Q2 2023 Aramark Earnings Call
Okay.
Good morning, and welcome to Aramark 's second quarter fiscal 2023 earnings results Conference call. My name is Kevin and I'll be your operator for today's call at this time I'd like to afford me. This conference is being recorded for rebroadcast and that all participants are in a listen only mode. We will open the conference for questions at the conclusion of the Companys remarks, I will now turn the call.
The police Casal, Vice President of Investor Relations and corporate development. Mr. Zhao. Please proceed.
Thank you.
Earnings Conference call.
Good morning.
John .
Right.
Our notice regarding forward looking statements.
It is included in our press release this morning.
During this call.
Actual results may differ materially.
I'm sorry.
Okay.
DNA.
Yeah.
Okay.
Additionally, we will.
Sure.
A reconciliation of these items.
Okay.
Yes.
I will now turn the call over to John .
Thanks, Felicia and thanks to all of you for joining us today.
Halfway through the fiscal year, we continue to make progress on our strategic priorities, which have resulted in one strong business performance to positioning the uniformed services spin off our success in three additional balance sheet optimization.
This morning, Tom and I will share an update on each of these priorities as well as well as a detailed outlook for the full year before opening the line for questions.
But first I want to acknowledge our teams around the globe, who embody Aramark service culture every day just over a week ago, we held our Aramark building community day during which the thousands of employees across the company volunteered their time energy and expertise to over 150 service projects around the world in areas, where they live.
And work.
This is just one example of our commitment to reach for remarkable as we continued to deliver on that promise.
<unk> performance starts with our people and I'm proud of the powerful impact and partnership that we've created with our teams our clients and our communities.
Now, let me comment on our second quarter business performance.
After record results last year, new business growth remained strong and our pipeline is robust.
This combined with retention rates remain above 95% keeps us on pace to deliver annualized net new business in fiscal 'twenty, three or 4.5% or more of last year's revenue and is creating solid topline momentum going into fiscal 'twenty four.
Net new business in the U S segment was broad based driven by new wins in health care corrections and facilities.
The University of Chicago Medical Center, the misery deep sea and an expanded relationship with Boeing as well as strong retention results and collegiate hospitality that reflect the recent proactive extension of Mississippi State University as an example.
With the selling season for education are well underway, we anticipate continued momentum with numerous opportunities already in the pipeline.
The international segment experienced ongoing success, winning bread and butter accounts across the portfolio, particularly in the U K, Canada, Ireland, and South America, our sales funnel continues to grow across all geographies and retention remains strong.
Our phased rollout of Maryland is now complete in all locations and we're looking forward to the upcoming busy season.
Uniform services generated increased new business compared to last year, a sign that the strategic growth plan for the business is being executed our sales pipeline remains solid and we expect new business to accelerate as we move into fiscal 'twenty four under the sales leadership of industry veteran Andy Patios recently joined a U S anyway is nearly <unk>.
30 years of experience many of you know andy's reputation in the marketplace and we're thrilled to have him onboard for the next phase of this business.
In the quarter, the company's organic revenue grew 19% compared to compared to the same period last year with pricing contributing approximately 6%.
Within the U S segment, all sectors contributed to organic revenue growth of 19% led by continued strong per capita spending in concert scheduling activity in our sports and entertainment business retail and catering in our collegiate hospitality business as well as a quarter over quarter increase of return to work practices within business and industry.
International organic revenue grew 31% compared to the second quarter last year, driven by solid net new business pricing initiatives and base business growth across all geographies like the U S sports and entertainment and business and industry continue to demonstrate strength driven by greater in person activity levels are.
Teams are also gearing up for a busy summer concert season ahead.
Organic revenue in the uniform services segment increased 6% year over year with solid performance in both the U S and Canada Adjacency services grew double digits and while currently a relatively small portion of the business revenue mix continues to be a focal point for growth within the U S.
On the uniform spinoff, we've continued to make significant progress with respect to the transaction and are excited for the opportunities ahead for uniform services as an independent Standalone company.
We continue to monitor macroeconomic and capital market conditions as well as the business has momentum while remaining diligent in completing the operational regulatory and financial logistics in order to be in a position to be able to complete the separation by the end of the fiscal year, all with an eye on doing what is right for the business and Aramark shareholders.
Lastly, we continue to strengthen our balance sheet in early April we completed the sale of our Noncontrolling, 50% equity stake in aim services for $535 million. We also recently signed an agreement to sell a portion of our ownership stake in the San Antonio Spurs NBA franchise for approximately $100 million.
We expect that that deal will close imminently subject to certain closing documentation and well.
We'll continue to work closely with the Spurs as a valued client in the future.
Before turning it over to Tom I would also like to highlight some of our new partnerships as we strive to be one of the most admired employers and trusted hospitality partners.
We partnered with a certain with the third good Marshall College fund to launch the Aramark HBC you emerging leaders program focused on career exploration and professional development for students at historically black colleges and universities.
We also formed an equitable alliance with Triple B Hospitality group on minority leader in human centric hospitality to bring new avenues of value to our workplace experience group clients, who want to empower their people and communities to overcome labor challenges and to drive more equitable impact from their businesses.
And just last week, we were once again selected as a top 50 employer by diversity, Inc. Even moving up in the rankings and for the first time also named as a top company for supplier diversity I'm extremely proud of the hard work and significant impact with Aramark is making as a unified community to drive inclusion.
<unk>.
Thanks, John and good morning, everyone.
Our performance in the second quarter reflected continued momentum in delivering profitable growth driven by actions that strengthen the current state of the business and position the company for future success.
As John mentioned total company organic revenue of $4 6 billion grew 19% year over year and adjusted operating income of $213 million was 30% higher on a constant currency basis compared to the second quarter last year.
Margin for the total company increased by 40 basis points to four 7% in the quarter.
Through the first half of the fiscal year.
Total company <unk>.
On a constant currency basis improved 39% compared to the first half last year and Oi margin was up more than 70 basis points to 5%.
In the U S segment increased.
Increased 43% on a constant currency basis compared to the second quarter last year.
By the maturity of prior years, new business supply chain purchasing compliance and tight above unit cost management.
As well as operating leverage off base business growth from returned to work activity within the P&I sector and higher per cap spending within the sports and entertainment business.
The inflation client pricing lag within our education sector and corrections business remained a headwind in the quarter, but we expect that to lessen as client approved pricing actions take effect during the second half of the fiscal year.
Specific to collegiate hospitality the use of agency labor remains higher than historic levels, but it is gradually improving.
In the international segment increased 3% year over year on a constant currency basis.
As previously disclosed the second quarter last year included $21 million in government reimbursement payments excluding.
Excluding this benefit to last year's second quarter. The segment grew by 113% and expanded <unk> margin by 140 basis points in the period each on a constant currency basis.
Year over year NOI growth within our international on a constant currency basis was driven by prior years, new business contract maturity operating leverage off hire base business volumes from returned to work activity across business and industry clients.
Supply chain purchasing compliance and reduced above unit costs generated through our restructuring initiatives across the segment.
Which more than offset the impact of Covid lockdowns in China during January .
At the end of the government reimbursement programs.
Uniforms, AOR grew 7% year over year on a constant currency basis, resulting in an oi margin of nine 8% versus nine 6% in the second quarter last year the.
The improvement was primarily driven by operating leverage off net new business tight control of administrative expenses as well as early savings related to efficiency initiatives, including an operating organization restructuring that more than offset higher labor and merchandise costs in the quarter.
We expect this margin progression to continue in the second half of the year, establishing the foundation for its public company debut.
Across the portfolio of supply chain remains an integral driver to our performance.
We have seen an improvement in supplier fill rates, which are now approaching pre COVID-19 levels progress.
Progress here allows us to fully leverage our current negotiated deals. Additionally, our supplier inventories continue to rebuild.
Seeing the return of opportunity buys providing another avenue within supply chain to offset cost pressures.
While product costs are universally higher than they were one and two years ago and are running more than 100 basis points higher than we planned at the beginning of the year. We have started to see moderation in the sequential rate of inflation.
If this trend continues the business is expected to experience a tailwind over time from consistent pricing actions, including the cost recovery related to pricing already implemented as well as pricing currently agreed with clients and set to be implemented in the back half of this fiscal year.
Net interest expense was $114 million and.
And the adjusted tax rate was approximately 25%.
Our performance in the quarter led to adjusted EPS of <unk> 28.
On a constant currency basis, adjusted EPS was <unk> 29 in the quarter compared to 21 in the second quarter last year, reflecting year over year increase of 38%.
On a GAAP basis, Aramark reported consolidated revenue of $4 6 billion.
Operating income of 182 million and diluted earnings per share of <unk> 21 for the quarter.
Comparatively consolidated revenue was $3 9 billion operating income was 142 million and diluted earnings per share was <unk> 14 in the second quarter last year.
Now turning to cash flow.
In the quarter net cash provided by operating activities was $314 million and free cash flow generated was $229 million in inflow consistent with this historic seasonality of the business.
Cash source from operations was better than the same quarter last year offset slightly.
By a higher use in working capital and higher capital expenditures, which at three 3% of revenue was still below historical average.
At quarter end are Mark had approximately $1 2 billion and cash availability.
Since quarter end, we have repaid $530 million in total debt and remain committed to lowering our leverage ratio. We will continue to evaluate broader capital market conditions stay opportunistic and looking for ways to strengthen our balance sheet through debt repayment and strategic refinancings.
So let me conclude with our outlook for fiscal 'twenty. Three that includes our current total company expectations as well as some additional insight on global FSS and uniforms.
For clarity global FSS includes FSS U S.
FSS international and corporate reportable segments and.
In short everything except for the uniform services segment.
The uniform services outlook here reflects that.
Portable segment and does not include any incremental public company costs, our capture of additional efficiencies.
With that we currently anticipate for the full year fiscal year 'twenty three.
Organic revenue growth rates to be just over 13% year over year comprised of global FSS at approximately 15%.
And uniform services around five 5%.
<unk>.
AOI growth to be approximately 32% compared to last year <unk>.
Comprised of global FSS at approximately 45%.
Uniform services around 7%.
Free cash flow of approximately $475 million before payment of the $64 million FICA payment completed last quarter and the anticipated cash flow impact of approximately $100 million to $125 million related to restructuring charges and transaction fees associated with the uniform spin off.
After these specific items, we expect our reported free cash flow to be approximately $300 million.
And our leverage ratio to improve to less than four times by fiscal year end.
We remain committed to a balanced approach on capital structure at the time of the spin with no plans to overburden either company.
We're confident in the momentum that continues to build in both global FSS and uniform services to deliver long term sustainable and profitable growth.
Our strong pipeline of new business opportunities.
Positive effect of ongoing pricing initiatives against sequentially moderating inflation.
Stabilizing supply chain and the benefits of actions taken in the first half to make the organization more efficient and effective give.
Give us confidence as we head into the second half of the year and set the foundation for fiscal 'twenty four and beyond.
Thanks for your time this morning John .
Thank you Tom as we move into the second half of the year I'm excited about what lays ahead for Aramark as we finish this year and build into fiscal 'twenty for us.
Tom mentioned revenue growth was strong driven by driven by continued solid net new business growth.
<unk> client pricing and the ongoing base business recovery and growth.
Following unexpected 45% increase in AOE. This fiscal year, we anticipate the momentum to continue within global food and facilities next year, driven by ongoing supply chain normalization and optimization.
Continued profit recovery through pricing in all segments, most notably in collegiate hospitality student nutrition and corrections.
The profitability ramp of record new business wins from the past two years through operational maturity and efficiencies.
The benefit of previously announced and completed organizational restructuring initiatives and FSS International and uniform services.
And tight control and leverage of above unit overhead across higher revenues.
Uniforms remains focused on our strategic agenda, and increasing route density with new business wins and successful cross selling is as well as route optimization from investments already implemented across our portfolio.
Additionally, the team has identified incremental opportunities as it prepares to operate as a standalone company related to restructuring the organization and adding experienced leadership talent with a history of value creation. This is just the start of what's to come for the business.
The work ahead is not easy we've continued to set a very high bar for ourselves and we're working hard everyday to deliver for our stakeholders.
And I feel the incredible momentum across our business each day and believes deeply in the ability of our teams around the globe to reach this level of performance and well beyond.
Operator, we'll now open the line for questions.
Thank you we will now begin the question and answer session. If you have a question. Please press Star then one on your Touchtone phone 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.
Pause for a moment, while we compile our Q&A roster.
Our first question comes from Toni Kaplan with Morgan Stanley . Your line is open.
Thanks, so much.
Nice quarter with regard to top line growth and you raised your organic growth guidance I was hoping you could talk more about what's driving the acceleration and particularly any additional color on new business trends, how you see the trajectory on new business through the year and outsourcing trends anything like that would be helpful. Thanks.
Sure. Thanks for the question Tony.
First of all we have very strong momentum and a very strong new business pipeline. So.
A lot of activity and I.
I would say, we're very we're very pleased and very excited about the prospects for the balance of the year as you know it's early in the selling season for education. So we still anticipate a lot of decisions through the back half of this year and are very excited about the opportunities that we have in front of us.
I would say we had a record performance for the last two years running and we're on a very similar trajectory for this year very excited about the overall prospects. We see continued a continued outsourcing as a as a trend that will support the business going forward.
And I believe that the company is well positioned to take advantage of those opportunities.
With respect to the businesses and business momentum and recovery in the base business. We are seeing an accelerated activity in return to work, which is helping to create momentum in business and industry not only domestically, but internationally as well and we expect that that trend will continue.
Through the balance of this year.
Great and then for a follow up did want to ask about the margins just a clarification, maybe it looks like sort of similar to what you were providing in March at conference is in terms of the expectation for <unk> margin. This year I know that that was hello.
But lower than what you had expected in <unk>, but it sounds like similar to March and so just maybe talk about either upside to the margin guide and.
Have you sort of stabilized here and cannot go up.
Yes.
About mid fives, I think for the year.
Really concentrating on both.
The progression on the top and the bottom line as we move forward with balance.
I think the.
The variable.
Continues to be the persistent of inflation.
We're getting pricing as John just mentioned.
Strong pricing, we have a lot of client agreed pricing already set to be implemented into the second half.
So thats obviously.
Countering that.
It sort of persistence that we're seeing.
As the as we get into the second half this year I'm not sure the Tony there is a lot.
It was going to change that to the upside as we move through the balance of the year.
<unk> run a short and we're already doing a lot of things, including the new business planning for fiscal 'twenty four.
But certainly we'll continue.
Continue to be very.
Aggressive on the pricing and appropriate.
To offset that and I think if we can get a little bit of a.
The.
Mitigation of it towards the fourth quarter that may help a little bit, but but by and large.
We're staying focused on it we don't see any real downside.
But a lot of the upside would be into 'twenty four.
Perfect. Thank you.
Our next question comes from Heather Bellini with Bank of America. Your line is open.
Okay.
Hi, Thank you.
I was hoping you could talk a little bit about the farms business.
You talked about.
Two parts, one you talked about adding new members of the team focus on value creation.
But at the same time, the organic sales in that business.
I think they've kind of it looks like they're slowing into.
Into the back half of the year to hit your guidance I'm curious with what's going on in the business right now and the opportunities we see ahead.
Yes.
Yes, I'll take that.
First of all we see continued sales momentum in the business and growth in terms of net new.
We are anniversarying last year's fuel recovery fees that would have been in the third and fourth quarter. So on a comparative basis year over year.
It has the appearance of slowing but the actual sales activity, we think is running.
At levels that are consistent with our expectations. So we're we're highly confident in the team that's in place there and as we built the team to create a public company environment. We're very confident in the leadership that we have focused on it so.
Yeah, we're very pleased to have Andy joined the organization. He has various strong established leadership in the industry and I think we'll leave that business to even greater heights from a new business perspective going forward as we implement some of Kim's new strategies with respect to targeted marketing and implementation. So yes.
I think our expectations are that the business will continue to perform.
Based on its plan for the balance of the year.
Great.
I don't know how much you can share, but you talked about your monitoring the macro environment the capital markets environment with regards to the spin.
Is there any thought that.
If the environment weekend that you might look to be a little bit more opportunistic around the timing of the spin or are you fully committed to the back half of the year.
And while we are fully committed to the spin timing will be the board's decision.
But we are monitoring as you indicated those macroeconomic conditions in the capital markets conditions.
Obviously, we want to be very cognizant of what kind of leverage the newco will be.
Will be.
Equipped with and want to make sure that that comes at a cost and at a rate that is something that's a.
Appropriate for the business going forward as Tom said, we don't plan to over lever either side of the organization. So we're just going to be very diligent about monitoring the conditions and looking for the right opportunity and timing.
Great appreciate the color. Thank you.
Thank you.
Next question comes from Ian Zaffino with Oppenheimer.
Really impressive top line here.
Better than some of the comps out there.
What is driving that.
Laurence culture.
Growth team process.
Also same thing on <unk>.
Why.
Global.
Food business as well so.
That is also outpacing kind of comps.
Tells me, what youre doing differently or kind of what's giving you that edge. Thanks.
Well I think youre seeing the acceleration and the realization of the net new business that's coming in that's come over the last couple of years contributing significantly to that.
Topline growth as those accounts come on and mature and we're realizing those revenues.
And and then Youll see us at those accounts mature continued improvement and continued margin improvement as those accounts come up the profitability ramp to maturity and so I think both of those factors are driving those those results that you've highlighted.
I think there is the culture of the organization is now really fully focused on growth.
We've built the incentive systems that we built be alignment throughout the organization and there's just a lot of excitement about the future of the company and so that's I think a very strong contributor on both on both of those elements and we see that continued performance improvement coming through this year. So the last two.
Years' performance wasn't done anomaly it was the new culture, and a new approach to running the business.
And I think we will continue to drive that success going forward.
Okay. Thank you and then.
A follow up.
Maybe talk about.
How the business works in periods.
Moderating food cost food costs have been coming down.
I'm curious.
Is there a point where your costs are coming down and then your prices are coming up is there going to be.
Price give back.
How are we thinking about those two dynamics are kind of falling let's you say food with the ability to kind of do you still got price recovery.
Yeah, absolutely as you know a price recovery as an element of both food cost inflation as well as labor inflation. So we don't need we don't generally end up.
Having price give back.
As prices come down on food product because we've.
But those pricing structures in place to recover the total cost of operation not just the food cost but.
In a time when you have some deceleration in the inflation rate.
There will be a point, where we crossover and have some tailwind coming from that improved pricing and the lower food cost than you are seeing some commodities breakdown.
With respect to pricing, which hopefully in the longer term will have an impact on the profitability and.
And total food cost for the operations.
I would say that those are it's still early.
And we still have inflation.
And but but at lower than than.
And then the last several quarters. So it gets beginning to moderate but it's still it's still there and still persistence. So we will be diligent about continuing to price to recover those costs will continue to be diligent about putting pricing in those businesses that have been that have had a lag due to contractual requirements.
And at some point you are right, we will have a bit of tailwind as a result of crossing over that debt.
Slope, if you will.
The one technical exception I would add to John's comment is.
With cost plus contracts.
We would see in a declining food cost environment.
<unk>.
Pass through to the customer drops so in essence, our revenue drop a bit.
As those costs came down.
But that would help margin that's going to be a tailwind to margin as we move into.
A deflationary environment.
Because our.
Fees are typically fixed in the pass through of the revenue would fall.
Okay.
Our next question comes from Neil Tyler with Redburn. Your line is open.
Yes. Thank you good morning, John Tom.
Two questions. Please firstly you talk about the continued momentum in the growth of the business.
Could you perhaps share some insight into any changes in the size or shape.
Origin of new wins bear in mind that a different lead times in different industries, whether that's all to the tool.
<unk> to six months or a year ago. Please.
Sure I would I would say that this year's results don't include what we would characterize as a whale Merlin obviously last year was a very significant.
New account win a much larger than we would normally sell in any given year. This year sales results are the result of a lot of wins across the enterprise broad based.
Our new account activity I described it as bread and butter for the international segment those accounts that are.
A couple of million dollars or less so now.
Not constructed of a lot of large whale accounts, but a lot of wins across the enterprise. So that's actually a very good thing and if we happen to hit on another large opportunity. That's that's terrific, but we are expecting to be able to achieve our results.
Across the organization and for the full year buy.
By selling.
A lot of new business around the world across the portfolio.
That's great. Thank you and then.
Tom I think you mentioned in your comments around the sort of ongoing.
Cost actions.
And I wanted to.
With regard to recovering or other pricing actions with regard to cost.
Have there been any.
Structural changes or permanent changes in either the structure of contracts or the timing of renegotiations.
Could you seem to you seem to suggest that it wasn't just the case of catching up but the business.
It might be set up better to cope with.
The volatility in the future.
Well I think two things with that one is.
All cycle pricing.
The course of the past year, we've become.
More more diligent I guess is the best word in in.
<unk>, our clients working with our clients to get off cycle pricing just given the volatility that we've experienced.
It had been more proactive with it as the year is going on in some of that is already set for the second half as I referred to and so is in place.
As good news, but I also think as we're moving forward with our new contracts.
We've been we've been bored.
Focused on the indices.
Keeping them more open to be able to renegotiate based on variable variability in the environment, we had such a low inflationary environment for so many years a couple of decades that I think contracts became fairly routine.
They were written with with with indices in caps and whatnot and so being much more proactive as we get into new business to not have those those sort of constraints anticipating.
This environment, either continuing or continuing to be volatile going forward. So I think we are positioned better.
Over the coming years based on the way we are structuring our contracts today.
That's really helpful. Thank you very much.
Yeah.
Our next question comes from Andrew Steinman with J P. Morgan Your line is open.
I wanted to kind of maybe folks gather a few concepts here. My question is do you feel like Aramark has entered a junk fares a company where you could just more readily balanced strong revenue growth with margin expansion at the same time like for example, if the company started reporting stronger.
Our revenue growth over the next few quarters do you feel like there's going to be healthy margin flow through or do you feel like perhaps sometimes the stronger revenue growth will still come.
Strained margins to some extent.
Yes, I would take that Andrew I think as the company continues to post sustained revenue growth. We should we should also post a sustained margin expansion on a going forward basis and its really a result of a couple of different.
Dynamics, one of which is continued supply chain economics.
Movement in supply chain, economics, and adding additional spend to our existing deals which we.
Which puts us in a position of earning at higher levels.
At growth levels. If you will on those agreements as you know many of those agreements with either manufacturers or suppliers are tied to total spend or case counts and as you grow the business you get accelerated returns.
And then there's also the phenomenon of just increased leverage with respect to the SG&A and the cost structure as you know we're very diligent about.
Keeping the organization is flat and is focused and as efficient as possible.
And so you end up with both of those dynamics contributing to margin expansion.
In a growth environment and that's the way we.
We've constructed.
The business model and its the way we have our incentives aligned.
<unk>, one continuing to stimulate that growth in top line by adding profitable new business and.
And then managing the middle of the P&L, if you will.
Pat.
It's a great question. It's one we're really excited about because it's the fundamental point.
And strategy that John and I have been talking about that we're two years in now back half of 'twenty. One all of 'twenty to first half of 'twenty three on this growth journey and really changing the trajectory of.
The underlying growth of the business. So we're getting there we've got to stay resolved to this this sort of virtuous circle and really then get to that balanced top line bottom line growth, but but.
It's in the works and margin will follow grow is because we continue to move forward and like John said Deleveraged. This out of the supply chain and leverage the the overall above.
Infrastructure.
Makes sense. Thank you so much.
Our next question comes from Shlomo Rosenbaum of Stifel. Your line is open.
Hi, Thank you I have two questions. This morning, I just wanted to piggyback a little bit more on Andrew's question over here.
Just in the quarter, we had very strong growth and youre raising the revenue guidance, but you're really not doing that with the margin guidance.
Might be consistent with what you said.
Conferences or the lower end of what you pointed to last quarter could you talk about what.
What are kind of the puts and takes within that margin are you seeing more inflation. It's offsetting other more startup costs because revenue is turning out better. If you can elaborate on that and then I have one follow up to that.
Yes, I think the biggest point is inflation. If you go back to the beginning of the year back last November when we put out the guidance.
32% to 37% Oi growth adjusted.
Adjusted for aim.
<unk>.
The difference between the midpoint and the lower end.
2000 $25 million same to the high end.
And so the move really has been driven by what we assumed was going to be a.
Decreasing well into the <unk>.
Early in the second half if not slightly before inflation rate that we would get some relief with consistent pricing then coming through and get a bit of that tailwind in the second half.
It's just stayed longer and more persistent than we thought back at the beginning of the year and thats been the tweak on the DIY.
Conversely, the topline both pricing to counter that has been stronger than we assumed.
And the net growth is new account wins continued to remain strong.
Which is the rise to the top end on the revenue. So it's just a bit of a dynamic in there.
For the year based on the assumption.
Primarily as inflation and a little bit of <unk>.
Net growth in startup costs.
And I would I would add that we're as Tom mentioned in his script.
We're very.
I'm pleased with the level of pricing activity, we have going into the second half of the year, that's already approved and contractually agreed to in particular it will affect the corrections business as you know that that pricing goes in on anniversary dates.
Contract many of which are July one based on federal state and local calendars.
And so the significant pricing that comes into the system in July that will lead to.
Improvement in that margin profile and then you have already agreed pricing for the collegiate hospitality team that goes into effect.
In September for the New award plan year. So we're confident that we've got the offsets to those rate of inflation, that's running a little higher than expected and that will and that will lead us into a strong start for 2004.
Great. Thank you and just my second question is quite to delve a little bit more on net sale of the.
Part of the ownership of the in San Antonio Spurs.
It seems like Youre getting a $100 million forward why are you selling part of it instead of all of it do you feel like you need to own part of it in order to.
Routine year kind of a commercial relationship with them are you trying to get some upside later on interest depreciation and price and then what are you is the money just straight going down to pay down debt or is there anything else, we should think about.
Sure I'll take that first of all.
We sold approximately half of our interest.
There was a buyer who is.
Working with the team to establish an ownership position and that's what that's what that buyer wanted to buy with.
With respect to that.
Chunk of ownership if you will it is not our intention to hold on to the other part of our ownership. We will work in partnership with the team ownership structure to go ahead and continue to market the balance of that ownership.
And no. There is no there is no requirement in our commercial relationship in fact, we just recently signed.
An extension agreement with the Spurs moving forward, which.
Which was part of the condition of the sale of that of that stake. So we will use the proceeds to pay down debt. We anticipate that we will continue to market the other half.
When we sell that that would probably generate a similar amount in terms of the proceeds.
Just wanted to add in here to Shlomo.
The action, we took with AME the Spurs.
Couple of other.
JV minority interest that we do have.
The purpose here is really just to simplify the business.
And get focused.
And Thats really been the driver for it.
So we.
We've looked at the balance sheet looked at some of these assets and again really just trying to focus on simplifying the business.
It's the opportunity for us to take the leverage level down.
Open the opportunity for other organizations that have looked at our leverage historically and felt that they couldn't invest.
<unk> because of that leverage and we recognize that that's a pool of capital we'd like to have access to.
And ultimately, it's all about creating the right balance sheet for future growth.
In investment and we're very we're very committed to getting our leverage level down.
And I think these actions help to accelerate that effort.
Thank you.
Our next question comes from Jeff <unk> with BNP Paribas Exane. Your line is open.
Hi, Good morning, everyone. First question I, just wanted to come back on organic growth and I apologize if I missed.
The other component I only heard you mentioned pricing contributing plus 6% in.
In Q2.
Could you maybe break down the whole of the plus 19% organic growth with pricing plus six.
How much did like for like volumes contributes and how much did new business contribute in the quarter. Please.
Yes, we're going to shy away from that a bit jafar, just because it does tend to bounce around quarter to quarter.
It tends to create.
A little more anxious than it should.
But the Covid recovery base continues to be in the mid nineties.
So I think Thats easy math from where we were last year.
To get you that component on the base.
And then there's negligible acquisition activity so the balance would be the realized net growth.
So all three components tracking.
On top of that pricing at 6% in the base business.
And that growth being.
Strong.
Okay.
Thanks.
And I guess secondly on new business at more forward looking maybe and I'm sure you'll share the full details.
The wins at the full years.
Said year to date, so far you were on a similar trajectory to the last two years and I appreciate each of 'twenty, one and 'twenty two.
Much better than the history of the company. So it's tempting to just say similar.
From our perspective.
2021 that you signed $1 2 billion of new business in 'twenty. Two you signed one six so it is quite different so I just wanted to see if you could be a bit more specific do you think you can maintain $1 6 billion do you think you can maintain one too or is your best guess at this stage.
You end up somewhere in between.
Yes, I don't think were going to give a specific number.
With respect to that we did say I think in our dialog that we expect to maintain four 5% or better of the prior year's revenues as net new.
And so we're we're expecting another strong performance.
And it's very difficult to actually call that the decision timeframe. So as you know we're not in control of the decision timing so.
So some of these some of these opportunities that we're working on now and May well close by end of year and some may leak into next year based on the client's decision timeframe. So I would just say based on what we sold to date based on what we've already had in terms of verbal commitments from clients that have not yet contracted we expect another very strong performance.
Year over year.
Education is very big for you. So just maybe to just further illustrate that.
Normal year, how much of your signings come into second half how much would you not have screens at all.
Today only Macy's.
Yes, I would say, it's we tend we tend to have about 50% of our business signed in the second half of the year.
With a significant component of it coming from.
Higher education, and K through 12 in the back half.
Got it.
International tends to have an earlier selling season than domestic and then they fall off in the third and fourth quarter and domestic has more results in the third and fourth so it's just that's why we report on an annual basis as opposed to quarter over quarter, just there's just too much variability and.
And again, we're not in control of the decision timeframe.
Understood.
Thank you very much.
Our next question comes from Harry Martin with Bernstein. Your line is open.
Hi, Good morning, everyone I thought I'd ask a question on the ramp up of the <unk>.
New wins from the last.
You mentioned <unk> is now fully operational so that should have a nice benefit in the second half.
Overrule Mr. Ron.
The new wins last year, and the year before happening as expected.
And then should we expect for this year and next year.
Revenue contribution could be slightly higher than the annualized revenue signed because of that ramp up.
We are didnt quite follow you on the second half of that question, but we are getting the ramp as I mentioned a couple of times.
In my script.
Script.
The maturity of the contracts won.
Again, starting in the back half of fiscal 'twenty, one and through last year.
Some of those like Maryland.
Take a couple of two or three years.
Fully become efficient.
Others much shorter timeframe. So we are seeing that underneath that is helping drive.
Year to date 70 basis points, helping drive 70 basis points of margin improvement.
And then we continue to expect that into two.
24 of $25.
The contracts that we've put in place so far.
Many of their ramp.
Okay. Thanks.
On the free cash flow guidance I thought I'd ask a question specifically on the client payments contract line.
It can be a bit lumpy, but $85 million in the first half it probably looks like it could be a very high year. So is there anything structural that we need to be aware of their own capital intense in demand from clients. So it is not just one or two contracts.
The payments.
Unexpectedly high.
Yes, it can vary quarter by quarter.
You mentioned that.
Running still below historical average.
I don't think well see anything in particular, there was some investment with Maryland that came through.
Higher Ed.
As we invest into those businesses.
But nothing out of the ordinary or that's going to take us off sort of that three 5% historical norm on the gross spend.
As I look forward to either to what we are.
Potentially winning this year or even what we're starting to look at for fiscal 'twenty four.
Great. Thank you.
Our next question comes from Leo Carrington with Citi. Your line is open.
Thank you good morning.
I Wonder if you could.
Sales on your previous comments on the pricing dynamics, specifically around consumer behavior at your clients I think some of your comments about.
Pricing mechanisms were clear, but are you seeing any signs of change behavior in terms of statistic participation rights or mix in the face of these price rises as they begin to.
To filter through to your.
Fuel consumers. Thank you.
<unk>.
Yes, I would say, we haven't really seen a change in consumer behavior, driven by pricing and we do see.
Evolving consumer behavior, as they're sort of returned to work.
Changes.
And we are seeing companies that have changed and modified their programs from full subsidy back too.
Back to the customer paying for their for their meals, but I would say participation rates are actually running higher than they were pre COVID-19, particularly in the P&I environment, which is.
Terrific. We think that's a function of the fact that some people are still working on <unk>.
A limited calendar, so three or four days per week. So they tend to use the facilities more often than not go out. So we're actually very encouraged by the participation rate dynamics.
Going on inside business and industry and otherwise not not seeing a change in consumer behavior related to overall pricing strategy I think there's been a benefit a bit from the retail environment in the high Street main street environment that.
Prices.
We have escalated so fast that within the contract environment.
There is even a perception of an increased value equation there so.
Again, we were very mindful when we do pricing.
What the retail environment is doing and what the consumer sees.
Outside the workplace or school or whatnot.
And the escalation of retail pricing has been so fast and so high that I think it's really.
Not not an issue for us in terms of the client per cetera consumer perception.
Okay. Thank you that's clear.
Brief follow up.
Yes education do you think that.
Your comments, though.
Still stand even with that.
Renegotiation interval.
Yes, I would say.
Pricing the pricing for board plans continues to elevate based on the total cost recovery required in those environments and what we've tried to do and we're designing those forward plans is to create.
<unk> opportunities for students.
A bunch of different ways, we design those plans.
To provide flexibility to give them the opportunity to use some of those dollars in the retail environment. So we're always cognizant of trying to create.
Great plans that that drive consumer acceptance and drive student satisfaction. So it's not always just about price it's about driving.
The behaviors as well so.
We expect that we will continue to have elevated pricing going into the new year.
In board plans to continue to recover the cost increases both from a food perspective, as well as the labor perspective, but certainly.
And arrange that.
That will have high consumer and customer acceptability.
Okay. Thank you thanks, John Thanks, Tom.
Thank you.
Our next question comes from Faiza <unk> with Deutsche Bank. Your line is open.
Hey, Thank you good morning.
Wanted to follow up on on pricing I know you touched on this and it sounds like that's the area where we're.
Whether it's been more of a pleasant surprise.
I'll, let Jeff do the last three to six months. So I'm curious is it I know you mentioned collection.
<unk> had.
The most positive surprise or are there other areas across the business, where you've been more successful as it relates to pricing.
We've been successful across all the businesses with respect to pricing activity and recovery.
And when I was referencing corrections is really talking about the lag in pricing in the collections environment and.
But that pricing comes in big chunks at contract anniversary dates, but that overall, 6% pricing impact that we were able to achieve through the through this first in.
In the second quarter was broad based across the enterprise both domestically and internationally. So all the businesses are focused on it.
It's part and parcel to the way we operate the business and we've created significant discipline to.
To make sure that our frontline managers are able to.
To raise price or to recover cost.
We give them.
Very detailed inflation data very detailed supply chain data that.
<unk> supports the decision, making process and the negotiation process with the customer as they request.
<unk> increases <unk> service changes to or to mitigate cost. So it's been it's been very broad based.
Understood and then just a big picture question as you look ahead too.
The next sort of three to four quarters.
Do you feel there is more uncertainty or where do you feel most confident versus confidante as it relates to whether it's pricing whether its new business, whether it's inflation.
Whether it's big enough, where I'm spending so talk holistically about.
What are some of the things that.
You are talking about.
Okay.
Yes, I don't know if its a confidence as much as it is just.
Uncertainty about what's what's going forward I mean at this point.
Biggest uncertainty would be inflation.
But I think as John just referenced we've really built in over the past year and maybe a little laid off the block a year year, and a half ago reacting to pricing or the need for pricing and inflation, but I think that that's become.
Part of what we do our confidence has been instilled with our operators.
And with information and whatnot, so I think that that.
That's not a lack of confidence or we're uncertain, but we just don't whats going to happen and we're just going to you either have to keep after it or will it.
Become.
Continue to persist.
Persistent issue or is it going to become a tailwind I mean, that's where we are there otherwise we feel very strong very good about the pipeline and the net growth trajectory.
The outsourcing trend as we've said many times.
The blip, we've seen post COVID-19 lame it live.
But if it settles back down.
We've structurally changed the culture and we believe we can continue on the path.
So we don't see a lot.
That we can't handle at this point as we move into 'twenty four and beyond.
It's just having to react to the environment.
Yeah, I would say, we're very confident in the discipline that's been built into the organization in terms of evaluating and problem solving.
And taking actions to go ahead and mitigate any concerns that may arise and we're very confident in the overall strategy of the organization the focus on growth the focus on customer satisfaction and the focus on our focus on hospitality.
And the cultural change that's taken place. So we have a very dynamic team. That's fully engaged we're very confident in their ability to execute regardless of what exogenously events may occur.
Or what macroeconomic conditions may occur, we have the operating discipline and the resources and the team built to respond to those to those potential challenges. So.
We're very confident in the path, particularly that we laid out at our Investor day, and we are very confident that we're along the trajectory that we established.
When we met with our investors and we think we're in very good position to execute.
On that strategy.
Okay.
Andrew Your line is open you can ask your question.
Oh, great. Thanks, So I was wanting to ask I guess on the interest expense, giving given that rates are have been moving up from the fed and you've got some of these capital transactions, including the already closed aimed transaction as well as the forthcoming.
Spurs sale, so Tom maybe could you just help us level set maybe first kind of comment on what youre thinking for the timing for the proceeds from this sale and frankly, if you could just help us on the interest expense line here for the second half of the year given all the moving pieces I think that would be helpful. Just to help us establish not just for this these two quarters, but maybe even.
Kind of establish a run rate on a go forward basis.
Sure I mean, the proceeds I think we expect in the quarter in the third quarter, so that will that will.
B here.
In terms of run rate for interest.
We ran about.
Two $2 15 for the first half total interest of which a 114 was in the in the second quarter.
Probably expect about the same for the second half.
But.
Falling off as we as we exit the year, a little bit so sort of ramped versus second quarter, probably should decrease third to fourth.
But in total first half second half should be about equivalent.
Got it and then just trying to understand the updated kind of revenue outlook here is a little bit better than people expected. It sounds like the net new outlook Hasnt really changed it.
It sounds like pricing is pretty good I guess I'm trying to just understand what drove a little bit of upside to your revenue outlook was there some benefit from FX in there is it really just the pricing.
Coming through to what do you attribute the slightly better than expected revenue performance.
I think it's a little bit better across the board. So I think a little bit better as we mentioned on pricing.
As we've stated had to stay up with the persistent inflation and expect to for the balance of the year.
The net growth.
Continue to stay in the range, but but it's it continues to be.
Strong on a historical basis and then the return to work continues to to be equal to or maybe even slightly better than we might have anticipated at the beginning of the year, but you know.
Pricing is certainly.
The strong driver of those three but the other two are equal to or maybe slightly better than we thought as well.
Our next question comes from Stephanie more with Jefferies. Your line is open.
Hi, good morning, Thank you.
Good morning, maybe and I don't mean to beat a dead horse here, but I'm going to ask another question on pricing, but only I kind of want to round out maybe a lot of the answers that I've kind of come out and say this Q&A as you think about the opportunity really in fiscal 'twenty four so as we look ahead to your fiscal 'twenty four can you.
Provide a bit of color on maybe as you look at the first half of 'twenty for what will be locked in pricing standpoint based on.
Really what was negotiated in 'twenty fiscal 'twenty three.
Just with the idea that I think there could be a pretty pretty meaningful price cost lag if inflation continues to.
Moderate so just trying to get a sense of what percentage of your business will be still based on maybe pricing level for 2023.
Well I think generally all of it because we don't expect.
Any of it as John said earlier to.
Revert or there to be a give back the only accept technical exception is cost plus contracts where.
Our pass throughs based on cost and so.
Those revenues are associated with cost plus contracts would drop is as our input costs drop, but again that would be a boost to margins.
As our fees fixed.
So I think everything thats in place or being put into place and implemented in the second half will will to your point all carry into 'twenty four and that's.
That's <unk>.
Part of what.
It was exciting for us and back to Andrew's earlier question as things move forward as you as you bundle up the continued consistent net growth maturity of those contracts leveraging the above unit overheads supply chain compliance.
With this pricing impacts staying in place.
It all moves forward into 'twenty four.
We're excited about that.
Yeah, and I would just add that we have as we've talked about we have negotiated pricing that goes into effect in the back half of the year.
For a couple of the key businesses that will carryover obviously throughout the year next year I would say it's.
We talked about.
Pricing basically contributing about 6% right now.
Inflationary environment remains consistent.
Year over year, I would expect you'd probably see similar pricing on a year over year basis.
With with maybe a little bit higher pricing in a couple of the other businesses that have that time lag on average.
They should be.
At similar rates, so we're going to we'll respond from a pricing perspective to the to the macro environment and if we see significant deflation will continue to press for price.
And in order to recover the other costs that we've incurred from a labor perspective, as we see continued.
Strength in the labor market.
Continued.
Need for pricing to recover those costs so.
Yeah, it's hard to say exactly what the percentage will be but we think we have the ability to go ahead and execute against.
What we need to go ahead and manage the business.
Thank you our last question comes from David Page with RBC. Your line is open.
I'm actually on for Ashish Sabedra.
Had a quick question on new business wins, I believe you mentioned it would be around four 5% for the year are you able to quantify.
Year to date, new business wins.
No. We typically don't just because they become so lumpy last year, we would've had in Maryland.
Ported it just becomes a complicated and not their useful comparison.
So we really just.
I think it's most appropriate to report on it on an annual basis in that four 5% relates to net new not not the gross new business wins, the gross new business wins running significantly higher than that as a percentage of revenue. So it's really the four and a half.
I think I said, specifically for 5% or higher in terms of net new business contribution.
Based on last year's revenues.
Okay.
Thank you I will now turn the call back over to Mr. Zelnick for closing remarks.
Terrific. Thanks again, everybody for joining us this morning really.
Pleased with the results for the second quarter were excellent.
Excited about the opportunities facing the organization.
I feel confident in.
In our approach and our strategy in the business. We're excited about the prospects for <unk> as an independent public company in the future and remain committed to growing the organization profitably and to achieving those targets we've established for ourselves in the in the Investor day.
Again, very confident in our execution and our strategy behind it. So thank you all very much for joining us and look forward to talking to you soon take care.
Thank you for participating this concludes today's conference you may now disconnect.
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