Q2 2022 Aramark Earnings Call
Good morning, and welcome to Aramark second quarter 2022 earnings results Conference call. My name is Josh and I will be your operator for today's call. At this time I would like to inform you that this conference is being recorded for rebroadcast and that all participants are in a listen only mode.
We'll open the conference call for questions at the conclusion of the company's remarks, I will now turn the call over to police cars sell Vice President Investor Relations and corporate Affairs. Mr. Yourself. Please proceed.
Thank you and welcome to Aramark second quarter fiscal 'twenty two earnings conference call and webcast. We also look forward to reviewing the plan to separate the uniform services business into an independent publicly traded company announced this morning.
You will be hearing from our CEO , John Zillmer as well as our CFO Tom on draft.
As a reminder, our notice regarding forward looking statements is included in our press releases. This morning, which can be found on our website.
During this call we may 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 MD&A and other sections of our annual report on.
Form 10-K , and 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 our website. So with all that I will now turn the call over to John .
Thanks, Elyse, it's good to be with all of you during this transformative time and earmarks history.
We continue to build on the operational changes we've made over the past two and a half years to drive our client focus growth mindset throughout the business. We are also excited about our plan announced this morning to separate Aramark uniform services or us into an independent publicly traded company.
U S is a terrific business. So it is well poised for continued success and one that I believe will thrive as a separate company under Kim Scott's leadership.
Clearly, there's a lot to cover today.
And to ensure we ramp up and our usual timeframe I will briefly highlight the key takeaways from our second quarter results and provide an update on the current state of the business.
Tom will then share his financial perspective on the quarter as well as performance expectations for the remainder of the year.
The final portion of the call to review the planned spinoff and open the line for your questions.
Our performance in the second quarter demonstrated the strong foundation, we have built and the resilience of the business as organic revenue increased 35% year over year and surpassed 95% of the corresponding pre COVID-19 fiscal 19 levels.
The progress on the topline came from all three segments and continued to be driven by the Covid index base recovery.
<unk> pass through to help offset the impact of inflation and contributions from last year's strong net new business as well as the startup of this year's net new business, which is on pace for another record year.
Our teams remain focused on working closely with clients to effectively manage through this higher inflationary period and tighter labor market.
While we're seeing an improvement in hiring availability and supply chain resources. The war in Ukraine is creating an added supply chain complexities globally, which we're working to navigate even though we have no operations in the region.
We continue to actively utilize our scale, our deep bench of suppliers and menu engineering flexibility to help moderate the inflationary impact in the business.
We have been opportunistic over the past year and selectively pursuing accretive tuck in acquisitions and partnerships that we believe aligned with our mission and expand our capabilities. Most recently, we signed an agreement to acquire Union supply group, a commentary goods and services supplier with a strong infrastructure of.
Abuse and centers and warehouses that will serve as a resource for our U S food business primarily in corrections.
When supply generated approximately $250 million in revenues last year.
The acquisition is expected to close in the third quarter subject to customary closing conditions and regulatory approvals.
As we enter the second half of this fiscal year, we will continue to execute on our strategic priorities as an organization. We are rooted in service and our vision is to be the most admired employer and trusted hospitality partner.
Trust is earned by delivering on our commitments and exceeding the expectations of our stakeholders each and every single day.
Our deep commitment to these principles enabled aramark to achieve a perfect score yet again in this year as human rights campaign Foundation's corporate equality index.
In recognition of our work towards the LGBTQ plus workplace equality.
Last week, we were also named the top 50 companies for diversity by diversity, Inc. And cited as a top company for employee resource groups.
In addition, we were once again selected as a top 50 employer by careers and the disabled for providing a positive work environment for those with disabilities. We.
We appreciate the extensive accomplishments of our teams and their continued focus on enabling the equity and wellbeing of our own people the customers, we serve and the communities in which we work.
I will now turn it over to Tom before reviewing the announcement regarding a U S.
Thanks, and good morning, everyone.
Despite the current challenging macro environment, we remain resolved during the second quarter to execute on our strategy to build a customer focused growth oriented company capable of achieving the financial targets, we outlined at analyst day.
The foundation, we built so far helped deliver strong revenue performance in Q2.
As John mentioned organic revenue surpassed 95% of pre Covid fiscal 19 levels compared to 71% at this time last year with meaningful improvement across all segments.
These results reflected a continued steady recovery in pre Covid based revenues.
It was also driven by the impact of pricing pass through and net new business, particularly from the contribution of accounts that are now up and running from a record net new business performance last year.
As well as a portion of new clients that started up operations during the first half of this year.
Consistent with what we've discussed regarding our revenue recovery and Covid index last quarter.
Many operations of components of the business that have already approached or exceeded pre COVID-19 organic revenue levels.
However, a few select areas within the portfolio continue to be slower to recover specifically white collar business and industry retail catering at higher education and health care.
Conference in convention centers concerts, and select events within sports leisure and corrections.
And some hospitality clients in our uniform segment.
We estimate that pre Covid based revenues were approximately 88% to 89% recovered in Q2.
With the Miss involved missing volume coming from the Covid index categories I just mentioned this.
This compares to an estimated 84% to 85% last quarter.
While encouraged by the steady progress we have seen in the recovery of the base volume, we still expect a residual impact from Covid as we exit the year of approximately one and a half to $1 7 billion slightly better than the one six to 1.9 billion, we communicated at analyst day.
As these areas continue to recover through the balance of this year and into fiscal 'twenty three.
Anticipate that incremental margin of 15% to 20% on the returning volumes.
In the second quarter, adjusted operating income improved $138 million year over year, driven by strong unit based cost management, and our ability to leverage above either operational cost and SG&A support across higher sales volumes.
It's a L. I performance resulted in a constant currency Oi margin of four 5%.
Paired to five 9% in the second quarter of fiscal 19.
Meaning we have now recovered 76% of the same quarter pre COVID-19 margins up.
Up from 62% in the first quarter.
At 60% recovered in Q4 of last year.
Or were pleased with the progress made so far on the margin recovery.
Progress, we expect will continue.
It is important to note a couple of things on margin in this period of high inflation.
First in certain businesses, there can be a lag to pricing pass through in a period of rising costs. And example is higher education, where most board plans or reprice twice a year before each semester.
Firstly in sports and entertainment, we can in many cases change prices event by event.
Where there are timing delays, we are actively working with those clients to address the impact of rising inflation levels.
Secondly, with cost plus contracts.
Cost or pass through to the client as incurred which increases revenue, but our fee is most often fixed.
This obviously pressures the margin percentage, but the AOR dollars remain unchanged.
As you know, we currently have a greater proportion of cost plus contracts than the historical norm coming out of the COVID-19 environment, although clients are steadily transitioning back to P&L.
Volumes return.
The unexpected developments in the first half of the fiscal year and increasing rate of inflation rather than abating.
Excellent.
The activation of the supply chain due to poor in Europe , rather normalizing do not change our business's structural margin profile, nor view, nor our views concerning achievement of our fiscal year 'twenty five financial targets.
Our ability to recover and go beyond the fiscal 19 margin.
We will be primarily driven by the incremental margin on the returning Covid index volumes.
Continued pricing to keep pace with inflation and the normalization of off program supply chain activity.
As well as our proven ability to leverage our variable cost base operating model and further drive operating efficiencies.
And as a reminder, when compared to fiscal 19 Oi margin has been affected by our substantial strategic investments and growth oriented resources and technology infrastructure, including cyber security.
Our performance in the quarter resulted in an adjusted EPS of <unk> 22 cents compared to an adjusted loss per share of <unk> 24 cents last year.
On a GAAP basis, Aramark reported consolidated revenue of $3 9 billion.
Operating income of $142 million.
Diluted earnings per share of 14th.
These results included $95 million revenue contribution from next level hospitality that continues to be excluded from organic revenue until we lap the acquisition in June .
Paul It's close the contribution of a union supply group will also be excluded from our organic revenue and NOI metrics.
We expect to close this transaction in the next few weeks following customary regulatory approvals.
John mentioned unit supply reported revenue of approximately 250 million last year, and we expect it to be accretive to earnings no later than the end of fiscal 'twenty three.
Now turning to cash flow.
In the quarter net cash provided by operating activities was $375 million and free cash flow was $278 million driven by improved operating income performance as well as effective management of working capital.
At quarter end, we had over $1 5 billion of cash availability and no significant debt maturities due until 2025.
In this period of rising interest rates.
We will be strategic and opportunistic opportunistic with regard to debt repayments and refinancing.
While we will continue to support our businesses to invest in profitable new business opportunities when needed.
We remain committed to leverage ratios below three five times by fiscal 'twenty five.
So let me wrap up by reviewing the latest outlook for fiscal 'twenty two.
Following a strong first half of the year. We are pleased with the trajectory of the business, particularly with respect to our business progress and net new business, while simultaneously navigating the current inflationary environment.
As a result, we anticipate the following for the physical peer.
Pierre.
Organic revenue growth expectations to be at or near 27% compared to previous expectation of 23% to 27%.
Due to stronger contributions from net new business increased pricing pass through to recover incremental costs from inflation.
And slightly improved base recovery.
Annualized net new business in a range of $650 to $750 million.
Compared to previous expectations of $550 million to $650 million.
Would reflect at the mid 0.58% of prior year revenues and four 3% of fiscal 19 revenues and represent another record breaking performance year for the company.
The raising outlook is due to better than expected new account wins, while maintaining last year's improved retention rates.
In addition, we have a robust sales pipeline and improving close rates.
<unk> margin to be at or very near 5% for the full fiscal year compared to previous expectation of five to five 5%.
As a result of startup costs associated with better than expected new business wins.
Reliance on off program procurement.
As well as slower than expected conversion back from cost plus to P&L contracts and the timing effect from pricing pass through.
We expect Q3 <unk> margin to be in the mid 4% range and Q4 to be mid 6%.
And free cash flow between 303 hundred $50 million compared to previous expectation of $300 million to $400 million due.
Due to working capital needs associated with higher than expected revenue and the timing of cost plus contract conversions back to P&L.
We continue to build the foundation to achieve our financial targets for 25 built on a sustainable and profitable growth framework.
The transformational actions, we have taken over the last two years are making meaning a meaningful impact and delivering results.
As such the planned spin of a U S reflects our confidence in that firm Foundation.
That's a timely opportunity to accelerate future growth and we believe will position both independent companies for great success.
I'll now pass it back over to John to review some of the details of the planned spin off transaction.
Yes.
Thanks, Tom I'll now share my comments on the planned spin off of the U S, which we believe will create two strong independent publicly traded companies each greatly positioned for profitable growth.
The transaction is structured as a spinoff that is intended to be tax free to aramark and stockholders for U S. Federal income tax purposes, and expected to close by the end of fiscal 'twenty three subject to certain customary conditions.
One of my top priorities when I rejoined Aramark was to recapture a winning hospitality mindset and try and reinvigorate the latent power of our people due.
Due to the hard work and unwavering support of the entire team Aramark as a company transformed now stronger focus and more energized than ever before.
As a result, we're now able to execute on strategies that we expect will unlock significant value for our businesses. This includes the planned spin off of the U S.
So why now.
Together with our board of directors and management team, we regularly assess the business portfolio to enhance performance and drive value for all stakeholders.
To that end, we believe the growth trajectory. We have worked to achieve enables us now to create two successful independent publicly traded companies with distinct growth and profitability strategies business characteristics and investment profiles.
Accordingly, we anticipate this transaction will offer numerous numerous value, creating compelling benefits for both companies, including enabling the executive leadership and boards of each Standalone company to focus solely on its respective business.
Each business has narrowed focus and the ability to compensate employees with equity incentives linked solely to its own performance enhances the ability to attract and retain strong employees.
The availability of equity linked solely to its distinct business will facilitate each company's acquisition strategies.
The flexibility for optimizing capital structures and capital deployment priorities and the ability for the investment community to value each business independently, which the company expects will result in optimized total stockholder returns.
Kim Scott, our president and CEO of the U S where you all heard from at Analyst Day is now firmly established in her role and has a strategic framework in place to successfully lead that business.
We have assembled senior executives with extensive public company expertise, including Tim Donovan is newly appointed General counsel of a U S who I worked closely with our allied waste and Republic as.
As well as Jeff Friday L. A senior Vice President human resources of a U S who has over 30 years of experience in labor relations organizational impact and diversity and inclusion.
Rick going also just joined as the CFO of a U S. Adding over 20 years of financial leadership, including experience as a public company CFO and is quickly getting up to speed.
Tom and I, along with the rest of the executive leadership team will remain on the Aramark side.
Aramark will continue to operate as a proven global leader in food and facility services with World class scale and capabilities proof.
Prudent facilities reported pre Covid full year fiscal 19 revenues of $13 6 billion operating in an extremely attractive and growing addressable market, which is estimated to be approximately $500 billion in revenues with favorable outsourcing trends.
Last fiscal year food and facilities achieved record net new business performance nearly five times higher than the historical five year average, reflecting new business wins over $1 billion and retention rates of approximately 96%.
This momentum has continued into fiscal 'twenty, two and we believe this is only at the beginning.
As you know <unk> provides customers with full service rental programs, resulting in a compelling contract based recurring revenue model with pre Covid full year fiscal 19 revenues of $2 6 billion.
The estimated $40 billion revenue market presents substantial opportunity for growth.
In the second quarter of 'twenty to <unk> quarterly performance surpassed pre COVID-19 fiscal 19 year ago levels, and we see tremendous upside ahead.
We remain committed to the financial targets provided in analyst day, which reflect opportunities for both companies to capitalize on accelerated organic growth and margin progression.
While the separation will enable aramark in the U S to implement capital allocation strategies that reflect their distinct growth opportunities and cash flow profiles. We expect both companies to have a leverage ratio is below three five times by fiscal 'twenty five consistent with our messaging at analyst day and it is our Intel.
That the two companies will maintain an aggregate dividend aligned with our historical practice following the completion of the spin off.
Today marks a milestone in aramark storied history, and surplus and sets the stage for us to reach new heights of performance success.
I have never been more excited about the company's prospects ahead within both food and facilities and a U S and with the teams we have in place to get us there.
Operator, we'd now like to open the line for questions.
Thank you we will now begin the question and answer session. You have a question. Please press Star then one on your Touchstone telephone.
If you wish to be removed from the queue. Please press the pound sign or the half if youre using a speakerphone you may need to pick up the handset first before pressing the numbers in order to accommodate participants in the question queue. Please limit yourself to one question and one follow up.
Our first question comes from Kevin Mcveigh with credit Suisse.
You May proceed.
Great. Thanks, so much and let me add my congratulations I mean, it's obviously very very tough environment and you folks are really executing exceptionally well despite that backdrop.
I wanted to start with the uniform business I mean, it's been talked about for a while John and you know.
For years, I think as long as I've covered it.
How are you able to get it done at this point I guess, what was you know kind of the catalyst for that.
Maybe we could start there.
Sure.
Slowly.
We have been obviously evaluating this for some period of time and.
I've always believed that the company had work to do with respect to fixing the business to getting the systems infrastructure right and the management team right and the investments we've made over the last couple of years and both sales infrastructure.
Growth infrastructure the route accounting system.
Are largely behind us and we are now well positioned to.
To accelerate the growth and improve the margins in the business and then secondly, we've built a management team that I have a great deal of confidence and I'm very pleased with the actions that the organization is already taking to improve the quality of the business and to improve the results.
Tim is well positioned to lead this business into the future.
The team that we've assembled around or I think is extraordinarily talented and very strong. So we felt we were well positioned this was the right time.
And I think frankly that the market will value both companies are more appropriately going forward as two separate entities focused on our respective businesses with the capital structure is designed to optimize for those businesses.
As we stated in the in the dialogue the benefits I think are very clear.
The board reached the conclusion that now was the what's the right time to proceed.
No that makes a lot of sense and then just one quick follow up on that I know you discussed a potential dividend back to Aramark I don't know if this is for maybe Tom but Tom is there any way to frame what that could potentially be and then will you hold any of the existing equity of the newco or will it be kind of completely standalone.
Well, Kevin all of that is really to be determined as we as we go forward in the process.
A lot of things to do from here.
But the debt structure.
<unk> is one of those as well as the the equity structure and then we will consider as we.
We.
It worked through the details of the transaction I mean, I'll, just reiterate what John said and our overall commitment.
To deleverage the company.
And really having both companies targeting to be below three 5% consistent with what we said before I mean time sorry.
Congrats again.
Thank you.
Okay.
Thank you. Our next question comes from Stephen Grambling with Goldman Goldman Sachs. You May proceed.
Hi, Thanks, I'd like to stick with the uniform separation as we as we think about it or are there any.
Dis synergies to think through as you separate the two business is kind of qualitatively and then I realize you do have work to do on the exact pro forma but is there any reason do.
Think about the segment reported as being different than what we would see move over.
Do you want to take the segment reporting.
I think it's directionally very accurate.
We've talked about for a long time these businesses have been run.
Pretty distinctly.
So I think that will give you a good feel for where to go.
There are certainly some cost that we're working through that Kim and the team are are starting to assemble some public company costs.
That will be added.
And we still think there is some other opportunities in other areas to be a little more efficient.
So we're we'll figure out what eventually get to the point, where were Kim and the team and US will give a clear indication of where we think the next few years ago, but by and large they're very distinct.
Yeah. We've operated the business is pretty independently over the last over the last several years. So I don't believe there was any significant dis synergies.
In terms of building the public company infrastructure in place the board the IR activities those kinds of things will be added cost for uniform services today.
But we believe there'll be corresponding cost savings from other parts of the organization as well. So all in all we think this is a fairly.
A fairly easy split let us.
At word very carefully because there is always a lot of hard work that goes with these.
But because the companies have operated separately for quite some time and are structured had been structured that way.
We think this will go.
Relative relatively quickly.
Makes sense and then on the benefits you mentioned more focused capital deployment, including I believe for inorganic growth what does that landscape look like in each segment.
Whats remaining and what's being separated as it relates to M&A in the current environment and do you generally think of those opportunities as being more tuck in or tangential growth opportunities. Thanks.
Yes.
Eventually like Kim and the team talk about the U S.
S opportunities, but but by and large I think they will at least continue on with the opportunities to to fill.
Philly density in many parts of the country with tuck in deals.
Highly synergetic just took an accretive for them to do those and they've had good past experience with it. So I'm sure that will be a continued strategy on the M&A side for a U S. On the food side same I mean, you've seen our activity here in the last 12 to 18 months.
We've been very happy with.
Some of the deals Wilsonville being a recent announcement with union supplies. So we will continue to look at very targeted opportunities to build R. R.
Our service offer.
Strengthen our management teams across all our sectors I.
I don't see anything John you can add to this I don't see anything transformational on the food side.
But more of what we've been doing.
Yes, I think thats exactly right. Our first priority is continue to be.
Growth organically through new account sales and support the debt paydown and the occasional tuck in acquisition when it makes sense in terms of expanding capabilities for our customers.
And in looking at new niches for the organization that might make sense from our from a base business perspective. So.
We are committed to the targets that we established for analyst day.
We see everything thats occurring in the business.
It's very supportive of that strategy.
And we like the trajectory and we'll continue to be focused on.
The metrics that we've outlined for our for our stakeholders.
Thank you. Our next question comes from Ian Zaffino with Oppenheimer. You May proceed with your question.
Hi, great.
Just wanted to kind of.
Hudson get the core business.
On the net.
New business side very very strong are there areas that are like let's just say massively outperforming expectations.
Really pushing this up or anything that's particularly strong we like to call out.
And I have a follow up thanks.
Sure, it's actually a very broad based performance both domestically internationally.
All the business units and we're very pleased.
The growth culture Thats been reestablished.
It has really energized the entire organization so.
Very strong performance.
Across all the sectors.
And so we're pleased by that we continue to see pipelines.
Pipelines building closure rates improving.
The net new business profile.
Much stronger than.
Then our previous history, and we're very encouraged by that so.
I wouldn't say there is weakness in any of the businesses that we operate today and I think they are all looking very solid.
And we're encouraged we have had significant self.
Self op conversions, obviously, we've talked about Marlin in the past that is a segment that is new to the organization the amusement Park segment.
Opened and are operating our first four facilities in the U K and we're very pleased with how that development is going well.
Otherwise I would say the business is very.
Is experiencing very broad based performance.
And across both domestic and international operations.
Okay, and then just as a follow up.
Can you just talk about the margin cadence.
How are you getting to <unk>.
Getting the year in the mid six percents and then also just on the rash.
Our rationale.
Walk me through the three five times leverage ratio you guys are talking about.
Sure how are you getting there how is that the optimal level.
And then why would it be the same for a much I think two different types of businesses.
<unk>.
So I guess.
Let's start with the 6%.
As a reminder, I think it's important for folks to go back to 19 and look at the seasonality of our margin.
In a air quotes normal year.
And you can see that both Q1 and Q4.
The higher margin periods Q.
Q4 being the highest.
There is a better.
A bit of seasonality, that's taking that that mid.
Mid sixes.
From from where we've been as we've traditionally done, but as I mentioned before as a percent of 19th margin.
Continue to progress.
And that rise to the mid sixes won't be further progression.
Back towards 19 levels compared to the last three or four quarters.
So.
It's just not rising because of the seasonality it's rising.
As we as we make our way back to those 19 levels.
In terms of the three five times.
As we said at Analyst day, No particular magic to it.
We feel that that's a threshold that we need to get to.
From there we'll see.
It could go as was pointed out on our analyst day, lower based on acquisition opportunities in and certainly.
New business organic growth opportunities.
Or we could have some good opportunities in front of us between now and 'twenty five.
That could keep it around that three five times, but I think it's a target for us.
To strive for and then once we get there, we'll we'll see where we are.
Yeah, and I would just add that we are we are obviously very comfortable operating at higher leverage levels. We recognize that the investment community would like to see us with lower leverage so we're being respectful of that.
That desire.
Inclination, but the organization is extraordinarily well equipped.
To operate in these.
This higher debt environment.
As interest rates rise, we recognize the desire to go ahead and pay down interest.
To reduce our interest expenses I'm not sure what the optimal.
That level is and I think over time, the investment community will help educate us to give us the optimal capital structure, but we know that we can achieve three and a half.
Focused on.
And committed to delivering on that level, and we'll see where that where that leads us going forward.
Thank you. Our next question comes from Andy Wittmann with Baird You May proceed.
Yeah, great. Thanks for taking my question I guess, given the synergies that are available and strategic combination of the uniform rental business can you talk a little bit about how you came to the conclusion that the spin was the best outcome for shareholders at this point in time.
I guess, it's one of the things that might have been the considerations.
The business is tax basis I know this has been something thats been discussed in the past.
And can you just maybe talk Tom a little bit about what happens to us as tax basis in the tax free spin does that get stepped up or anything that might have future benefits to the company.
Well again as we go through the transaction.
We will provide more details on it.
And more clarity on leverage on tax basis.
A lot to do in terms of the carve out financials.
Again getting that came in the team equipped and up and running.
So.
Don't mean to evade but certainly more to come on the details around the tax basis.
And the debt structure and everything else around the spin.
Yeah.
The primary reason.
If youre doing the tax free spend is historically this business has had relatively low tax basis.
And an outright transaction or a sale of the entity would've been.
Significantly.
Value destructive for our shareholders. So that's.
That was not an option that we considered.
This is I think the best option for the shareholders ultimately to receive these shares on a tax free basis, and then to make an independent decision about whether or not they want to continue to be invested in both the food business and the uniform business or make a trade off for one or the other.
We think optimally this gives the investment community a much greater degree of flexibility.
And and much higher degree of clarity around their investment decisions.
We feel very strongly about the performance of the business. These are both great businesses and so absent the desire to optimize shareholder returns Theres really no reason to go ahead and sell this business because we believe the performance will continue to improve or to spin. This business, but we think this does create value for shareholders.
In the long run and that's why we've gone ahead and chosen this path.
Okay. That's helpful perspective, Thank you for that and then just on the Union supply group on the acquisition.
It's a little bit different than just a normal tuck in of a business that youre already doing so I'm trying to understand how this fits in it sounds like it's a warehouse distribution place. So is this a margin play you're giving us a $250 million revenue are they are a supplier to your part of your supply chain today that.
You'll have.
Intercompany revenues on this I'm, sorry, I'm, just trying to understand how this fits in strategically.
So just looking for a little bit more color on that yes.
Yes. This is really a commentary services company that provides services to the corrections community.
They are a competitor today.
And we provide commentary services as well.
Use a model that's an on site model for the institutions that we serve and the customers that we serve they use a distributed model that that is a different segment of the marketplace. So this is really expanding our reach to a new set of customers for a service that we all already provide and giving us scale in that marketplace. It would.
Have been difficult to achieve.
By either selling new accounts or growing the business organically. So this is an expansion of capability into our business, we already we already run.
And allows us gives us a platform.
With the distributor model.
Essence of pick and pack capabilities.
Serve other parts of our business, yes, there is opportunity on the retail side and other businesses for them to deliver to those <unk>.
Ponant as well so it is in <unk>.
<unk> and the capabilities of the company has.
Thank you. Our next question comes from Heather <unk> with Bank of America. You May proceed.
Hi, Thank you for taking my question I wanted to ask about inflation.
I was hoping you could help.
Help us understand the guidance a little bit more in terms of the level of inflation that you are assuming for the rest of the year and then thoughts on it.
The environment I think it's been worse than people had originally anticipated.
<unk> you.
The levers you have in.
Inflation is higher than even it is right now.
Where you can go from here.
I guess help us understand also with pilot.
The pricing on the education side, when we can start seeing that flow through given the delays in timing.
Sure I will both tackle this question.
I'll start off with the education component as you know board planned pricing is set.
By universities.
Semester or the year before so.
It's difficult to raise prices on a college freshman when they're already on campus.
And have already paid for the board plan that they're consuming so those prices lagged by a period of at least a semester and sometimes a little bit longer. So as we negotiate those new board plan rates for the fall semester. That's when we'll see the benefit of that cost recovery, we can price.
On campus, we can price both the retail business in the catering business.
On a more on a more active basis and we take advantage of those opportunities. So there are two different elements on the on the.
Pricing side for for higher education.
Obviously, we believe that the inflation environment.
We're making the assumption that will continue through the balance.
This year a lot of a lot of focus on cost recovery as a result of pricing.
And.
A lot of cost reduction as a result of menu engineering and menu flexibility.
There are multiple levers that we can employ to go ahead and mitigate those higher costs that are affecting our frontline operations. There is also.
Beyond inflation. There is also the supply chain adult availability issue, which has.
<unk> been rather dramatic in certain parts of the business in certain commodities in proteins. So we continue to work through those challenges as well.
The fact that we have been able to demonstrate hitting our earnings target for the quarter was very strong.
And our performance.
<unk> that the teams have overcome a significant inflation in both food and wages.
During that time period, and we believe that will continue to be able to recover we have the contractual flexibility the operational flexibility to continue to recover those cost increases going forward.
Yeah, and I guess in terms of our outlook or at the beginning of the year we were wrong.
Looking at the time, it sort of 4% to 5%.
At the beginning of the year and then it easing in the second half of the year.
Conversely, it's now moved into the sort of 7% to 8% range for the second half of the year. So that gives you that order of magnitude on.
What we expected at beginning of year, and then where.
We've gone to here for the second half.
The one other thing I had mentioned.
To add to John's comments is we do have higher Ed that has.
Timing is.
Issues.
Beyond that we've got like sports and some others that are much more real time, and then everything in between so.
We continue to manage the inflation increases.
Account by account.
Business line by business line.
U S is.
<unk> is.
Quickly getting up to speed with it.
The international business much more part of their DNA.
TNA and their their landscape traditionally to have inflation.
A part of the mix and so I think they've been able to respond more readily and more consistently.
Sure.
Two to inflation.
Thank you and I'm just curious on.
On the sales side.
Yes.
I guess should we think of inflation as they age.
For the company.
To do self op conversion.
Are you seeing more demand in this inflationary environment.
I think thats true.
A number of things in the last couple of years, probably not wished upon anybody that that have helped.
Self ops convinced.
Convinced themselves that maybe they shouldnt be doing it themselves.
The pandemic obviously wasn't.
The big driver and I think inflation in the supply chain disruption.
It has been another reason for people to rethink.
Whether thats something that there.
In a position to do or should they outsource so.
Do think that that's a helpful tailwind as well.
Thank you. Our next question comes remains you're starting it with Jpmorgan. You May proceed hi, Tom I just wanted to confirm that you said mid fours operating margin for the third quarter and with that being overall I was wondering if you'd be willing to make a couple of segment level margin.
Comment for the current quarter the June quarter, and then I also know I think I heard you. When you said, Hey don't forget fourth quarter has seasonal lift in 200 basis points of seasonal lift is obviously very typical.
And nowadays for third into fourth quarter for Aramark, but I was kind of struck by your comment that the higher than previously expected gross wins will weigh on margins and I assume that's disproportionally, a fourth quarter of fiscal fourth quarter dynamic.
Well it is just I'll start with your second question.
That is sort of offset by the underlying strength of the margin.
So said another way without the new business wins, which we wouldn't want.
We believe we could be a little bit stronger even in the fourth quarter as we exited into 'twenty three.
So it is that combination of of seasonality in that lift but also.
The recovering base volumes with the with the.
Higher incremental margin as well as.
Continuing to drive efficiencies in the business.
I I always.
I respect your asking in.
About more detail on them.
Margins by sector, but thats.
We'll just leave it at the four and a half for the overall company at the moment Okay.
No problem. Thank you very much.
Yes.
Thank you. Our next question comes from Toni Kaplan with Morgan Stanley You May proceed.
Thanks, So much I wanted to ask about international a really good quarter.
This quarter.
What are you seeing in terms of differences compared to the U S. And also you mentioned Europe , and Canada experiencing improved business activity, but wanted to ask about sort of the outlook for Europe .
Yes, I think theres two things internationally I mean, they are doing very well and credits.
Karl and <unk>.
Leadership throughout the.
The business.
Really just sort of rising to the challenges in front of them.
They as I mentioned before.
Deal with inflation more as a part of their everyday year in and year out and so I think their ability to react to it.
It's probably quicker than the rest of the business in terms of its recognition.
Particularly in the Latin America businesses.
They see that quite consistently.
Their benefit for them is and we've talked about this as an overall.
Driver of the model is they've had consistent new business wins.
For a number of years.
And so there their maturity of their business day 123 years ago is paying dividends and so in a way, it's sort of covering up their startup cost of new business Merlin being a slight exception for them given its size, but when you have a model where you're winning business consistently those those older contracts are maturing.
And then you also used to inflationary environment.
That sort of has mixed together to allow them to really sort of.
Do well through this environment.
Great lighthouse.
My follow up on competition.
You mentioned that the self op conversion has been helped by inflation wondering if sort of the inflationary environment has impacted the competitive environment in terms of does it become harder for maybe smaller companies to compete.
Just any sort of change.
Uh huh.
Competitive environment due to the inflation dynamic.
Yes, My guess.
And it's still a little bit early to tell because as we've talked about hello to contract for a lot of self ops and other conversions can be years.
So while we think it's a tailwind and we have seen tail winds out of the pandemic.
Not quite sure whether inflation will deliver that but.
The suggestion would be it would it would and I think it will favor the bigger companies I mean, right now with the supply chain.
<unk>.
The bigger voices.
Our winning and I think have more leverage.
To deliver and so smaller folks.
Smaller suppliers.
And in <unk>.
Businesses are struggling a bit more with limited supply and rationalization.
So I think it will help but probably a little early to tell yet.
Thanks, a lot.
Thank you. Our next question comes from Shlomo Rosenbaum with Stifel. Please proceed with your question.
Hi, Good morning, Thank you for taking my questions.
To start out a little bit with the nature of the new wins, the raised $100 million guidance as this kind of broad based to the contrary concentrated one sector and how much of the pressure on the on the large.
Is coming from the startup costs from the new wins or is this really tangential and think about it is overwhelmingly from the inflationary pressures and this is just kind of a tangential pressure.
It's probably a little bit more than 10 gentle just as we're coming off a standstill star like we talked about at analyst day, I mean, we really didn't have any net growth for a number of years.
Really experienced our first startup.
Substantial material new business.
Last year and really in the second half of last year and then this year, so probably a little bit more than tangential, but that will wane as we as we move into 'twenty three and then certainly into 'twenty four provided we consistently continue to.
To deliver on the net growth.
And that's our goal.
Inflation is is a big driver at the moment in terms of our our guidance in the range.
Between the 5% to 5% that we started out with so and the timing lag that we talked about.
With that so of the two I'd say the inflation is tipping the scale a little bit more than the startup costs at the moment.
That's right, but both components are significant.
I think the startup cost as Tom indicated.
As we set this engine going.
We expect that we will have significant startup costs year over year and that will eventually kind of lap that phenomenon.
And in an average sales here will have somewhat average opening costs, but it is.
New to the P&L this year as a result of both the magnitude of the wins last year and frankly, the magnitude of the wins, we've already achieved this year. So.
Very good phenomenon to have.
Like this is the alternative.
We know we have the flexibility and the capability to work through.
Getting past these costs and bringing on this business on into.
Into very profitable accounts for the organization. So we're pleased.
Terms of where we are to date and we're also pleased with the with the Companys ability to go ahead and recover those inflationary cost increases.
By way of the various mechanisms that we've described before.
Okay. Thank you.
And then also.
How much is the aramark on the food services side customer of Aramark on the uniform side is it's something that we should consider in terms of the spin, but there'll be some kind of long term contracts set up or how material is that.
Yes, that's a great question, and yes, and yes aramark.
Aramark as a large customer a customer of Aramark uniform services and when do you expect to continue to be.
And that we will have a longstanding commercial relationship.
That will that will.
Survived the spin in many many years to come we would have.
The expectation that we will probably always be a customer of a U S.
And they.
They will have as a business they will have to perform.
To serve the needs of their aramark customers just like they do every day for every other customer that they operate.
But I think this whole that whole question raises a good point, it's very important that.
Everybody understand that we are undertaking this spin because we believe that the two companies will perform better.
Separate.
Separately that.
You know that the ability of our management teams to focus on their respective businesses will be enhanced the ability of the board to focus on.
Debt.
That individual business will be enhanced.
And that ultimately it leads to stronger performance by both organizations and that's really the primary reason for the ultimate spin.
We think theres value accretion as a result.
The transaction, we think Theres also cigna.
Significant value created.
As a result of creating equity that's that's focused.
Distinctly on its on its business, but ultimately it's about the performance of the company.
The management teams and their ability to manage the business more effectively.
Very focused way and and that's that's the ultimate reason for the spin.
Thank you. Our next question comes from the acquired with starting with <unk> You May proceed.
Hi, Good morning, just wanted to go through some of the new business numbers if thats okay.
Your guidance.
750 Thats net.
Then I think you also said retention is broadly maintained last year's level, which I think was $95. Five so is my math correct.
To get to the new guidance Youre going to find around $1 4 billion of gross new signings.
Sure.
Just curious how much of that is signed how much of that is.
The <unk> expectations.
The big number.
And then related to that how do we understand the impact of the contract startup costs is there a rule of thumb.
The $1 1 billion of gross signings.
Do you have to spend in year one for.
So each one of.
Those contracts before there im.
Just trying to separate those.
Lots of costs from that from just inflation impact.
Well your math is right.
That's the trajectory we're on.
We've got a good deal.
Signed at this point again I want to stay away from.
Disclosing quarter by quarter.
What we're booking because it does tend to vary year by year end.
<unk>.
That doesn't necessarily always come in the same quarter. So.
We have signed a good bit and then based on our our pending bids in our remaining pipeline feel very confident about that gross number.
And again that would be another record year for us.
So we're.
Well on our way.
As a startup cost.
Yeah.
I wish I could give you a rule of thumb there is not really.
Only thing that's tried and true.
Figure the account the more of the startup costs. So that's why we like.
The smaller accounts that is the bread and butter and understand that underneath the marlins in the produce in the Miami, Ohio and whatnot there are.
At Corning there are.
A lot of $1 million to $3 million accounts, which which are really the bread and butter.
And the ones, we like to get they have less.
In terms of startup cost of complexity is less.
The understanding of those operations.
A little quicker.
So that's probably the rule of thumb is if youre seeing a lot of big big accounts, there's going to be heavier startup cost.
If there arent the bigger accounts than there'll be less.
Yes.
Great answer time, I wish there were a rule or rule of thumb would be easier to predict but.
Every account is different every circumstance is different.
They are somewhat.
Differentiated by size, the bigger and more complex they are the higher the opening costs.
But we have a very we have sold a very broad base of business. We've had a couple of very large accounts. This year like Merlin and as Tom indicated we've got hundreds of accounts.
What are the smaller bread and butter accounts that are related to kind of the lifeblood of the business. So we don't focus on just the big ones we focus on.
A big range of accounts and it's also somewhat differentiated by the line of business.
And.
The opening cost can be somewhat determined by the contract type as well, whether it's a management fee or a P&L. So.
A lot of variability there, but it's something that as we've said as you as you have an engine that produces significant net new business year over year. Ultimately those opening costs are just part of the.
The normal operating cycle and the fact that we've gone from zero to 60.
We're going from zero to two 100 this year it makes that.
That phenomenon.
More impactful in the year.
Alright. Thank you that's useful thanks.
Thank you. Our next question comes or buys all of them.
Which bank you May proceed with your question.
Yes, hi, Thank you good morning.
So I was curious on pricing you mentioned that inflation was seven to eight firsthand.
Im wondering where you are on pricing at this point in time and sort of where do you expect.
Pricing to be like do you expect pricing and inflation to be aligned.
Or is there more incremental pricing that we should expect as we get into.
23.
Well again I wish I wish there was a straight forward answer is it depends a lot on.
Wyant contracts depends a lot on the timing lag.
And just our ability to sit with our customers and understand what operational adjustments they might want to make to help offset the cost.
Whether the contracts are cost plus for P&L obviously.
So theres a lot of factors that are going into the pricing. So it's really hard to give just a straight answer on.
Broad brushed across what pricing is versus cost.
We continue to get pricing.
And we're trying to again always demonstrate value to our clients.
We're able to to mitigate those increases better than if they were on their own or with someone else.
So.
Again, it's a combination of things the pricing ultimately hopefully is never what you would read in the headlines.
We've done a good job of mitigating cost.
Again, therefore, the client sees the value equation.
Yeah, and ultimately what we expect is that pricing and inflation is relatively neutral.
And that we're able to we're able to offset inflationary pressures.
Through those through a number of mechanisms pricing being one of them.
And one and one that's obviously in today's environment more important than the normal.
But we're always looking to match those.
Those two things, we never want to over price because we want to make sure our consumers are protected and our consumers continue to want to.
Frequent our operations and so we're always carefully managing.
Price to value and we're also carefully managing menu.
In order to mitigate the impact on the consumer but make no mistake, we are pricing to go ahead and recover.
Added costs and we expect over the long run for those.
<unk> pressures to be neutralized by price as well.
Okay, Okay, great and then.
At Investor Day, you had talked about an ongoing for long term growth rate of 527%.
I'm curious if you are able to talk about the growth framework for uniform.
The remaining business.
And that's part of that.
If youre.
Or willing to comment on how you thought about that.
Relative valuation of the two businesses as you were evaluating various strategic options at your disposal.
I will get into as we as we begin to formalize the spin the structure of the spin.
Details will be able to present, a framework that highlights what the three year plan is for the business I don't want to be very careful.
<unk>.
We're focused on.
On creating the environment for the spin on putting it.
Putting the team.
Against the project and really detailing the.
The story, if you will in the.
Our plan, if you will and that will take.
That will take some time over the next few months as we work to do the separation.
I think it's a little premature to go ahead and give relative valuation kinds of <unk>.
Metrics.
But again, we really believe that these businesses will be served well by the separation.
Would you be able to focus on optimizing their strategic focus on their flexibility.
And that each management team will be able to really focus on what's best for their operations from both a capital strategy as well as on acquisition strategy. There is just a number of benefits that we've highlighted.
But ultimately we think the performance of both organizations will be enhanced and we will over the next several months have an opportunity to me.
Meet with the investment community to talk about what the spend looks like and what the forward looking plans are.
Thank you. Our next question comes from Ashish <unk> with RBC capital markets. You May proceed.
Hi, This is John filling in for Ashish, how should we think about the volume recovery in some of the lagging areas such as the amount of retail catering conference. Thanks.
In terms of their ultimate recovery I think things have been pushed out to the right a little bit.
Certainly when.
When we started the year, we felt like a lot of the.
The white collar P&I, the technology finance space would be would be back by first of the year.
Crown variance set in and that's pushed things out.
So we continue to see a steady recovery in that category and I think that will continue throughout the summer and then.
Into the fall so we're.
Confident that.
The progress of recovery continues in that segment I think you'll see the same in the convention and conference Center business.
That's remained slow I think through the various variants are slower than we thought through the winter and spring, but I think as we get into the fall that also.
The.
Calendar 'twenty three that we'll also continue to pick up concert activity I know is picking up.
Quite a bit as we get into the summer, particularly the outdoor venue.
Then use.
<unk>.
The hospitality to lend inside of uniforms in hospitality, particularly the smaller restaurants.
Continue to have a little bit of a stop and start so all of all of that remaining Covid index. As we said is has moved along about as we thought maybe a little bit better.
But we continue to progress and feel as though as we move into the balance of this year and certainly into 2000, and so you will continue to see some recovery of those volumes.
Thank you. Our next question comes from Harry Martin with Bernstein, You May proceed.
Hi, good morning, everyone.
I just wanted if I could ask.
A question really about the targets that you gave at the <unk>, you said, you're sort of happy with.
Commentary that based.
Based on the commentary you've given about the separation, having benefit and see how more focused management team being able to accelerate that growth I mean can we expect ultimately to get to some to be more than the pops in times of financial performance.
Any sort of.
Commentary, you're willing to share on.
How quickly we can sort of start expecting that improvement to come sort of post 2023.
Well I would certainly say that we can expect some to be greater than the parts.
That we that we honestly believe that the performance of both organizations will be enhanced the ability to grow.
Improved margins.
Will be enhanced as well so it is our expectation.
That that both companies will see performance improvement.
As a result of the spin and.
We're on a very favorable trajectory right now.
Business is showing improvement year over year, and making significant progress and again will detail.
Our expectations for the two companies.
Separately going forward.
Sure.
I would I would say that our expectation is for the.
For both businesses to show significant improvement.
Great and then just a follow up on.
On the new business I guess.
Second consecutive record year.
How do you feel about how much of that is.
The new normal versus.
Some of those.
Market impacts from supply chain and from inflation sort of accelerating some outsourcing for today.
Can you sort of run rate guidance, the new wins actually you will say.
Come up all the time, if we carry on seeing.
Quarters.
Such impressive performance.
Yeah, No we're very happy with.
The progress the teams have made.
Over the last 18 months really again coming from a standstill start.
Okay.
I think the performance.
Is more to do with our reinvestment in our focus on growth.
And then on any of these.
Tailwind Air quotes again on the pandemic and first time outsourcing those are great I've said that before they're they're great to have inflation may add a bit more.
We love the opportunity to take this big pile of self operated business.
Within our our total addressable market 500 billion.
Have people come to come to market and consider outsourcing, but we believe so strongly in this market and the growth rates, even without that even if that return to normal.
That we still believe this mid single digit growth rate is very sustainable for a very long time as long as we remain resolved and focused on growth and keep that front and center as the lifeblood of the company. So again I've said over and over again I said at analyst day.
Don't want people to think that this this.
Spike up this increase in net growth is just due to first time outsourcing. This is fundamentally how strong and how fertile this contract foodservice environment is for growth.
Absolutely right, it's really the change in culture and the investment we've made in both growth resources and the management teams that are driving this performance. We have an expectation that we will continue to see improvement year over year.
This year's results were planned to be better than last year's and we expect to plan that next years will be better than this year. This year's end.
We have an expectation that we'll continue to see an improving trajectory for long term growth for the company.
That's the model that's been built and Thats the commitment of the management team.
It's the kind of culture that we've been able to recreate.
To drive that performance.
Thank you and our last question comes from Neil Tyler Redburn You May proceed.
Your line is now open Neal.
And I will now turn the call back over to Mr. Zelnick for closing remarks.
Terrific well. Thank you very much everybody for your time. This morning. This is an exciting time really a historic day for Aramark. We're extraordinarily pleased with the results for the quarter and we're also very pleased with the.
Trajectory of the company I want to acknowledge to the performance of the entire organization I think both aramark.
Food and support services and a U S. These teams have been hyper focused on doing what's right in terms of serving our customers day in and day out.
And the results of the company.
The results of the company has been able to demonstrate are the result of their hard work and effort. So thank you to all the Aramark team members.
And thank you to all of you for attending this morning.
Take care.
Thank you. Thank you for participating this concludes today's conference you may now disconnect.
Okay.
[music].
Okay.
Yes.
Okay.
[music].