to pass on increases in supply chain pricing.

Supply chain overall focus remains to optimize spend ensure availability of innovative products honor our commitments around local and diverse suppliers and stay true to our sustainability efforts.

On the labor side, we're confident in our ability to appropriately navigate the current marketplace. We have a strong talent acquisition team and compelling programs in place designed to attract top tier talent, including our newly instituted instituted employee stock purchase program. All featured in our recently launched Aramark careers website designed to Cree.

And at an optimal candidate experience.

Aramark is consistently recognized as an employer of choice and highlighted as 1 of the world's most admired companies by fortune.

We've been successfully implementing strategies to mitigate labor costs led by disciplined scheduling protocols and efficient resource management aligned with demand as well as differentiation through innovative technology.

We're also able to benefit from our scale by utilizing our full employee base and leveraging client locations in adjacent geographies.

Lastly, I am extremely proud of our B, well do well commitment that continues to make important strides to reduce in equity and improve the health of those across the globe.

Through our healthy for life initiative, we were honored to have recently been recognized by the American Heart Association with a reward for Meritor Meritorious achievement based on our efforts to promote better nutrition and lifestyle.

We are also appreciative to just being named as 1 of the best companies from multicultural women by ceremony as well as 1 of the best places to work for disability inclusion with a score of 100% on the disability of equity index for the fifth consecutive year of reflection of our dedication to create equity and increase access to opportunities for our team.

Before turning it over to Tom I want to take a moment to thank our board member of Calvin Darden for his many contributions to Aramark. Following his retirement announced a few weeks ago cash.

How closely partnered with me to creator of Executive diversity Council that is focused on leveraging diversity equity and inclusion to elevate our culture drive business outcomes and advanced positive social impact we wish <unk> the best.

Now Tom will provide a detailed financial review of the business.

Thanks, and good morning, everyone.

Over the next few minutes I will discuss our financial results in the quarter as well as provide our outlook for the remainder of the year.

As John mentioned, we are encouraged by the continued base revenue recovery in the quarter tied to improved levels of business activity throughout the portfolio as.

As well as increasing contributions from net new business.

Accelerated pace of client re openings, driven primarily by the sports and entertainment and leisure businesses.

Contributed to the organic revenue, reaching 73% of pre COVID-19 levels compared to just 55% during the third quarter last year. These improving trends have extended into the fourth quarter.

New business wins continue to build within all segments and the pipeline is robust as we approach the new fiscal year.

With the education selling season, just finishing the K 12 at higher education businesses should deliver their highest level of annualized new business revenue since aramark IPO in 2013.

And the uniform segment fueled by the sales investments made over the past 18 months along with our international segment are on pace to approach record levels of new business revenue as well.

We will provide annualized components of revenue growth at summary of wins detail on the year end earnings call.

Adjusted operating income was $106 million in the quarter, resulting in a constant currency AOI margin of 3.6%.

Up over 250 basis points from the second quarter.

Higher profitability across all segments was driven by rebounding sales volumes combined with effective cost management, partially offset by ongoing investment in growth resources and inventory write downs for certain PPE and uniforms.

Corporate expenses increased primarily due to higher equity based compensation.

Associated with the company's incentive strategies to align the organization with shareholders.

Yes.

Adjusted EPS was <unk> <unk> compared to a loss of <unk> 69 at the same period last year.

This significant improvement was led by the profitability drivers just discussed.

As well as at partial quarter interest expense benefit from the 500 million of debt repayment completed in early June.

In the third quarter Aramark generated net cash provided by operating activities of $12 million and spent $101 million of capital expenditures, resulting in a use of $89 million and free cash flow.

Typical based on the historical cadence of the fiscal quarter.

Net cash from operating activities benefited from increased operating income as well as strong working capital management.

<unk> expenditures continue to be managed with purpose to drive performance in existing accounts associated with client re openings and support growing new business activity.

Through 9 months of the company is driven at $309 million year over year improvement in net cash provided by operating activities combined with a favorable 15 million variance.

And capital expenditures to produce at $324 million improvement in free cash flow.

This strong year to date result was led by improved operating income and effect of working capital management as well as the benefit of deferred payroll taxes.

And at $94 million federal tax refund that occurred in the second quarter related to the cares Act.

Note that we continue to participate in the appropriate country specific government assistant programs from which we received approximately $130 million fiscal year to date and labor credits.

These credits offset the cost we incurred globally related to the retention of employees and for absorbing 100% of the benefit cost associated with furloughed employees.

As a result of our solid performance of free cash flow, we had over $1.9 billion in cash availability at quarter end, allowing us to advance our capital allocation priorities.

Including our acquisition of next level of dividend payment in the quarter.

We remain well positioned to evaluate additional deleveraging opportunities.

Balance of our disciplined use of capital investment.

Facilitate new business wins and drive results and existing client accounts as well as percentage.

Pursue select accretive M&A.

As previewed last earnings call. We took further actions this quarter that strengthen our balance sheet. In addition to debt repayment, including.

We refinanced 833 million of of 202020 for term loan B credit facility to extend maturity to 2028.

Closed at 3 year extension on substantially all of our revolving credit facility as well as term loans ANC to 2026, reflecting approximately $400 million.

Upsized, our revolving credit facility to $1.2 billion increase in cash availability by over $200 million and most recently.

Finalized an extension of our existing receivables facility by 2 years through June 2024 to provide additional financial flexibility.

These are of refinancing actions together with the $500 million debt repayment mentioned earlier are expected to result in a quarterly interest expense savings of approximately $3 million going forward.

I will now briefly review our GAAP results.

<unk> revenue was 3 billion operating income was $74 million and diluting earnings per share diluted earnings per share was <unk> 13.

Results for diluted earnings per share included the benefit of a noncash gain on an equity investment in the San Antonio Spurs of $138 million.

Partially offset by a non cash loss of $61 million from the termination of certain defined benefit pension plans in Canada.

Exiting the pension plans with a proactive action to eliminate uncertain future liabilities.

Before moving to our outlook for the fourth quarter I want to quickly review a few key modeling assumptions.

As you can see at our third quarter results of the performance of the next level of hospitality will be excluded from organic revenue and adjusted operating income metrics.

Until we lap the acquisition date in Q3 of fiscal 'twenty 2.

At the beginning of the fourth quarter of share count is expected to be approximately $258 million with the increase driven by the timing of equity based compensation as well as the cumulative participation in the employee stock purchase program.

So let me wrap up by sharing our outlook for the remainder of the fiscal year.

We are extremely encouraged by the upward trends of the business, while appreciating the exact pace and timing of recovery is evolving as we continue to monitor the broader environment.

While developing and executing a wide array of client reopening plans, we will leverage our resilient variable cost and unit business model continue to implement our supply chain strategies.

And drive above unit operating efficiencies.

Based on our current expectations for the fourth quarter, we anticipate continued organic revenue recovery, reaching 80% to 85% of 2019 levels adjust.

Adjusted operating income margin in a range of 4.5% to 5%.

And free cash flow outlook raise to generating $150 million to $250 million for the for fiscal 2021 day.

Driven by an expected strong seasonal cash inflow in the fourth quarter associated with the higher education business.

Thanks for your time this morning, and now I will turn the call back over to John.

Yes.

Thank you Tom.

Enormously pleased with our business execution and successfully reopening at client locations now at an even more accelerated rate combined with driving our growth strategies that are expected to result in a record new wins by the end of this fiscal year and this is just the beginning our teams across the globe are of greatest asset and I want to personally thank them.

I'm from their heroic acts that are driving trust and confidence and at Aramark prosperous future.

Thank you operator, and we will now open the call for questions.

Thank you we will now begin the question and answer session. If you have a question. Please press Star then 1 on your Touchtone phone if you wish to be removed from the queue. Please press the pound sign all of the Husky.

Of our using a speakerphone you may need to pick up the handset first before pressing the number.

In order to accommodate participants in the question queue. Please limit yourself to 1 question and 1 follow up.

For Mr. Zhang from Zain BNP Paribas is on line with a question.

Hi, Hi, everyone. Thanks for taking my question.

2 short ones.

Hey, Thank you just from the.

Number of reopening outlook looks like you have solid visibility now on which clients want to be back at which level of et cetera, youre guiding on revenue.

We'll go to tweak the cash flow guidance to reflect the working capital that comes at those reopening.

Curious whether September.

September reopening also has an impact on margins in particular.

Have been any of reopening costs.

In your Q3 operating profits or if there will be of reopening costs in <unk>.

Q4, if I can.

You did in your margin guidance and the effectiveness of that 1 off.

That provides upside into next year.

And then just briefly at couldn't help but notice that.

We've always discussed procurement as a division.

Thomas from some more disclosure on net new business growth new business retention all of those components with so far you've refrained from making any reporting changes or disclosure changes just curious.

If there's a batch of those coming from the full year results.

Yes, I'll take the last question first and then Tom will address the first 1.

Yes, we don't recognize new business wins until we have of signed contracts. So we are always hesitant to go ahead and named those accounts until we have the documents in our hands. That's our that is our general approach.

So even though we have new wins that are under letters of intent, we wait until we have a signed contract before we announce them.

And we always wait for our clients to give us their approval to do so so.

Our intention is to document of our new business wins for the year and our year end call when well catalog those opportunities and those wins from the year end.

Give a greater level of detail at that time.

Yeah and on the margin question certainly Q4 is.

<unk> up to be a little bit more uncertain given the.

That's the last few weeks.

So the reopening within business dining in particular.

A little bit within education K 12.

Will it include some uncertainty and cost above the unit.

That we're factoring into that guidance.

As we tried to.

At <unk> engineer of the work week.

Is the phrase we are using it.

Understand when people will be in how many people will be in the flow.

That will be.

Created for the companies that are are coming back after labor day.

That all comes at a cost our first priority is to serve our clients at the.

Fully staffed for what they expect to come in but I think there is still a lot of uncertainty client decline as to.

Those coming back what what that will take so.

Where client first.

It could carry some.

Cost.

Transitory in the quarter as we as we reestablish ourselves and we factor that at.

Alright, thank you.

Gary Bisbee from Bank of America.

On line with a question.

Yeah, Hey, Thanks, Good morning, guys, maybe just following up on that last comment.

The reopening commentary all positive trends in the quarter.

I didn't hear much mention of.

Tom's last comment sort of delta and how that may be changing at what.

What is the recent increase.

Don in terms of of what Youre seeing from client activity today in door discussion of planning around reopening is there any meaningful changes youre seeing at this point.

Thanks for the question Gary Yes, we are seeing some customers to further reopening dates.

By 30 to 60 days and we're seeing that in the P&I sector.

But I think people are still taking a wait and see attitude based on the timing of the delta variance and what impact it might have on their businesses. So I.

I think we've been able to show in the last year and a half of that we can adapt and pivot to whatever the circumstances are to manage the expectations for the client and so we're we're poised and ready for when they come back and that will that will result in some cost incursion in the fourth quarter as we get ready for those customers to return.

We have adequate staffing in terms of management people.

So that there we believe there will be a slight delay in the recovery in DNI.

As a result of the Delta variance, we don't believe that that will have an impact on higher education sports and entertainment, It's really limited mostly to companies and their return to work strategies.

Okay. Thanks, and then on the really positive new business.

Commentary you provided.

Are there any way that.

Part out of that how much of the improved performance. This fiscal year results from the many strategies you put in place to really.

Prioritize growth and winning business versus just.

A positive environment, where the self op guys want to get the heck out of running at themselves given the complexity of doing so in a pandemic.

To the extent that.

Easy to tell I guess, if we just think more longer term how are you thinking about pipelines of business looking even beyond this fiscal year end and the positioning to continue to deliver strong new business going forward. Thank you.

Great question, Gary and absolutely I think our strategy.

The changes we've made to leadership the additional sales resources to sales training.

And development activities that we've engaged in over the course of the last year.

Have have really paid significant dividends and it's resulting in very significant win rates of higher closure rates than we've had historically and I think that's a testimony to the quality of at the leadership team and the quality of the sales team.

And so even though we are.

Seeing more self op conversions, you still have to win those conversions you still have to compete for those wins and nobody hands you of the business. So.

It is a result of those improved capabilities and improved focus and frankly of the incentive compensation.

Approaches at the company has taken them and at the.

Board has adopted towards incentive net new sales growth of our net growth for the leadership team. So I think those are all components of it.

I think it's primarily due to the improvement in the quality of the people and the improvement in the quality of the offerings that we're putting in front of customers.

Thank you Greg.

Shlomo Rosenbaum from Stifel is online with a question.

Great. Thank you good morning, and thank you for taking my questions. At this 1 might be more for Tom Tom could you kind of quantified the impact of like.

Inflation on the quarterly results.

And kind of your expectation for <unk>, maybe just some more color on what's happening exactly with the wages.

The.

The input costs.

Yes for Q3.

It wasn't a massive.

Impacting the input.

I think that it really started to accelerate right at the end of the quarter.

As we get into this quarter I mean, we're expecting the U S.

In the fourth quarter to be sort of in the 3.5% range on product cost.

Europe, well below that it's remained actually below expectations.

At the moment, so theres a bit of an offset there.

Asia being pretty steady at.

That's about as expected so the impact is really just.

Coming through the U S business.

Not at cost.

And.

As you well know.

The business model is set at.

We're pretty adept at.

Being able to manage those costs.

As always we're trying not to lean completely on.

Passing that through our contracts, primarily allow us to do it and manage it in other ways.

To provide that value to customers.

<unk>.

Not really a driver.

Too much for us in the Q4 guidance.

We feel we can we can manage through at both on the product cost.

On the labor side.

Great.

And then.

What was going on exactly in the uniforms Division, maybe you could talk a little bit more about the PPE write down and then just in general kind.

Of the expectations for the acceleration of revenue growth in the fourth quarter and whenever outlook you can give beyond that if possible.

Yes, just to just to frame at uniforms. The uniform business is largely recovered to pre COVID-19 levels in the core business. So.

We do have significant linen operations that have not fully recovered that that is probably the biggest source of the shortfall of restaurant operations have not returned to using cable clause of napkins, even though they may be very robust businesses at this point.

And in store continues to be soft.

And the Canadian operations had significant restrictions still through the through the end of the third quarter. So.

We like what we're seeing in uniform services, we're seeing of solid pace of recovery in the core business.

And.

Excellent.

In Canada, the business has largely recovered to pre COVID-19 level.

We continue to see opportunities on the growth side retention rates are significantly higher than historical averages.

And we're seeing very high closure rates.

And new business wins as you know we've added significant numbers of sales resources over the course of the last.

Year end and actually the last 2 years so.

We're encouraged and we think the pace of recovery will continue.

In uniforms.

And hopefully we'll begin to close the gap on the lending side of the business.

At some point here in the near future.

We're at the write downs.

And then.

The write down is.

Year ago basically we.

Jumped into PPE.

And really built the inventory to be able to serve our clients to be able to.

Sell at.

To third parties.

We kind of $90 K of 95 mask, which were initially.

Quite popular theme.

Themed through at the CDC to be inadequate for medical purposes. So there is a stock of that inventory that we have been.

And writing down.

It's been very slow moving.

Yes.

Thank you.

Ian.

Zaffino from open Hymer is on line with your question.

Alright, great. Thank you.

Good quarter, Thanks for taking my question.

I kind of wanted to just talk about some from the new wins here.

You mentioned at the first of all of the can you tell us maybe specific areas, where you think most of this business is coming from or should be coming from what areas of education and I think Eni has been big areas, but is at very exclusive to that what are the areas. There and also is there anyone else.

Eric.

That maybe you see more competition or less competition and I know you type of itself being somewhat competitive but is that more competitive less competitive than what youre seeing and just kind of overall.

Where you see the opportunities thanks.

Yes, you bet I think the industry has always been highly competitive.

Particularly amongst the big 3 and then all of the various regional competitors as well. So it's always been a highly competitive industry end.

That hasnt changed everybody is working hard to sell new business. We have enjoyed success throughout the enterprise, we've highlighted wins in higher education, and we've highlighted the Walmart corporate headquarters for example.

But we've also had very significant wins in the facilities business.

And at some of which we haven't disclosed yet, but we will shortly as we had those signed contracts.

Significantly at the facilities component of the business in food manufacturing and other areas of the company.

We've enjoyed good success in healthcare as well both on our retention.

Both on the retention side as well as new account wins, so I would say, it's very broad based we are enjoying very significant success in terms of new account wins.

And we will be very excited to talk about it in its totality.

At year end.

This is this is a point in time kind of business we have.

We have retention that we that we started at 100% and we work towards year end and when we finished we can report the number of for total retention.

Now, it's trending at 96% and above and we're very pleased with at.

The new account wins are at a record pace and it will be very happy to disclose them by name.

When we have the contracts signed in our hands, but I would say most importantly, it's very broad based it's not limited to 1 business or another but we've enjoyed particular success in higher education.

And <unk> facilities and in uniform services this year.

Okay, Great and Tom.

Tom can you just talk about cash flow a little bit with the range is that a function of.

The cadence of the recovery being smoother than you expected are there any other drivers.

That are driving that increase.

Yes, I think if you go back a year I mean certainly the.

The bond issue a year ago was out of caution.

I think John and I believe that the business was resilient enough.

Certainly.

The cost based variable enough.

To manage through.

Of the massive uncertainty that we're all facing a year ago.

So that cash is you know really at 5 was not.

Not used indeed at.

And so the business is really just delivered on that variable cost base with all seat at this past year, and we're very proud of the business and its ability to execute.

The teams of broad.

And so the cash flow generation I think.

It hasnt been surprising it's of.

It's got its normal seasonal cadence.

Quarter to quarter, but by and large is a.

At relatively working capital neutral.

Business, which is very attractive.

Been able to manage capex appropriately without sacrificing any of the needs of our clients.

So again, we've been very pleased with how.

Cash flow has been managed throughout this past year.

Of that.

This solid base that we've had cash availability at now.

In the position to start to Delever.

Okay, great. Thank you very much end. Thank you guys. Thank you.

Thanks.

Toni Kaplan from Morgan Stanley is on line with your question.

Hey, guys. This is Jeff Goldstein on for Toni. Thanks for taking my questions. I just wanted to ask on uniform margins came up quarter over quarter, but are still fairly below 2019 levels. Even though like you said revenue is getting fairly close to even there.

This gap is still driven by investments in the business. So maybe you can confirm that and then just talk about when we would expect to see these investments roll off and for more margin to move back closer to 2019 levels.

Yes.

Great point, yes, it is still related to the investments that we're making in the ABS rollout and to the investment in new accounts or new sales executives.

The significant.

And frankly, the write down of PP&E that also contributed to the softness from the margin.

In the previous quarters. So we.

We do see the trajectory beginning to return with the startup of the new fiscal year of some of those costs roll off and as the end as we lap of the new accounts sales executive additions and as we begin to see the benefits of the ABS rollout begin to accrue in the operations as well so.

We see the improving trajectory, we've talked a lot about what kind of expectation we have for that.

We believe we will begin to realize that beginning in 2022.

Okay, Great and then Im curious what Youre hearing from your higher end clients in terms of the fall of environment are you expecting fully in person learning with full attendance and.

And just maybe any continued pressure on enrollments there are universities looking for more unique services given the environment, maybe things around delivery.

Maybe just some broader thoughts around the higher end higher at environment going into the fall at would be helpful.

Sure you bet.

I was with a university president.

Friday of this week as a matter of fact and they are.

Planning for full enrollment and full participation in class learning.

There is an expectation.

Throughout the higher education community that classes will largely be in person.

And they may make some modifications, but there'll be relatively small.

And our expectations are that enrollments are going to be it at.

At very high levels, given the fact that you had many students differ from prior years.

From prior year into into this year to start their campus their on campus experience. So.

The commentary inside of higher education is all very strong and we're planning for a very robust reopening.

In fact, some of the universities are going to be starting up here in just a very short period of time and our people are working full time day and night to be ready for those students to get back to campus.

Alright, thanks for the color.

Andrew Feinman from more from Jpmorgan is on line with a question.

Hi, It's Andrew I heard you say new wins are at a record pace year to date you. Dan I also appreciate the client retention number of 96% is of high number.

So I just wanted to make sure I am putting these 2 things together correctly. So when I put them together I think you are saying.

Net new sales year to date is notably higher number year to date number in recent years I think that's what you're saying I'm not at all.

A number but I just want to make sure that's what you're saying and then on the other part of that equation of 96% client retention. When you show up at that plant, which is obviously less of them number my question is.

Of that rate might be benefiting right now from renewal decision deferrals drug called at and that number could end down get into a post COVID-19 environment.

Yes.

First of all your math is 100% correct.

Absolutely net.

New business significantly improved over prior years end.

As a result of those significant new business wins and high customer retention. So.

The.

It's our expectation that we will maintain this retention rate going forward.

There may have been early in the early in the year of some slowness in terms of the.

Activity level with respect to new client or Im sorry to client contract changes, but I would say that pace has accelerated throughout the year.

Ben we had a very active pipeline of new account wins, we've been very aggressive in terms of renewals and.

Retention and so it's our expectation that we will maintain this number moving forward that's always been our goal to be there in this 96 range and so we're very pleased that we're there I don't I don't believe it's COVID-19 affected I think at as a result of performance and delivering on our client.

<unk>.

The very proactive retention efforts that we've that we've undergone.

That's great John Thank you very much.

Thank you Andrew.

Yes.

Andy Wittmann from Baird is online with a question.

Yes. Thank you.

I wanted to ask 1 question, 1 just kind of technical detail question here first on facilities.

You mentioned in the press release and the number so at that.

Sure.

Your revenues are up over pre Covid and Thats great.

I think in the prepared remarks, you made some comments around cross selling I was just curious as to the nature of those cross selling.

New work that you experienced in the quarter.

Of those related to like deep cleaning services or other things that can be tied directly to COVID-19 or are they.

I don't know how you call at other services that will be provided during the long term, even if COVID-19 were to go away Tomorrow and then my second question I.

I guess, it's probably for Tom.

And it has to do with uniforms and the installation of ABS, which is obviously progressing along nicely there.

Any way you could quantify the.

Costs incurred for.

Transition costs and selling that and just want to make sure that those are not excluded from the adjusted EPS number. So those are my 2 questions. Thank you.

Yes, I'll take the facility's question first.

We don't we don't Count project cleaning as a new account win that's just that's just base revenue growth and an existing accounts. So none of these new wins and facilities are new services provided to either existing or new customers. So.

<unk>.

Large components, we have existing customers that have made the decision to outsource large components of their facilities management model.

Over the course of the last year end have transitioned from self op to.

Conversion and in some cases.

Those include.

Additional services that they were self performing.

Now transition to our facilities group so.

All new business wins not.

Not base business growth.

Yes.

The installation costs are not adjusted out.

And we will consider.

Putting together.

A bit of an overview into next year as we complete the project.

And provide some some guidance at.

As to the cost and the benefits going forward at.

If that would be helpful. So we will consider that disclosing those those 2 pieces of information around the Avs project.

Okay at a later at a later date.

Okay look forward to that thank you.

James Ainley from CPE is on line with your question.

Yes, good morning, everybody. Thanks for taking my question.

2 questions. Please.

Firstly.

The P&I client.

Can you talk about how maybe that structurally reconfiguring their restaurant spaces.

To allow full.

Because of low attendance from the office, but maybe get high participation as a result.

Rather than sort of capital required from from.

Yourself to just a pull back.

Configuration.

And then just secondly, just on.

Kind of temporary nature of some of the contract terms that you've had over the last year at <unk>.

Thanks.

Are those largely rolled off or should we expect at the roll off over the next quarter. Thank you.

With respect to the contract terms, we haven't seen a significant shift back to P&L yet.

So operating most of our P&I locations on management of fee contracts.

And we don't have there is not an expectation of an accelerated pace of shifting back and we think that will take some time.

As companies ramp up their strategies and returned to work environments.

Some companies are considering changing the configuration in terms of the way that the customers will be served those are mostly technological kinds of implementations like touchless payment technology grab and go kinds of opportunities convenience opportunity so not significant capital investment required to make those kinds of changes in <unk>.

Existing operations.

And even in those organizations that are going to have remote working.

Kinds of our hybrid working experiences, we don't see structural changes to the surgeries.

Being necessary or required.

We do see many companies adopting a more aggressive subsidized payment plans are subsidized approaches to include service to as an inducement to get employees to return to work we've seen many companies considering going back to free meals, which we think will certainly drive participation significantly.

And then the whole safety and security protocol environment, we see taking some some time before before that really evolves to.

Pre COVID-19 activities. So we think participation will rise naturally just because it'll be easier for people to take advantage of the of the.

Serving environment and their existing facility rather than leaving the building.

And coming back so we do see higher participation as a result of this moving forward in the <unk> sector and things of that will be very beneficial.

Very good thank you.

Stephen Grambling from Goldman Sachs is on line with of course.

Hi, Thanks, I guess another follow up on the new business wins, and I know youre going to give more detail coming up but is there any color that you can provide directionally on the onboarding timing as we think about the sales contribution and also any margin impact as it relates to these new contracts, which sometimes start at lower margin rates.

Yes.

Timing typically given if you take the total blend of of.

Business wins across.

Higher Ed.

Just kind of health care et cetera.

Typically about 40% of that is in year.

And the balance rolls into the following year.

Yes.

As of basic metric.

In terms of margin, yes, you're absolutely right that typically in the year of.

Of all opening between startup cost and just general unit inefficiencies.

That will start at a lower than average.

Unit contribution and then build from there.

We typically see we typically see a learning curve as we open new accounts.

Obviously higher Ed tends to open all at 1 time, so you have a big burst of activity in the fall.

Same with the case true 12 business. So that's.

Immediate impact almost beginning in the beginning of the fiscal year.

But DNI winds are spread throughout the timeframe and even though we've been awarded the accounts in say June at May not open for us our transition until December. So there is some timing in terms of the opening.

That may impact the day in year.

Volume.

But as Tom said about 40% generally affects the in year sales so.

We're excited by the new business wins, we see significant.

Growth coming from new business and we're excited to see those new accounts opened and begin to contribute to the organization.

That's helpful. At maybe 1 other follow up and again I know, it's hard to have at a lot of visibility on 'twenty 2 but are there any 1 time items discrete things that you can at least flag.

To us of investors.

Not that we're sitting here looking at each other now.

Tom and I are staring at each other going from I think we're I think nothing that comes to mind.

Awesome. Thanks, so much of a best of luck. Thank you.

Richard Clarke from Bernstein is online with a question.

Hi, good morning, Thanks for taking my questions I just wanted to just look at your Q4 guidance Youre talking about revenue as maybe being back within 15% of 2019, but the margin will still be sort of only about 60% of 2019 levels I know you've called out of few factors in that but the general kind of industry guidance of being margin.

Get get back ahead of it.

Ahead of volume is that your expectation is that the law of 15% need to happen is this about renegotiation of what all of the steps now to get margins back to 2019 levels and above.

Yes, I think it's just continued progression that last 15% matters.

As you saw on.

On the way down last year.

So I think the uncertainty as I talked about earlier certainly doesn't help.

Right now we like we like certainty, we like predictability, we can schedule staff order.

More appropriately and efficiently with certainty.

So that's playing in a little bit right now, but that's transitory.

But we still feel very good about getting back to 2019 margins.

Ultimately beyond because.

As we grow we're going to leverage our above unit cost will continue to build the supply chain and power of that with growth.

And just generally generally operate more efficiently in unit.

As we as we improve our retention rates so.

All of those things still hold.

But I think given given the phase we're in now we've got to be client first as we reopen.

Sure, we do it safely and appropriately.

At play this a little bit long.

Yeah, and I would just I would just add that as Tom said that 15% does matter.

Incremental profit on that last 15% is extraordinarily high because we've got although labor back in the management back and generally all of the fixed costs.

2 in place to go ahead and recover back to a 100%. So there is.

That 15% of is important.

But it is not of it is not subject to negotiation at is not we're not waiting for clients to give us approval to do things, it's really all about creating the efficiency.

<unk> employees return to the work environments.

You would see if you broke down the business the businesses some will be of pre COVID-19 margin. Some will be slightly below end as you would expect those businesses that haven't fully returned to work.

Where we have the margin gap still but.

But in the other businesses you see margin recovery.

Coming rather rapidly as they get back to pre COVID-19 levels.

Thanks for that and maybe just a quick question on your sports.

Measuring corrections division I mean, I would expect correction as part of that is probably pretty stable compared to 2019 were hearing lots about national parks being at record attendance at our overall revenues that still in the quarter about 200 million lower than they were in 2019.

Maybe wanted to understand the bridge there is that just all the sports component still.

A long way of capacity and maybe what's your anticipation for that into the fourth quarter.

Yes. It is as John mentioned I mean sports is the driver there.

If you go through the time line of major League baseball reopening everything really with the quarter cutting off of June 30 ish.

That's right when things were.

Fully reopening and so.

This quarter really had partial attendance at best at all of our facilities. So it was the primary drag.

Yeah and on the National Parks side, while we're while we're seeing record demand at.

At Lake Powell and at Yosemite.

The operations at <unk> are still largely shut down as cruise ships of not returned yet to Alaska, and so and that park is primarily fed by cruise ship traffic. So even though it is open and operating at it has not returned to pre COVID-19 activity levels and probably won't until next.

Summer when when cruise ships are back operating in the Alaskan corridor. So.

So that would be the probably the big impact item on parts of the rest of the parks operating at very high levels with very high demand.

Okay that makes a lot of sense. Thanks for the color.

Thank you.

MS. Zhang from Jefferies is online with a question.

Hey, good morning, Thank you.

On just the new business wins could you maybe comment on who you are gaining share from I know you mentioned self op being sort of half of your wins versus 1 third historically.

I guess I guess on that do you expect that to continue going forward, because because of better sales execution and maybe Covid and then maybe just talk about who you are gaining share from as well.

And the same answer if possible.

Sure well, we're winning we're winning accounts from a from a broad base of our competitors I don't want to single anybody out in particular, but.

But I would say that we've got.

As.

As we have achieved day.

A very high level of self op conversion wins across a range of the businesses that we believe will continue.

We think that that trend will continue to evolve it may not stay at the 50% level, maybe it'll drop back a little bit, but we see continued interest in self op conversion across a range of business at so.

And a range of industry. So we expect that will continue to have very good results there.

In terms of share gains from competitors I would say, it's consistent with past performance. We win some from so that's how we win some from compass, we win some from regional competitors.

And they win some from us.

So it's a very competitive industry.

We try to develop programs that are consistent with our clients' expectations and strategies and we tried to.

Offer of proposals that offer them the best solution I'm not so much worried about who I'm competing against is making sure that the offering that I design and the offering that I customize from my clients is best suited to serve their needs and Thats and Thats, how I think about winning by winning the customer and not winning against them.

My competition.

Got it very helpful. And then just my follow up question on the uniform side could you maybe talk about where you are in terms of adding.

Further ancillary services to your product line, whether it would be first aid or other stuff. Maybe if you could talk about where you are there I know you touched on the avs software et cetera, but maybe on the ancillary services side just update us there. Thank you.

Yes, we can.

Certainly can we continue to enjoy double digit gains in revenue and new accounts on the ancillary services that would be month, primarily first aid and restroom services. Those 2 offerings, we still have a lot of runway.

Available to us in our existing client base and obviously in our against competitive accounts. So we see those as the 2 primary areas with with first aid being probably the primary.

Execution strategy, and we will continue to focus on that going forward I don't anticipate adding any other kinds of services I really just wanted to focus on those 2 of Theyre both high margin.

Very accretive to earnings and.

We've got the existing sales staff and support in place to go ahead and execute on those strategies end and we're winning those at double digit rates.

Got it. Thank you so much thank.

Thank you.

I will now turn the call back over to Mr. Zillmer for closing remarks.

Again, thank you everybody for joining us. This morning, we really appreciate your support of the company and the.

The hard work and dedication of the Aramark team I can't say enough about the performance of this organization over the course of COVID-19, we're proud to lead at we're proud to be here and looking forward to.

A strong close to this fiscal year end on to a great 2022, Thank you very much.

Thank you for participating this concludes today's conference you may now disconnect.

Okay.

[music].

Good morning, and welcome to our March 3rd quarter of 'twenty 'twenty..1 earnings results Conference call. My name is Paul and I'll be your operator for today's call at this time I'd like to inform you that at this conference is being recorded for free.

He broadcast and that all participants are in listen only mode.

Open the conference call for questions at the conclusion of the company's remarks, I will now turn the call over at least at least yourself, Vice President Investor Relations and corporate Affairs, It's Steve.

Please proceed.

Thank you and welcome to Aramark third quarter of fiscal 2021 earnings conference call and webcast I hope those listening are doing well. This morning, we will be hearing from our Chief Executive Officer, John Zillmer as well as our Chief Financial Officer, Tom Andre off.

As a reminder, our notice regarding forward looking statements is included in 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 of various risks uncertainties and important factors, including those discussed in the risk factors M DNA and <unk>.

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.

With that I will turn the call over to Josh.

Thanks, Felicia and thanks to all of you for joining us today.

This morning, I will provide a strategic review of the business as well as highlight the significant opportunities ahead that we believe will contribute to aramark strong and profitable growth trajectory and.

In the third quarter revenue has improved this quarter progressed led by an accelerated pace of client reopening some of the United States, particularly with our sports and entertainment and leisure portfolios.

This upward momentum continues largely due to our team's dedication to serving clients and focusing on our growth agenda.

Our ongoing commitment to be a trusted partner has led to significant new year to date business and high levels of client retention that exceed 96%.

The selling season at higher education, just finished and we achieved a record number of new account wins driven by historically high closure rates are testament to our investment in leadership sales resources and training.

Beyond higher education, new business wins occurred throughout the organization, including our P&I sector, adding walmart's headquarters and our sports and entertainment business, gaining the athletics programs for the University of Arizona, and Virginia Tech.

To name a few at in K through 12, we now provide suite foodservice to the Fort Worth Independent School district of significant self op conversion.

We are seeing greater first time outsourcing activity with nearly half of our wins from the U S segment coming from self op conversions. This fiscal year up from historical levels of approximately 1 third and.

In our international segment, we proceeded to win broad based new business across all geographies that most recently includes the addition of the University of Toronto Mississauga.

Turning now to Aramark performance in the third quarter organic revenue increased 34% year over year and reflected ongoing sequential quarterly improvement.

AOI margins grew to 3.6% from the quarter driven by cost discipline and scalable operating efficiencies.

In reviewing the quarter by business segment U S food and facilities drove an organic revenue increase of 52% year over year, resulting in solid sequential quarterly revenue improvement.

K through 12 continues to benefit from the Universal government sponsored meal of programs that are extended through June of 2022.

And sports leisure and corrections demonstrated significant improvement, especially at the end of the quarter.

Of the NBA steadily increased sand counts throughout the playoffs at all of our major League baseball clients moved to full capacity by July 1 of <unk>.

Aside from the Toronto Blue Jays, who just returned home last week permitting partial fan attendance.

Leisure kicked off the recreational season that typically begins in late may with strong visitor of frequency of following a record reservation demand.

Corrections has already returned to pre COVID-19 levels.

The sector has experienced highly encouraging trends as many of return to typical summer activities attending baseball games concerts and the national parks.

In the coming months, we are also gearing up for full capacity expected throughout our NFL portfolio.

Many clients are offering food services is an added incentive to further attract employees back to the workplace that includes adopting of subsidized pricing or offering complimentary meals.

And we've recently implemented our artificial intelligence and touchless payment technologies and many of our client locations to create speed of service and compelling grab and go options.

Healthcare steadily improved largely reflecting increased retail activity as visitor restrictions eased the business is expected to greatly benefit from heightened demand in elective procedures that had been delayed due to COVID-19.

International continues to effectively manage through various stages of geographic recovery as a team exhibits ongoing agility and responsiveness and addressing of real time client needs are.

Organic revenue increased 20, 28% year over year with areas, such as China already surpassing pre COVID-19 levels in Chile operating at high capacity driven by mining services, given the very high demand for copper.

From serving of World leaders and delegations at the NATO summit in June to the athletes at the Olympic and Paralympic villages at as a privilege to provide clients the support that they need.

<unk> seen a slower recovery in our hospitality business approximately 20% of pre Covid revenues.

And the Canadian market, where government imposed restrictions were still in place throughout the quarter.

Adjacency services, including of first aid in the restaurant management once again drove double digit growth and we continue to see a significant opportunity to expand these offerings.

Retention rates have improved 300 basis points and customer satisfaction scores increased to 10% higher than pre COVID-19 levels, a reflection of the transformative actions underway.

In supply chain, our team has been effectively managing through market and category needs working in close collaboration with our clients and supplier partners.

This includes leveraging our significant purchasing scale and a broad bench of cross channel partners.

We're also deliberate in our menu design, given the inflationary environment and apply of flexibility our menu of alternatives as appropriate while.

While it is not our preference were able contractually to pass on increases in supply chain pricing.

Supply chain overall focus remains to optimize spend ensure availability of innovative products honor our commitments around local and diverse suppliers and stay true to our sustainability efforts.

In addition, an optimal candidate experience.

Aramark is consistently recognized as an employer of choice and highlighted as 1 of the world's most admired companies by fortune we've.

We're also able to benefit from our scale by utilizing our full employee base and leveraging client locations in adjacent geographies.

Lastly, I am extremely proud of our B, well do well commitment that continues to make important strides to reduce in equity and improve the health of those across the globe.

Through our healthy for life initiative, we were honored to have recently been recognized by the American Heart Association with a reward for meritor at Meritorious achievement based on our efforts to promote better nutrition and lifestyle.

We are also appreciative to just being named as 1 of the best companies from multicultural women by Sarah amount as well as 1 of the best places to work for disability inclusion with a score of 100% on the disability of equity index for the fifth consecutive year of reflection of our dedication to create equity and increase access to opportunities for our team.

Before turning it over to Tom I wanted to take a moment to thank our board member of Calvin Darden for his many contributions to Aramark. Following his retirement announced a few weeks ago cash.

Now Tom will provide a detailed financial review of the business.

Thanks, and good morning, everyone.

Over the next few minutes I will discuss our financial results in the quarter as well as provide our outlook for the remainder of the year.

As John mentioned, we are encouraged by the continued base revenue recovery in the quarter tied to improved levels of business activity throughout the portfolio as well as increasing contributions from net new business.

The accelerated pace of client re openings, driven primarily by the sports and entertainment and leisure businesses.

Contributed to the organic revenue, reaching 73% of pre COVID-19 levels compared to just 55% during the third quarter last year. These improving trends have extended into the fourth quarter.

New business wins continue to build within all segments and the pipeline is robust as we approach the new fiscal year.

At the education selling season, just finishing the K 12 at higher education businesses should deliver their highest level of annualized new business revenue since aramark to IPO in 2013.

The uniform segment fueled by the sales investments made over the past 18 months along with our international segment are on pace to approach record levels of new business revenue as well.

We will provide annualized components of revenue growth at summary of wins detail on the year end earnings call.

Adjusted operating income was $106 million in the quarter, resulting in a constant currency AOI margin of 3.6%.

Hep over 250 basis points from the second quarter.

Higher profitability across all segments was driven by rebounding sales volumes combined with effective cost management.

Partially offset by ongoing investment in growth resources and inventory write downs for certain PPE and uniforms.

Corporate expenses increased primarily due to higher equity based compensation.

Associated with the company's incentive strategies to align the organization with shareholders.

Yes.

Adjusted EPS was <unk> <unk> compared to a loss of 69 at the same period last year.

This significant improvement was led by the profitability drivers just discussed.

As well as at partial quarter interest expense benefit from the $500 million debt repayment completed in early June.

In the third quarter Aramark generated net cash provided by operating activities of $12 million and spent $101 million in capital expenditures, resulting in a use of $89 million and free cash flow.

Typical based on the historical cadence of the fiscal quarter.

Net cash from operating activities benefited from increased operating income as well as strong working capital management.

<unk> expenditures continue to be managed with purpose to drive performance in existing accounts associated with client re openings and support growing new business activity.

Through 9 months of the company has driven at $309 million year over year of improvement in net cash provided by operating activities combined with a favorable 15 million variance.

And capital expenditures to produce at $324 million improvement in free cash flow.

This strong year to date result was led by improved operating income and effect of working capital management as well as the benefit of deferred payroll taxes.

And at $94 million federal tax refund that occurred in the second quarter related to the cares Act.

Note that we continue to participate in the appropriate country specific government assistant programs from which we received approximately 130 million fiscal year to date and labor credits.

These credits offset the cost we incurred globally related to the retention of employees and for absorbing 100% of the benefit cost associated with furloughed employees.

As a result of our solid performance of free cash flow, we had over $1.9 billion in cash availability at the at quarter end, allowing us to advance our capital allocation priorities.

Including our acquisition of next level and dividend payment in the quarter.

We remain well positioned to evaluate additional deleveraging opportunities while balancing of our disciplined use of capital investment.

Facilitate new business wins and drive results and existing client accounts as well as pursue.

Pursue selective accretive M&A.

As previewed last earnings call. We took further actions this quarter that strengthen our balance sheet. In addition to debt repayment, including <unk>.

We refinanced $833 million of of 202020 for term loan B credit facility to extend maturity to 2028.

Closed at 3 year extension on substantially all of our revolving credit facility as well as term loans ANC to 2026, reflecting approximately $400 million.

Upsized, our revolving credit facility to $1.2 billion increase in cash availability by over $200 million and most recently.

Finalize an extension of our existing receivables facility by 2 years through June 2024 to provide additional financial flexibility.

I will now briefly review our GAAP results.

<unk> revenue was 3 billion operating income was $74 million and diluting earnings per share diluted earnings per share was <unk> 13.

Results for diluted earnings per share included the benefit of a non cash gain on an equity investment in the San Antonio Spurs of $138 million.

Partially offset by a non cash loss of $61 million from the termination of certain defined benefit pension plans in Canada.

Exiting the pension plans was a proactive action to eliminate uncertain future liabilities.

Before moving to our outlook for the fourth quarter I want to quickly review a few key modeling assumptions.

As you can see at our third quarter results of the performance of the next level of hospitality will be excluded from organic revenue and adjusted operating income metrics.

Until we lap the acquisition date in Q3 of fiscal 'twenty 2.

And beginning of the fourth quarter of share count is expected to be approximately $258 million with the increase driven by the timing of equity based compensation as well as the cumulative participation in the employee stock purchase program.

So let me wrap up by sharing our outlook for the remainder of the fiscal year.

We are extremely encouraged by the upward trends of the business, while appreciating the exact pace and timing of recovery is evolving as we continue to monitor the broader environment.

While developing and executing a wide array of client reopening plans, we will leverage our resilient variable cost and unit business model continue to implement our supply chain strategies.

And drive above unit operating efficiencies.

Based on our current expectations for the fourth quarter, we anticipate continued organic revenue recovery, reaching 80% to 85% of 2019 levels adjust.

Adjusted operating income margin in a range of 4.5% to 5%.

And free cash flow outlook raise to generating $150 million to $250 million for the for fiscal 2021 day.

Driven by an expected strong seasonal cash inflow in the fourth quarter associated with the higher education business.

Thanks for your time this morning, and now I will turn the call back over to John.

Thank you Tom.

For their heroic acts that are driving trust and confidence in aramark prosperous future.

Thank you operator, and we will now open the call for questions.

Are you seeing a speakerphone you may need to pick up the handset first before pressing the number.

The order to accommodate participants in the question queue. Please limit yourself to 1 question and 1 follow up.

Before Mr. <unk> from Exane BNP Paribas is on line with a question.

Hi, Hi, everyone. Thanks for taking my question.

2 short ones if that's okay.

Of course, you just from the September reopening outlook looks like you have solid visibility now on which clients feedback at which level of et cetera, youre guiding on revenue.

Of course to tweak the cash flow guidance to reflect the working capital that comes at those reopening.

Curious whether.

September reopening also has an impact on margin and in particular, if there have been any of reopening costs in your Q3 operating profits or if there will be of reopening cost in Q4.

Included in your margin guidance and effectively at that 1 off.

Provide upside into next year.

And then just briefly I couldn't help but notice that.

We've always discussed procurement has a.

Division.

Of promise from some more disclosure on net new business growth new business retention all of those components with so far.

Crane from making any reporting changes or disclosure changes just curious if.

As a batch of those coming from the full year results.

Yes, I'll take that last question first and then Tom will address the first 1.

Yes, we don't recognize new business wins until we have a signed contract. So we are always hesitant to go ahead and named those accounts until we have the documents in our hands. That's our that is our general approach.

And so even though we have new wins that are under letters of intent. We wait until we have a signed contract before we announce them.

And we always wait for our clients to give us their approval to do so so our intention is to document our new business wins for the year and our year end call when well catalog those opportunities and those wins from the year end.

We will give a greater level of detail at that time.

And on the margin question certainly Q4 is.

Shaping up to be a little bit more uncertain given the.

The events of last few weeks.

So the reopening within business dining in particular.

A little bit within education K 12.

Will it include some uncertainty and cost above the unit.

That we're factoring into that guidance.

As we tried to.

And P&I engineer of the work week.

Is the phrase we are using and.

And understand when people will be in how many people will be in the flow that will be.

Created for the companies that are are coming back after labor day.

That all comes at a cost our first priority is to serve our clients at the.

Fully staffed for what they expect to come in but I think there is still a lot of uncertainty client decline as to those.

Those coming back what what.

That will take so.

Where client first.

Could carry some.

Cost.

Transitory in the quarter as we as we reestablish ourselves and we factor that in.

Alright, thank you.

Gary Bisbee from Bank of America.

In line with your question.

Yeah, Hey, Thanks, Good morning, guys, maybe just following up on that last comment.

At the reopening commentary all positive trends in the quarter I didn't hear much mentioned until Tom's last comment sort of delta and how that maybe changing at what what is the recent increase.

Don in terms of what Youre seeing from client activity today in door discussion of planning around reopening is there any meaningful changes you are seeing.

Yes, thanks for the question Gary.

Yes, we are seeing some customers to further reopening dates.

By 30 to 60 days and we're seeing that in the P&I sector.

But I think people are still taking a wait and see attitude based on the.

Of the timing of the Delta variance and what impact it might have on their businesses. So I think we've been able to show in the last year and a half of we can adapt and pivot to whatever the circumstances are to manage the expectations for the client and so we're we're poised and ready for when they come back and that will at.

Will result in some cost incursion in the fourth quarter as we get ready for those customers to return.

So that we have adequate staffing in terms of management and people.

So.

We believe there will be a slight delay in the recovery in DNI.

Okay. Thanks, and then on the really positive new business.

Commentary you provided.

Is there any way to tease apart out of that how much of the improved performance. This fiscal year results from the many strategies you put in place to really prioritize growth and winning business versus just.

A positive environment, where the self op guys want to get the heck out of running at themselves given the complexity of doing so in a pandemic and to the extent that's not easy to tell I guess, if we just think more longer term. How are you thinking about pipelines of business looking even beyond this fiscal year end.

The positioning to continue to deliver strong new business going forward. Thank you that's of Great question, Gary and absolutely I think our strategy the.

The changes we've made to leadership the additional sales resources to sales training.

And development activities that we've engaged in over the course of the last year.

Have have really paid significant dividends and it's resulting in very significant win rates higher closure rates than we've had historically and I think that's a testimony to the to the quality of at the leadership team and the quality of the sales team.

And so even though we are.

Seeing more self op conversions, you still have to win those conversions you still have to compete for those wins and nobody Hans <unk> of the business. So.

I think of as a result of those improved capabilities and the improved focus and frankly the incentive compensation.

Approaches at the company has taken them and at the board has adopted towards incentive net new sales growth of our net growth.

For the leadership team. So I think those are all components of it.

But I think it's primarily due to the improvement in the quality of the people and the improvement in the quality of the offerings that we're putting in front of customers.

Thank you Greg.

Shlomo Rosenbaum from Stifel is online with of course.

Great. Thank you good morning, and thank you for taking my questions. At this 1 might be more for Tom Tom could you kind of quantified the impact of inflation on the quarterly results.

And kind of your expectation for <unk>, maybe just some more color on what's happening exactly with the wages.

With the.

At the input costs.

Yes for Q3.

There wasn't a massive.

Packed in the input cost I think that it really started to accelerate right at the end of the quarter.

As we get into this quarter I mean, we're expecting the U S.

In the fourth quarter to be sort of in the 3.5% range on product cost.

Europe, well below that it's remained actually below expectations at the mall.

So theres a bit of an offset there.

Asia being pretty steady at as about as expected. So the impact is really just.

Coming through the U S business on product cost.

And.

As you will know.

The business model is set.

We're pretty adept at.

Being able to manage those costs.

As always we are trying not to lean completely on.

Passing that through our contracts, primarily allow us to do it and manage it in other ways to provide that value to customers. So it's.

It's not really a driver.

Too much for us in the Q4 guidance.

We feel we can we can manage through at both on the product cost.

On the labor side.

Great.

Then.

What was going on exactly in the uniforms Division, maybe you could talk a little bit more about the PPE write down and then just in general kind of expectations for the acceleration of revenue growth in the fourth quarter and whenever outlook you can give beyond that if possible.

Yes.

Just to just to frame at uniforms. The uniform business is largely recovered to pre COVID-19 levels in the core business. So.

We do have significant win in operations that have not fully recovered that none of that is probably the biggest source of the shortfall restaurant operations have not returned to using table clause of napkins, even though they may be very robust businesses at this point, so when and still continues to be soft.

The Canadian operations had significant restrictions still through the through the end of the third quarter. So.

We like what we're seeing in uniform services, we're seeing of solid pace of recovery in the core business.

And.

Excellent.

Canada the business has largely recovered to pre COVID-19 level.

We continue to see opportunities on the growth side retention rates are significantly higher than historical averages.

We're seeing very high closure rates.

New business wins as you know we've added significant numbers of sales resources over the course of the last.

At year end.

Actually the last 2 years so.

We're encouraged and we think the pace of recovery will continue.

In uniforms.

And hopefully we will begin to close the gap on momentum side of the business.

At some point here in the near future.

Well at the write downs.

And then.

The write down is.

Year ago, basically we jumped.

Jumping into PPE.

And really built the inventory to be able to serve our clients at the analytics sell at.

To third parties.

We can't 90, K of 95 mask, which were initially quite popular.

Deemed through the CDC to be inadequate for medical purposes. So there is a stock of that inventory that we have been.

<unk> been writing down.

As it has been very slow moving.

Sure.

Thank you.

Okay.

Yes.

As of Pheno from open Hymer is on line with a question.

Alright, great. Thank you.

Good quarter, Thanks for taking my question.

I kind of wanted to just talk about some from there.

New wins here.

You mentioned at first of all of them.

Can you tell us maybe specific areas, where you think most of this business is coming from or should be coming from what areas of education at night.

C&I has been big areas, but is at very exclusive to that what are the areas. There and also is there any 1 area.

That maybe you see more competition or less competition at I know you type of itself at being somewhat competitive but is that more competitive less competitive than what youre seeing and just kind of overall.

Where you see the opportunities thanks.

Yes, you bet I think the industry has always been highly competitive and particularly amongst the big 3 and then all of the various regional competitors as well. So it's always been a highly competitive industry and really at.

But we've also had very significant wins in the facilities business.

Some of which we haven't disclosed yet, but we will shortly as we have those signed contracts.

Significantly at the facilities component of the business in food manufacturing and other areas of the company.

We've enjoyed good success in healthcare as well both on our retention.

Both on the retention side as well as new account wins, so I would say, it's very broad based we are enjoying very significant success in terms of new account wins and we will be very excited to talk about it in its totality.

At year end.

This is this is a point in time kind of business we have.

We have retention.

We started at 100% and we work towards year end and when we finished we can report the number for a total of retention.

Right now, it's trending at 96% and above and we're very pleased with that.

New account wins are at a record pace.

It will be very happy to disclose them by name.

When we have the contracts signed in at our hands, but I would say most importantly, it's very broad based it's not limited to 1 business or another but we've enjoyed particular success in higher education.

In DNI facilities.

And in uniform services this year.

Okay, Great and Tom can you just talk about cash flow a little bit with the raise is that a function of.

The cadence of the recovery being smoother then thank you.

Expected are there any other drivers.

That are driving that increase.

Yes, I think if you go back a year I mean at certainly the.

The bond issue a year ago was out of caution.

I think John and I believe that the business was resilient enough and certainly.

The cost base variable enough.

To manage through that.

The massive uncertainty that we're all facing a year ago.

So that cash is you know really at 5 was not was not used of needed.

And so the <unk>.

Business is really just delivered on that variable cost base with all seat at this past year and been very proud of the business and its ability to execute.

The teams of broad.

And so the cash flow generation I think.

It hasnt been surprising.

It's got its normal seasonal cadence.

At quarter, but by and large is a.

Relatively working capital neutral.

Business, which is very attractive we've been able to manage capex appropriately without sacrificing any of the needs of our clients.

So again, we've been very pleased with how.

Cash flow has been managed throughout this past year.

At this.

This solid base that we've had cash availability at now.

In a position to start to Delever.

Okay, great. Thank you very much end. Thank you guys. Thank you.

Thanks.

Toni Kaplan from Morgan Stanley is on line with your question.

Hey, guys. This is Jeff Goldstein on for Toni. Thanks for taking my questions I just wanted to ask on the uniform margins came up quarter over quarter, but are still fairly below 2019 levels, even though like you set of revenue is getting fairly close to even there.

Yes.

Great point, yes, it is still related to the investments that we're making in the ABS rollout and to the investment in new accounts or new sales executives.

The significant.

And frankly, the write down of PP&E that also contributed to the softness in the margin.

In the previous quarters. So we.

We do see the trajectory of beginning to return with the startup of the new fiscal year of some of those costs roll off and as the end as we lap of the new accounts sales executive additions.

As we begin to see the benefits of the ABS rollout begin to accrue in the operations as well. So we see the improving trajectory we've talked a lot about what what kind of expectation we have for that.

We believe we'll begin to realize that beginning in 2022.

Okay, Great and then Im curious what Youre hearing from your higher end clients in terms of the fall of environment are you expecting fully in person learning with full attendance direct do you anticipate any continued pressure on enrollments. There are universities looking for more unique services given the environment, maybe things around delivery.

Maybe just some broader thoughts around the higher end higher at environment going into the fall at would be helpful.

Sure you bet.

With a university president.

On Friday of this week as a matter of fact and they are.

Planning for full enrollment.

Full participation in class learning.

There is an expectation.

Throughout the higher education community that classes will largely be in person.

And they may make some modifications, but they'll be relatively small.

Our expectations are that enrollments are going to be at at.

At very high levels, given the fact that you had many students differ from prior years.

From prior year into into this year to start their campus their on campus experience. So.

The commentary inside of higher education is all very strong and we're planning for a very robust reopening.

Alright, thanks for the color.

Andrew.

From more from J P. Morgan is on line with questions.

Hi, It's Andrew I heard you say new wins are at a record pace year to date you can I also appreciate the client retention number of 96% at the high number.

So I just wanted to make sure I am putting these 2 things together all correctly. So when I put them together I think you're saying net new sales year to date is notably higher than being able to number of recent years I think that's what you're saying I'm not expecting a number but I just wanted to make sure that's what you're saying.

And then on the other part of that equation of the 96% client retention when you show up with that.

Play, which is obviously end of last time number my question is.

That rate might be benefiting right now from renewal decision deferrals drug called at and that number could end.

I could get into a post COVID-19 environment.

Yes.

First of all your math is 100% correct.

Absolutely net.

New business significantly improved over prior years end.

As a result of those significant new business wins and high customer retention. So.

The.

It's our expectation that we will maintain this retention rate going forward.

There may have been early in the early in the year some slowness in terms of the.

Activity level with respect to new client or Im sorry to client contract changes, but I would say that pace has accelerated throughout the year.

Then we had a very active pipeline of new account wins, we've been very aggressive in terms of renewals and.

Retention and so it's our expectation that we will maintain this number moving forward that's always been our goal to be there in this 96 range end.

So we're very pleased that we're there I don't I don't believe it's COVID-19 affected I think of as a result of performance and delivering on our client expectation and the very proactive retention efforts that we've that we've undergone.

That's great John Thank you very much thank you Andrew.

Yes.

Andy Wittmann from Baird is online with a question.

Yes. Thank you.

I wanted to ask 1 question, 1 just kind of technical detail question here first on facilities.

You mentioned in the press release and the number show at that.

Sure.

Your revenues are up over pre Covid and Thats great.

I think in the prepared remarks, you made some comments around cross selling I was just curious as to the nature of those cross selling.

New work that you experienced in the quarter.

Of those related to like deep cleaning services or other things that could be tied directly to COVID-19.

Are they.

I don't know how you call at other services that will be provided during the long term, even if COVID-19 were to go away Tomorrow and then my second question.

I guess this is probably for Tom.

Has to do with uniforms and the installation of ABS, which is obviously progressing along nicely there.

Any way you could quantify that.

Costs incurred for those transition costs in selling that.

Just want to make sure that those are not excluded from the adjusted EPS number. So those of my 2 questions. Thank you.

Yeah, I'll take the facility's question first.

We don't we don't Count project cleaning as a new account win that's just that's just based revenue growth and an existing accounts. So none of these new wins and facilities are new services provided to either existing or new customers. So in that.

Large components, we have existing customers that have made the decision to outsource large components of their facilities management model.

Over the course of the last year end have transitioned from self op 2 <unk>.

Conversion and in some cases.

Those include.

Additional services that they were self performing.

Our transition to our facilities group so.

All new business wins not.

Not base business growth.

Yes, yes.

The installation costs are not adjusted out.

And we'll consider.

Putting together.

A bit of an overview into next year as we complete the project.

And provide some some guidance as to the cost and the benefits going forward at.

If that would be helpful. So we will consider that disclosing those those 2 pieces of information around the Avs project.

Okay at a later at a later date.

Okay look forward to that thank you.

James Ian Lee from CPE is on line with your question.

Yes, good morning, everybody. Thanks for taking my question.

2 questions. Please.

Firstly on P&I clients.

Can you talk about how maybe that structurally reconfiguring their restaurant spaces.

Maybe.

To allow full.

Because of low attendance from the office, but maybe get high participation as a result.

And whether that's at the capital required from from.

Yourself too to support that.

Configuration.

And then just secondly, just go on.

Kind of temporary nature of some of the contract terms that you've had over the last 18 months.

Are those largely rolled off or should we expect at the roll off over the next quarter. Thank you.

Yeah, and with respect to the contract terms, we haven't seen a significant shift back to P&L yet.

So operating most of our P&I locations on management of fee contracts.

And we don't have there is not an expectation of an accelerated pace of shifting back we think that will take some time.

As companies ramp up their strategies and returned to work environments.

Existing operations.

And even in those organizations that are going to have remote working.

Kinds of our hybrid working experiences, we don't see structural changes to the surgeries.

Being necessary or required.

We do see many companies adopting a more aggressive subsidized payment plans are subsidized approaches to foodservice to as an inducement to get employees to return to work we've seen many companies considering going back to free meals, which we think will certainly drive participation significantly.

And then the whole safety security protocol environment, we see taking some some time before before that really evolves to.

Pre COVID-19 activities. So we think participation will rise naturally just because it'll be easier for people to take advantage of the of the.

Serving environment and their existing facility rather than leaving the building.

And coming back so we do see higher participation as a result of this moving forward and the P&I sector and things of that will be very beneficial.

Very good thank you.

Stephen Grambling from Goldman Sachs is online with of course.

Yes.

Timing typically given if you take the total blend of of.

This wins across.

Higher Ed business dining health care et cetera.

Typically about 40% of that is in year.

At the balance rolls into the following year.

Yes.

As of basic metric.

In terms of margin, yes, you're absolutely right that typically in the year of.

Of all opening between startup cost and just general unit inefficiencies that.

That will start at a lower than average.

Unit contribution and then build from there.

We typically see we typically see a learning curve as we open new accounts.

Obviously higher Ed tends to open all at 1 time, so you have a big burst of activity in the fall.

Same with the case true 12 business. So that's.

Immediate impact almost beginning at the beginning of the fiscal year.

Volume.

But as Tom said about 40% generally affects the in year sales so.

We're excited by the new business wins, we see significant.

Growth coming from new business and we're excited to see those new accounts open and begin to contribute to the organization.

That's helpful. At maybe 1 other follow up and again I know, it's hard to have at a lot of visibility on 22, but are there any 1 time items discrete things that you can at least flag.

To us of investors.

Not that we're sitting here looking at each other now.

Tom and I are staring at each other going from I think we're I think nothing that comes to mind.

Awesome. Thanks, so much of a best of luck. Thank you.

Richard Clarke from Bernstein is online with a question.

Hi, good morning, Thanks for taking my questions I just wanted to just look at your Q4 guidance Youre talking about revenue as maybe being back of in 15% of 2019, but the margin will still be sort of only about 60% of 2019 levels I know you've called out of few factors in that but the general kind of industry guidance has been.

Margin should get get back ahead of it.

Ahead of volume is that your expectation is that the lost 15% needs to happen is this about renegotiation of what all of the steps now to get margins back to 2019 levels and above.

Yes, I think it's just continued progression that last 15% matters.

As you saw on.

On the way down last year.

So I think the uncertainty as I talked about earlier certainly doesn't help.

Right now we like we like certainty, we like predictability, we can schedule staff order.

More appropriately and efficiently with certainty.

So that's playing in a little bit right now, but that's transitory.

But we still feel very good about getting back to 19 margins.

Ultimately beyond because.

As we grow we're going to leverage our above unit cost will continue to build the supply chain and power of that with growth.

And just generally generally operate more efficiently in unit.

As we as we improve our retention rates so.

All of those things still hold.

But I think given given the phase we're in now we've got to be client first as we reopen.

Making sure we do it safely and appropriately.

At play this a little bit long.

Yeah, and I would just I would just add that as Tom said that 15% does matter.

The incremental profit on that last 15% is extraordinarily high because we've got although labor back in the management back and generally all of the fixed costs.

2 in place to go ahead and recover back to a 100%. So there is.

That's 15% of is important.

But it is not of it is not subject to negotiation at is not we're not waiting for clients to give us approval to do things, it's really all about creating the efficiency.

As employees return to the work environments.

And you would see if you broke down the business the businesses some will be at pre COVID-19 margin. Some will be slightly below end as you'd expect those businesses that haven't fully returned to work or where we have the margin gap still.

But in the other businesses you see margin recovery.

Coming rather rapidly as they get back to pre COVID-19 levels.

Thanks for that and maybe just a quick question on your sports leisure and Corrections Division I mean, I would expect correction part of that is probably pretty stable compared to 2019 were hearing lots about national parks being at record attendance at the overall revenues that still in the quarter about 200 million lower than they were in 2019.

Just maybe wanted to understand the bridge there is that just all the sports component.

A long way of capacity and maybe what's your anticipation for that into the fourth quarter.

Yes. It is as John mentioned I mean sports is the driver there.

If you go through the time line of major League baseball reopening everything really with the quarter cutting off June 30 ish.

That's right when things were.

Fully reopening and so.

At this quarter really had partial attendance at best at all of our facilities. So it was the primary drag.

Yeah and on the National Parks side, while we're while we're seeing record demand at.

At Lake Powell.

Assembly.

The operations at <unk> are still largely shut down as cruise ships of not returned yet to Alaska, and so and that park is primarily fed by cruise ship traffic. So even though it is open and operating at Theres not returned to pre COVID-19 activity levels and probably won't until next.

Summer when when cruise ships are back operating in the Alaskan corridor. So.

So that would be the probably the big impact item on parts of the rest of the parks operating at very high levels with very high demand.

Okay that makes a lot of sense. Thanks for the color.

Thank you.

MS. Zhang from Jefferies is online with a question.

Hey, good morning, Thank you.

I'm just of new business wins could you maybe comment on who you are gaining share from I know you mentioned self op being sort of half of your wins versus 1 third historically.

I guess I guess on that do you expect that to continue going forward, because because of better sales execution and maybe Covid and then maybe just talk about who you are gaining share from as well.

At the same answer if possible.

Sure well, we're winning we're winning accounts from a from a broad base of our competitors I don't want a single anybody out in particular, but.

But I would say that we've got.

As.

As we have achieved day.

A very high level of self op conversion wins across a range of the businesses that we believe will continue.

We think that that trend will continue to evolve it may not stay at the 50% level, maybe it'll drop back a little bit but.

But we see continued interest in self op conversion across a range of business at and so.

At a range of industry. So we expect that will continue to have very good results there.

In terms of share gains from competitors.

I'd say its consistent with past performance, we win some from Sodexo, we win some from Compass, we win some from our regional competitors.

And and they win some from US so it's a very competitive industry.

We try to develop programs that are consistent with our clients' expectations and strategies and we tried to.

Proposals that offer them the best solution I'm not so much worried about who I'm competing against is making sure that the offering that I design and day offering that I customize from my clients.

Best suited to serve their needs and Thats and Thats, how I think about winning by winning the customer not winning against my competition.

Got it very helpful. And then just my follow up question on the uniform side could you maybe talk about where you are in terms of adding.

Further ancillary services.

Product line, whether it be first date or other stuff maybe.

Maybe if you could talk about where you are there I know you touched on the avs software et cetera, but maybe on the ancillary services side just update us there. Thank you.

Yes, we can we certainly can.

To enjoy double digit gains in revenue and new accounts on the ancillary services that would be primarily first aid and restroom services. Those 2 offerings, we still have a lot of runway.

Available to us in our existing client base and obviously in our against competitive accounts. So we see those as the 2 primary areas with first stage being probably the primary execution strategy and we will continue to focus on that going forward I don't anticipate adding any other kinds of services.

I really just wanted to focus on those 2 of their both high margin.

Very accretive to earnings and.

<unk> got the existing sales staff and support in place to go ahead and execute on those strategies end and we're winning those at double digit rates.

Got it. Thank you so much thank.

Thank you.

I will now turn the call back over to Mr. Zillmer for closing remarks.

Again, thank you everybody for joining us. This morning, we really appreciate your support of the company and the.

A strong close to this fiscal year end on to a great 2022, Thank you very much.

Thank you for participating this concludes today's conference you may now disconnect.

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