Q3 2023 Aramark Earnings Call
Okay.
Yeah.
Good morning, and welcome to <unk> third quarter fiscal 2023 earnings results Conference call. My name is Kevin and I'll be your operator for today.
At this time I would like to inform you that this conference is being recorded for rebroadcast and that all participants are in a listen only mode. We will open the conference questions. After the conclusion of the Companys remarks, I will now turn the call over to police cars Bell Vice President of Investor Relations and corporate development. Mr. Zhao. Please proceed.
Thank you and welcome to Aramark 's third quarter fiscal 2023 earnings conference call and webcast.
This morning, you'll be hearing from our Chief Executive Officer, John Zillmer.
Well as Chief Financial Officer, Tom on draws.
As a reminder, our notice regarding forward looking statements is included in our press release this morning, which can be found on our website.
During this call we will be making comments that are forward looking 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 rest of the actors MD&A and other sections of our annual report on Form 10-K.
And other SEC filings.
Also 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.
Well as on our website.
With that I will now turn the call over to John .
Thanks, Felicia and thanks to all of you for joining us today.
Morning, Tom and I will review, our third quarter results, which reflect a strong focus on growth across the organization.
And our return to normalized margins.
I'll also share an update on the significant progress we've made on the uniform services spin off transaction.
And then turned to our raised financial expectations for this fiscal year with just one quarter to go before opening the line for questions. We believe that our performance driven culture and all that it represents is creating substantial opportunities that we expect to capitalize on in the months and quarters ahead.
Before I get into the results I want to acknowledge a tremendous loss.
<unk> family had a few weeks ago.
John <unk>, our senior Vice President of supply chain losses hard fought battle with cancer.
Many of you know John returned to Aramark in October of 2019, and it was with the company for almost 40 years in total.
He was a true inspiration a dear friend to so many of us and a visionary to change the way supply chain is managed first for Aramark and then throughout the foodservice industry, establishing a true gold standard.
Turning to his focus on doing everything he could for Aramark.
A strong capable team.
Solid succession plan.
Hearts or heavy or we have full confidence in those who learn from all John So generously shared.
I will now turn to the quarter.
Remarks organic revenue grew over 14% compared to the same period last year global food and support services consisting of U S. S. U S FSS international and corporate reportable segments contributed year over year growth of more than 16% and uniform services increased by approximately 5%.
Global life SaaS U S segment grew organic revenue nearly 15% year over year.
<unk> continued momentum from net new business strong per capita spending and increased dependent tenants in sports and entertainment and continued favorable trends across the business and industry sector.
Walter Greater returned to work activity at client locations.
International organic revenue increased more than 20% versus the comparable period last year performance was driven by robust net new business performance are busy sports and concerts calendar in Europe , particularly in Germany, and Spain as well as strong mining activity in South America.
Global SaaS continues to add broad based new business contributions from all sectors and geographies with retention rates maintained above 95% since.
Since last quarter just to name a few our student nutrition team one D. C public schools and will then be an eye, we expanded our relationship with Walmart to serve their new headquarters and at micro markets and bending locations across the country.
Collegiate hospitality has been active during its typical selling season and was recently awarded Towson University and the college of William and Mary among others.
The International segment also gained new clients and higher education, including Kingston University in the UK and really readily college in Canada had ongoing success with other bread and butter wins across the portfolio.
One of the most important developments of the quarter that Tom will review more in detail what is our.
Work with customers in the education sector and corrections business as we have said in the past the margins in these businesses had been artificially compressed.
Due to the sudden and significant inflation not seen in this country for decades.
Very pleased to report that our clients have recognized our strong service levels and the cumulative effect of many quarters of outsized inflation and they've recently agreed to meaningful price adjustments that will bring us a big step closer to normalized margins. The benefit from this will occur partially in the fourth quarter and more fully in the first quarter of fiscal 'twenty four and beyond.
The progress in spirit of partnership we've seen in this quarter makes us more confident than ever that are returned to normalized margins is proceeding apace and we fully expect will inevitably be achieved.
The meaningful progress this quarter is a gratifying proof point to the strength of our bond with our clients and their satisfaction with our service to them.
Organic revenue growth in uniform services was driven primarily by pricing actions and growth in adjacency sales, partially offset by the roll back of an energy surcharge that was implemented in the third quarter last year that represented approximately 80 basis points.
We're pleased to have uniform services leadership, well in place and our strategic growth plan is underway with early signs of success coming from improved analytics portfolio targeting analysis and adjacency sales.
This underlying momentum to build into next year and well beyond.
Regarding the spin off our collective teams have made significant progress related to the operational regulatory and financial logistics, we expect to complete the spin off at the end of our fiscal year subject to customary closing conditions and based on the current macroeconomic and capital market environment.
A few key milestones as we work towards the execution of the transaction.
Just this morning, we announced the future board of directors for uniforms as an independent public company.
Most of our strong mix of industry expertise public company experience and diverse perspectives.
As impressive and highly qualified group will provide helpful strategic insight to the uniforms leadership team and their mission to drive significant value.
The board will be chaired by uniforms industry veteran Phillip Holloman, former President and Chief operating officer of Centas with over two decades of experience in the industry.
The uniforms Board will also include other seasoned leaders, who have a strong relevant backgrounds and uniform and similar route based businesses.
Our U S is finalizing terms on approximately $1 8 billion in fire and financing through banking partners, consisting of $1 5 billion in term loans and a $300 million revolving credit facility.
Given the attractive cash flow attributes of the uniforms business. The interest rates are anticipated to be comparable to aramark. Most recent refinancing.
With these proceeds spin co is expected to transfer approximately one $5 billion to aramark, maintaining neutral net leverage for the total company.
Women I to continue a path of Delevering for both Aramark.
Yes.
Finally, Kim and her team will host an analyst day in New York City in the morning of September <unk>.
Excuse me September 13.
It will also be available via webcast to review the strategic plan for uniforms and the next phase of value creation.
This will be a great opportunity for you to meet the strong team of executives, including exceptional new hires from leaders within the industry.
We will share more details with you soon.
We're excited about the potential and strategic benefits of bulk business is operating as independent companies.
Before turning the call to Tom I'd like to highlight a few key accomplishments related to our ESG and <unk> initiatives, reflecting our ongoing commitment to positively impact people and the planet through our B well do well plan.
These initiatives remain highly important to us as well as our clients partners and shareholders across the globe.
First we've taken another step forward in our sustainability efforts just last month, we received confirmation from the science based targets initiative of our goals to reduce our carbon footprint. According to their net zero standard these targets follow and complement our existing ESG commitments.
Also I'm proud of our recent recognition as the best place to work for disability inclusion and perfect 100% score on the disability equality index. Once again, we continue to be focused on creating a welcoming and inclusive culture across the organization and diversity equity and inclusion will continue to be a top priority for us.
We believe that our focus on our people has become a key differentiator for the company that has led to tremendous outcomes I could not be more proud of what our team has been able to achieve.
Tom.
Thanks, John and good morning, everyone.
Our performance in the third quarter reflected continued strong top and bottom line momentum across the portfolio.
As John mentioned Aramark reported consolidated revenue of more than $4 7 billion in the period representing year over year organic growth in excess of 14% underpinned by 6% pricing and strong contributions from net new business as well as continued recovery of the base business.
Operating income in Q3 was $203 million.
Adjusted operating income of $240 million was 34% higher on a constant currency basis compared to the same quarter last year.
Our margin of five 1% increased 75 basis points year over year, and it was more than 40 basis points higher than the second quarter, which typically has similar margin levels.
As a reminder, aim services, which historically contributed 15% to 20 basis points to total company margin is not included given the sale of our Noncontrolling stake at the beginning of April .
Across all segments higher year over year profitability in the quarter was driven by operating leverage from higher revenue and the maturing of new business for prior years as well as improved supply chain economics, and disciplined above unit cost management.
Organic revenue in global FSS increased 16% to 47% respectively year over year on a constant currency basis.
Organic revenue growth was led by contributions from strong net new business and pricing actions as well as base business growth coming to us most notably from higher per capita spending in sports and entertainment business and returned to work activity in the business and industry sector.
Global FSS AOI margin increased 86 basis points compared to the third quarter last year, and 27 basis points sequentially versus the second quarter.
On a constant currency basis uniform services organic revenue increased 5%.
<unk> grew nearly 13% compared to Q3 last year.
Hey, Oi margin was up approximately 80 basis points to 11, 1%.
Reflecting a nearly 140 basis point sequential improvement compared to the second quarter.
As Jon mentioned revenue growth in the period was impacted by 80 basis points due to the rollback of an energy surcharge put in during the third quarter last year.
The segment's significant margin expansion versus prior year was driven by the initial benefits from implementing a sales strategy focused on a more balanced revenue mix, including adjacency and add on services.
As well as early savings related to efficiency initiatives, including the organization organizational restructuring earlier in the year.
Across the portfolio supply chain normalization continues to be a key contributor to growing profitability. This year, and we believe will be a significant future opportunity for the business.
As John and I had mentioned before a few of our food services businesses experienced a lag in recovering inflation.
A more periodic pricing.
Generally once a year, including collegiate hospitality meal plans student nutrition and corrections.
These businesses account for roughly 25% of our total company revenues.
Okay.
Over the past few quarters. The teams have worked hard with our customers to obtain significant pricing actions across these business lines.
Each of which will be implemented during Q4.
At the same time, we've seen inflation moderate over the past quarter.
While we obviously cannot control the precise path of inflation going forward, we feel good about our ability to recover this price cost lag, which coupled with our normal year end seasonality gives us confidence in the expected upward margin inflection during Q4 and further benefit rolling into next year.
Turning to the remainder of the income statement net interest expense was $113 million in the quarter, reflecting $630 million of debt repayment and the adjusted tax rate was approximately 27%.
Our quarterly performance resulted in earnings per share of $1 29.
Which included the net gain on sale of equity investments in.
And adjusted EPS of <unk> 36.
On a constant currency basis, adjusted EPS was <unk> 37 in the quarter compared to <unk> 25 in the same period last year.
Presenting a year over year increase of 48%.
With regard to cash flow net.
Net cash provided by operating activities was $23 million and free cash flow was a use of $80 million in the quarter, which is consistent with the typical seasonality of the business.
The $16 million year over year free cash flow improvement was driven by stronger net income results and favorable working capital, partially offset by higher capital expenditures, which at 3% of revenues year to date is still lower than historical levels.
At quarter end Aramark had over $1 billion in cash availability.
Net cash provided by investing activities included approximately $635 million in combined proceeds from the sale of our 50% equity stake in aim services.
And a portion of our ownership position in the San Antonio Spurs NBA franchise.
We also took another big step forward in strengthening our balance sheet with a proactive $1 1 billion refinancing of the company's 2025 term loan b to extend the debt maturity by more than five years to June 2030.
We are pleased with the outcome of the transaction that was completed at attractive terms, adding a run rate of just $2 million per quarter of interest expense.
And as net leverage neutral, while maintaining a comparable fixed to floating debt ratio.
We will continue to be opportunistic and enhancing our capital structure and financial flexibility.
So let me finish up with our current outlook for fiscal 'twenty three.
We are raising our expected organic growth revenue growth to near 15% compared to a greater than 13% previously.
This growth is anticipated to be comprised of global FSS at near or 17% compared to approximately 15% in our last update and.
In uniform services remaining around five 5%.
We're also lifting our expected OE growth to approximately 33% compared to approximately 32% previously.
This growth is anticipated to be comprised of global FSS.
At 46% compared to approximately 45% previously.
In uniform services raised to 8% from approximately 7% previously.
We continue to expect free cash flow to be around $475 million before payment of 64 million.
Payment completed in the first quarter.
Any anticipated cash flow impact of approximately $100 million to $120 million related to restructuring charges and transaction fees associated with the uniform spinoffs.
After these specific items, we expect our free cash flow to be approximately $300 million.
And finally <unk>.
Leverage ratio at the end of the fiscal year continues to be projected at less than four times.
I am pleased with our performance in the quarter and the momentum we are building.
The spinoff transaction continues on pace and we believe strongly in the many opportunities ahead for both companies.
Our teams across the globe continue to control what can be controlled with a sharpened resolve focus on delivering great service to our clients.
And growing the business profitably.
Thanks for your time John .
Thank you Tom I'm extremely pleased with our performance this quarter and remain confident in our ability to close the year strong.
The fourth quarter is historically, our highest margin and free cash flow period, and we're laser focused on delivering strong results as.
As I said last quarter, we set a high bar for ourselves as a company and have a lot to accomplish in the coming months and I am confident in the Aramark team to get the job done with a focus on being the most admired employer and trusted hospitality partner I'm excited about the opportunities ahead to further our success and drive top and bottom line growth into the fourth quarter.
24, and well beyond.
Operator, we will 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 a handset before pressing the numbers in order to accommodate participants in the question queue. Please limit yourself to one question and one follow up to remove yourself from the queue. Please press star one again.
We will pause for a moment, while we compile the Q&A roster.
Our first question comes from Harry Martin with Bernstein. Your line is open.
Hi.
Good morning, everyone.
Three questions from me.
The first one I think on the <unk>.
Organic growth acceleration.
Sequentially maybe versus 2019.
Got it.
Yes, I think there has been some acceleration in inflation in those markets, but could you dimension how much of that is from new wins and market share gains and what's driving that continued success in the international business.
The second question I have is you made quite a few comments about the ramp up of new business wins contributed to margin. So I wondered if you could give a little bit more specific commentary on some of the the vegetation contract wins from 2020 in 2021 that are starting to hit not two to three year maturity level.
Spoke about at the Investor day, our margins in those contracts ramping and starting to be accretive to the group level, even with some of the accelerated cost inflation and is there a lot more to come in terms of inflection in the next six to 12 months and then and then the final question is just on the.
The disclosure of you're a major shareholder.
Looking to reduce the stake.
Sure Mark.
I just gave up the board see I Wonder if you have any sort of any comments on the relationship with <unk>.
How do you see ongoing in the future thanks very much.
Yeah.
Yeah.
This is John I'll answer the question on the 13D first first of all I think the farm speaks for itself I think they were very explicit with respect to what their intentions are.
Paul and his team of mantle Ridge had been great thought partners.
Think that <unk> described.
The mantle Ridge general partner and will continue to be invested for the long term.
But <unk> also it does indicate the fact that the final fund will be winding down. So I think the farm speaks for itself and.
Yes.
Have to comment I think any further on that but with.
With respect to international growth, we're very pleased with the performance in the International group, we've had a lot of bread and butter wins in new account sales.
The course of the last couple of years and most of those accounts have been.
What I would characterize is mid sized accounts, they ramp to profitability and more rapidly and they are.
Growing very nicely so.
Our retention rates remain high in international as well as domestic so we're seeing that really impact the growth line.
Plus we've had strong performance in the sports and entertainment sector year over year and in the concert season that has contributed significantly to that to that year over year growth as well so Tom I'll leave it to you to answer on the individual account ramp up yes.
The maturity is.
New business continues to move along.
Very much as we expect.
Some of the bigger accounts that we've won.
Corning comes to mind back in 'twenty, one Purdue course in Berlin.
Continue there.
Efficiency and maturity ramp I think overall it's.
Fairly linear we don't expect any <unk>.
Significant jump as we move forward, but just a continued.
Move forward and the key for us going forward as we've mentioned many times before is just to continue to.
Deliver a consistent.
Net growth number so that we don't have.
Years, where theres really nothing and then years, where theres a lot so.
That maturity is at.
Is moving as we would expect and we're very pleased with it.
Great. Thanks very much.
Thanks, Larry.
Question comes from Andrew started been with J P. Morgan Your line is open hi.
It's Andrew your question sorry got it.
The first one is Tom if I did my math right.
The implied middle of the range.
Margins are about.
9% for the fourth.
Is that correct.
For the fourth quarter, and then provide fourth.
And then secondly, with the price increases that you talked about in the areas of education, and then provision for the fourth quarter. So the.
Aramark CLO quite up.
<unk>.
Underlying input cost deflation.
At this point.
Yes, I'll Trust your math on the on the margin Andrew.
Usually better than mine.
And then on the price increases.
I don't think we are fully caught up I think it continues to be a journey.
As John mentioned inflation hit hard and fast.
In these three businesses K 12, higher Ed corrections.
Been a journey over the last 18 months.
To get on the right side of that and the teams keep chipping away at it.
Big July 1st or Thereabout, and then in September for higher Ed they've made a big.
Step in the direction, but I think there is.
Still more to come into next year.
Thank you. Our next question comes from Heather Bellini with Bank of America. Your line is open.
Hi, Thank you for taking my question.
Questions for you first can you talk about the underlying.
Underlying leverage that's planned for the uniforms business you talked about the $1 8 billion, but I think we're all kind of backing into what EBITDA maybe for uniform. So so can you help us there in terms of the leverage ratio is and then.
Separately just on the margin topic.
With regards to your mid term goal with regard with what Youre seeing with pricing this inflationary environment.
Are you still thinking that Youll end up at the low end or is there a change in view there. Thanks.
On the leverage the idea here is to come out roughly four times.
The companies will split at parity.
Ideally.
So thats I think thats the math that you can work off of.
To get the underlying EBITDA for for us.
On the margin in the mid term.
Yes, we are.
We're tracking there are two adjustments.
Over the past two years I think.
To the to the margin flow for us.
One of course is the divestiture of Aime, which as I said before is about.
Roughly 20 basis points to the total company margin.
And the other if you were putting.
The two companies together a couple of years from now.
In FY 'twenty five the public company cost.
For a U S would also be a factor so.
With inflation, we've talked about before.
We're really ramping up post the analyst day.
We were trending towards the lower end of that range and then what.
With those two adjustments.
That I just mentioned.
We still feel comfortable that we're moving forward, we will progress to and through.
The margin we had in 19.
And.
Should feel feel.
We feel pretty good about getting into that the range, we indicated on the analyst day.
Great. Thank you.
The next question comes from Ian Zaffino with Oppenheimer. Your line is open.
Patients on the clarify firstly and great to see the Great Guide.
As far as what that guide now means how should we be thinking about your return or at least a pathway as you return to pre COVID-19 margins.
Does this accelerate.
When you thought you were going to get back in.
As buy side sell side, how should we think about the cadence on the return back to pre COVID-19. Thanks.
Yeah again.
The margin will progress and we will like I, just said get to and through.
The 19 margin.
We really have a lot of confidence in that the timing of it again, we can't predict.
The pace of inflation and what will happen.
We're.
We've had significant margin progression this quarter and will this year up.
75 basis points, we expect to move it forward.
Quite a bit into 'twenty, four and we'll update you on that outlook in November .
So we continue a pace so to speak to progress the margin.
But.
And it will continue.
Fairly.
Linear way.
But.
I just.
I'm loath to sort of step out in front of the margin.
At this point from a guidance standpoint.
Given the.
Uncertainties.
With inflation and whatnot so.
But again the overall business.
And what we see going forward and the progress we've made and the progress we have insight.
We continue to progress the margin significantly in the quarters ahead.
Okay understood and then also on the spin it seems like the board.
It's pretty static.
Yes.
Really great additions.
Appointments can you tell us maybe what's driving that what are some of these members scene.
That's really attracting them there thanks.
Sure.
I think we have assembled a very dynamic board for.
And it was a.
Our work over many months between me and art Winkle Black are.
Nom and Gov Chair, who began the selection process more than more than a year ago to build but we want it to be.
Very dynamic and high energy board that could add significant value.
To that to the new code so the spin co and so.
Alright, frankly targeted very significantly several individuals who we thought would be great and we were able to attract all of them based on the.
The opportunity that exists in the U S.
And what they see as the future potential of the business.
And a strong management team that we have in place I think all of them were very eager to work with Kim.
And to move forward in the business and saw it as a as a great opportunity.
For value creation for the shareholders and employees.
And just an opportunity to participate in what would be a terrific board. So yes, we're very excited by all of the appointments we've got a great.
A great group of people seasoned executives with very relevant experience very diverse.
Viewpoints and perspectives and so we are very excited about it.
Okay. Thank you very much.
Thank you. Your next our next question comes from Toni Kaplan with Morgan Stanley . Your line is open.
Thanks, very much I was hoping you could give some additional color on the new business wins from the quarter are on the pipeline.
Anything incrementally different versus last quarter in terms of the strength of the pipeline.
So I know you've given the gross new business in past quarters.
Maybe also just focus on education as well.
Yes, I think it's been a very active selling season.
<unk> is still underway.
And all of the businesses we have.
Very robust pipeline with lots of opportunities both domestically and internationally. So we feel very good about another strong year of net new performance and.
So I think the.
The specific accounts individually many of them have been awarded yet contracts haven't quite been signed and we're not operating them. So it will be a little bit more.
Hesitant about naming names yet at this stage, what we're working through some of those processes.
But yes, we feel very good about another a third year of very strong net new and solid business performance. So.
Walmart Great addition, in terms of their corporate headquarters.
And we've also had significant wins in higher education, both domestically and internationally.
I'm very pleased with the results and very pleased with the level of pipeline activity. As you know is it as a senior leadership team. We review these results on a monthly basis with each of the business units. So the momentum is there.
The focus is there and we feel very good about.
Overall results.
The organization.
Great.
<unk> you could talk maybe a little bit about international very strong quarter there.
I guess, maybe thinking about the different regions.
How is the UK fairing.
No.
Any strength to call out across the different geographies or challenged areas.
Yes, I would say we've got.
Good.
Strength across all sectors and all geographies.
Leading to that significant performance year over year or so.
Specific call outs I would say, obviously the sports and entertainment season in Europe has been very strong in particular in <unk>.
Spain and in Germany.
And that's been very robust the concert season.
Has been terrific.
Long mining performance in Chile.
And.
Strong results in Canada as well so it's very it's very broad based and I wouldn't I wouldn't characterize any region is being.
Below our expectations. So we're very pleased with the overall results from international.
Thanks, a lot.
Thanks, our next.
Our next question comes from Shlomo Rosenbaum of Stifel. Your line is open.
Hi, Thank you very much for taking my question can you I wanted to focus a little bit more on kind of the things that had been inflating and deflating.
The food staple items have really been deflating, just not not even slowdown in inflation, but our actual deflation can you talk about how this is impacting the gross margin currently.
This more of a benefit than you were expecting to see at this point in time and should we see a really strong margin going forward. If this kind of continues and then what about the wage inflation part of the package is dead.
<unk> down as much or is that kind of offsetting still some of the food staple items that are deflating.
Yes, I would say first of all there are certain commodities that have come off significantly year over year.
That is certainly benefiting us from a supply chain perspective, but keeping keep in mind that even even though it is moderating it is still higher year over year and so we are recovering through pricing the impacts of that inflation food away from home index still little running a little higher than that.
The original expectation so.
While certain commodities are breaking down and having an impact overall net net in the business.
We're still working to recover the total.
Total inflationary pressures on the on the food side, making significant progress no doubt about it and as we if we continue to see the trend.
Moving forward there will be will.
He will be an enhanced margin impact as a result of that.
Just hard to predict the exact timing of it and when it all flows through.
And.
And the higher energy prices over the course of the last few weeks as you see the oil price began to shoot back up again.
It can be it can be an impact item on transportation, which could affect food cost inflation as well. So we see a moderating trend we're very pleased with that and we anticipate that it'll continue to improve.
But really not in a position to call. The precise pathway. If you will from a labor perspective.
We are seeing moderating.
Inflation and pressures in labor.
Is labor availability continues to.
You know it continues to improve very slowly.
And so overall, we feel very comfortable in our ability to recover both wage pressures and food cost inflation over the course of the next 12 months as it is.
It moderates.
As Tom said.
We're still working still pricing still managing every day in the middle of the P&L to optimize for our customer.
<unk> locations and our client expectations.
And having I think significant success and we're looking forward to the results in the fourth quarter and the ramp into next year.
Thank you.
Our next question comes from Neil Tyler with Redburn. Your line is open.
Okay.
Yes. Thank you good morning, John Good morning, Tom.
A couple left for me please firstly.
The price adjustments that you've achieved in.
And education and correction.
During the negotiations around that is there anything different in the structure.
Has been altered in structural terms of those contracts that might mean.
More immediate price adjustments if costs.
Declined significantly that that's the first part of that question and the second is no.
Any.
Mike.
Negotiations have any knock on effect.
On retention I'm thinking more positively than negatively.
I would appreciate your thoughts on either.
And then just as a.
So thats.
The question relates to your comments on the strength of the.
Entertainment.
Activities in international.
Should we think about that as a slightly sort of abnormally high base I know, it's not a big number in the scheme of things but.
The concert season in Germany, and Spain is that sort of especially strong unusually strong.
So I, just just where you are not ones because of the cost of the real number for next year. Thank you.
Yes ill take the last part first.
First of all I wouldn't say, it's abnormally strong I would say that it's a it's stronger than prior even than the prior year based on.
The improved overall.
Customer opportunities and improved attendance. So you still had last year somewhat of a lag from Covid does that was impacting some of the sporting events and some of the and some of the concert season. So it's really more back to normal would be the way I would characterize the both the.
Concert and soccer seasons.
In Europe , so I wouldn't I wouldn't call it out as being abnormally high just higher than prior year due to that circumstance.
Okay.
Yeah. So I think Thats I think thats right and Tom do you want to take that yes, and I'd just add to that comment.
It's sort of like playoff baseball or weather or whatever.
We're not going to call that out it's just these things ebb and flow.
Do you take the good and the bad with in each year and used to build upon it. So it's not something that I would call out as an exceptional.
Pricing negotiations changed contracts, not really where its existing client in the middle of the term.
Certainly we are.
Were using the last year and a half.
As an experienced and a <unk>.
Way to modest modify.
New contracts going forward so that.
The old escalators in some of the contract language that we had in the past.
When there is 20 years of benign inflation is particularly going to work anymore. So where we've had opportunities obviously with new contracts, but then with with renewals and retention efforts. We've worked to change language. So we have more flexibility.
But if it's just mid term and we're just getting our pricing.
The exception for those contracts I don't think it's really changed the contract language much.
And then impact on retention.
Okay.
If I'm following the question.
Not really anything notable there.
Just wondering if you're able to use the opportunity to extend any contracts.
Yes, I would say I would add that yes, we have taken the opportunity to extend and use the negotiation process.
Not only to recover costs for in the near term, but as I've said many times before we look at these contracts as annuities and Thats why in many cases, we're willing to we were willing to wait to get appropriate pricing because we didn't want to put the contract at risk.
By pushing it out to bid because we were we were in a profit situation in a given year. So we look at these as long term deals and long term relationships average contract life close to 20 years. So.
It is.
As we've worked through these negotiations we've done it very carefully with an eye towards keeping that customer for the long term.
And solving and solving for cost recovery as well, so I would say no impact to retention.
On a from a negative perspective, I would say proactive extensions included with many of those renegotiations.
That's great very helpful. Thank you very much.
Thank you.
Our next question comes from Leo Carrington with Citi. Your line is open.
Okay.
Your line is open you can ask your question.
Again Leo Carrington. Your line is open you can ask your question.
One moment for our next question.
Our next question comes from Faiza <unk> with Deutsche Bank. Your line is open.
Yes, hi, thank you.
Now, let's talk about the increase in our guide for asbestos.
I think when you initially guided for the year. It was a mix of new business growth.
Around 4.5% to 5% sort of pricing and the underlying recovery in Covid volume.
Like where we are now is it primarily just incremental pricing that has helped you.
Increased that guide it sounds like maybe the better recovery of corporate volumes as well, but just wanted to get your perspective on disaggregated the various factors that.
That has helped to increase.
Yeah.
Yes.
At the end of the year will.
November will recap the year.
By components.
Once the dust settles and we've got a good picture of it but I'd say if I'm if I'm looking at this 0.3 quarters of the way through the year.
Against those original assumptions.
I would say that pricing is high.
Had to have been higher than we thought I think as we talked about at the beginning of the year inflation purse has persisted all year for longer than we thought at the beginning of the year. So I think price pricing has probably been a slightly oversized driver of the.
The over performance, but the realized net growth has been has been strong.
And I think less so the COVID-19 recovery a little bit.
Better, but I'd say pricing is the bigger driver with the other two slightly over performing expectations.
Understood and then just a follow up how do you think about.
Your market share.
Are you continuing to see sort of increase trend.
Sourcing.
Or do you think you are still continuing to win share I know you've previously talked about the combination of both.
How has your thinking evolved.
Sure.
Yes, I don't think it's really changed from our beliefs about the.
The normal kind of run rate in the business.
We don't.
We are focused on growing the business the total addressable market is.
Is huge.
And so we continue to be focused on delivering net new.
Both organic.
New account wins.
From both competitors as well as self op conversions, we see that self op conversion trend continuing.
This year so we.
Overall, we don't really measure it in terms of share shift between the competitors.
We look at we look at the gross business wins in our net new as being the drivers and the things that we can manage and the opportunity set that we that we pursue.
We look at closure rates and we look at ultimately that total addressable market. So.
I would say we continue to get our fair share of new opportunities, we continue to see increasing self op conversion and overall.
Terrific terrific opportunities ahead so.
Yes, we're very very pleased with overall performance of the organization as it relates to to growth and we will continue to focus on it.
Great. Thank you for groups.
Our next question comes from Leo Carrington with Citi. Your line is open.
Thank you good morning.
If I could I'm wondering too.
Firstly on.
I appreciate you just sort of square that.
<unk>.
The end of the year, but when it comes to thinking about pricing specifically can you indicate.
The pricing levels in Q3, I guess, presumably when it comes to.
Thank you about pricing and to <unk>.
We ended the year.
Maybe more.
FY 'twenty four.
Fade fade and importance of that.
Catches down to CPI or would you think you will.
Do you think the price recovery will listen.
Continue to be.
Right.
Drive margin.
Margin driver into 2024.
And then secondly, maybe just a follow up question on that in terms of.
Sure.
In terms of the.
Uniforms margin, specifically Q3 was I'll say.
Pretty strong I think as good as the best quarter in 2019.
It's underlying.
Sort of call out, but that was favorable.
Or is this just the impact.
The impacts of the actions you've taken in the proxy.
LNG.
Fighting away.
Yeah no on the <unk> question I think it's underlying I mean, it's the impact of.
The management team.
<unk> has been in place coming on two years.
The focus the ability of the team to.
To drive the performance of the business forward the revenue.
Line is shifting if you will.
As they look at the client base.
More emphasis on on Adjacencies and add on services.
Continue to build the selling machine Andi Andi Pannose has come in.
To lead the sales group here in the last couple of quarters.
So I think that will start to shift and move forward as we lap this energy surcharge that artificially holding down the year on year growth optics.
I think they will deliver good momentum as we move into 'twenty four and beyond on the top line bottom line.
Again.
Tim and Rick and the team really focused.
And on making the business more efficient this past year in anticipation of the spin I think they will talk more about what the opportunities that they have ahead of them.
On a profit perspective.
As they speak.
Speak next month, and then post the spin so I know they are excited about both the top and bottom lines opportunities that they have going forward.
In terms of pricing I mentioned, it was 6% in the quarter.
So that's.
Roughly where we were last quarter as well those benefits will carry into next year, we typically have not been able to price for margin, but just for cost recovery.
But as the inflation cost dynamic.
Trends downward and that pricing stays in place and we're quite confident that it will.
I think that that that recovery of that price inflation lag will become more apparent as we move into 'twenty four and beyond.
How important a piece of the puzzle it is to our revenue growth going forward totally depends on inflation I mean, if we revert back to the sort of 2% norm that we had for 20 years it becomes much less of an impact.
If it stays elevated.
It will be more prominent.
In.
In the revenue numbers.
Okay. Thanks, Tom I appreciate that.
Our next question comes from Ashish <unk> with RBC capital markets. Your line is open.
Thanks for taking my question, maybe just a couple of quick clarifying question. One was just on the surcharge.
In.
The uniform business, the 80 basis point headwind is that the right.
You would think about for the next three quarters.
And then on the pricing side, how should we think about the pricing and getting home business going forward.
I was attending and hosting.
The trend going forward any color on those centers.
Yeah, I would I would say first of all the impact in the in this quarter was approximately 80 basis points the impact.
And the and the.
The fourth quarter is actually a little bit higher year over year with respect to the fuel recovery fee that's been eliminated nearly.
Nearly 2% in the fourth quarter, so that would.
That would.
Normalized starting in the first quarter of next year. So there is a little bit.
Little bit of a lag yet as they anniversary those those fuel recovery fees that are now eliminated so but they are pricing in the rest of the business has been robust and they've been able to recover their costs.
As demonstrated by their improving margin performance.
Coming from both in pricing and improving pricing recapture and improving cost leverage so.
You know I would expect that pricing leverage to continue going forward.
And the comps will get better just as they anniversary that fuel recovery fee. That's now.
No longer in place.
That's very helpful. Thank you.
Our next question comes from Josh Chan with UBS. Your line is open.
So that's another very good quarter guys.
Thank you.
Yes, hi, so I guess when Tom you mentioned the pricing dynamic into next year, and then moderating inflation.
How should we think about.
Margin seasonality in 24 as compared to normal when you seem to have those two favorable dynamics kind of moving into the start of the year.
Ken will give you a sort of more of a look or a little bit more granular when we get to November .
24, but but by and large it's not going to change the shape.
We will still have the U shaped.
Margin dynamic as we move into next year any.
Any dynamic on on pricing outpacing inflation as we as we go through the year next year.
Would be around the edges, but the true shape is still going to hold and not be materially affected.
Okay, that's fair.
And then on the retention side, you mentioned, David retention continues to be very strong I guess underneath that are you seeing any more desire from customers to kind of shop around now that we're past the supply constrained environment.
The thing there recognizing that you continue to maintain very strong retention rates. Thank you.
Yes, no I would say, it's pretty normal level of activity from a from a rebid perspective, I mean, some years are higher than others based on kind of structural impacts to the business.
The USDA has very strong requirements with respect to rebid activity in the K 12 sector. So there is kind of years, where you have heavier retention and some years, where it's lighter just dependent upon.
School districts are in the cycle.
But by and large I think the activity level is very consistent year over year.
In the pipeline.
Very very strong so.
<unk>.
I don't see a higher degree of propensity for change.
The industry I think it's just kind of at its normal level.
So we always we always are pursuing new opportunities.
We're always working aggressively against a targeted list of prospects.
And some are some are scheduled rebids and some are unscheduled, we just work aggressively against that target list of prospects and work to work to grow the business. So I would say not a change in customer behavior that I would that I could identify.
Great and thank you for the color and thanks for your time.
Our next question.
Our next question comes from Manav Patnaik with Barclays. Your line is open.
Hi, Good morning. This is running Kennedy on for Manav condolences on the passing of your colleagues. Thank you for taking my question.
As a follow up I think to <unk> question on pricing can you the confidence that you've expressed and it's sticking can you just kind of give insight or articulate how and why prices will stick, whether it's a function of the contact contract structure the value and high level of service provided to clients et cetera.
And then also just a reminder, on where we stand in terms of percentages of contracts that are P&L cost plus or management fee and.
And how you see there being benefits to each through the expected moderation of inflation.
Yes, I would say.
First of all our expectation that pricing sticks is based on the history of the business and based on the way it's.
Operated as an industry.
Very rare for us to take pricing down except maybe on a particular commodity that has had a unusual price spike that may have some artificial.
Pricing approach.
Back to the days when coffee was impossible to get in coffee prices were elevated coffee prices moved up and then and then moved down on that particular commodity had an impact that's not the way the business gets priced anymore.
Really price across our market basket of products.
So.
So it's rare for us to move our price down once once.
Once the consumer has already begun to pay that price for the product. So pricing is I would say a highly sticky.
And remember you are to your pricing to the consumer not to the client. So these arent contractual prices buried.
In the client relationship their consumer base prices that are that are.
At the end user is paying.
With respect to pricing I think I think we all believe it'll be very very sticky.
And that will continue to be able to price to recover costs going forward as we've discussed.
And I'm sorry, what was the second one the contract types.
Yes.
Continue to move back towards P&L.
The change is still reside primarily in P&I.
Where the volumes arent fully recovered.
And that's really the driver of converting.
A P&L or running a P&L was having adequate volumes so not quite back to where we were at 19, but but continuing to move towards that.
The inflation dynamic and pricing dynamic with each contract it does have its plus and minuses.
No pun intended on that.
The cost plus is obviously, a a immediate pass through to the client, but does have a margin headwind.
<unk>.
Again with food, we are billing them $100.
Previously now we're going to 120, but we're still getting our $10 fee on both so it depresses the margin even though it increases the revenue.
When prices fall you lose the revenue on a cost plus contract.
But your margin goes up so that dynamic is cost plus typically are lower risk.
Scenario for us.
And it ebbs and flows on the top line.
As pricing moves up and down P&L is the dynamic we really like because we control the controllable cost component.
Pricing in an inflationary environment.
Accrues to us.
John just mentioned.
We believe it will stay in place and be sticky.
And then we can also manage through the cost components. So that we don't have that headwind against the margin typically that we might have with a cost plus contract it limits our profitability in most cases so.
We like the P&L format.
And in an inflationary environment, we'd be we'd be happy to continue to move.
Back to that P&L cost plus mix that we had prior to the pandemic.
To take advantage of that.
Thank you I appreciate it.
Our last question comes from Harold <unk> with Jefferies. Your line is open.
Good morning. This is Jorge Alonso on for Stephanie more so.
Just on the new business wins could you.
Provide us an idea of what it represented.
In the quarter, and then just give us a understand the size and shape the new business wins in industries.
You win them and then.
Can you provide any insight on where you win in this business from regionals or something.
Some of your competitors.
Yes, we'll give you more.
Update at the year end on it as we typically do.
Net growth on all of those factors on the contribution to the year.
Where we're winning it from.
<unk>.
And.
But suffice it to say that.
It's moving along as John said very very solid year for us continues to be a third year of.
Significant growth versus where we were prior to the pandemic and.
The source of wins.
Continues to be pretty broad based.
Both where it's coming from and where we're winning it geographically.
So overall.
Continue to be pleased with the with the growth.
Engine within the business.
And to give you further updates when we get to year end.
Yes.
Got it and then I guess my last question.
With your oven such a lot of.
The contracts locked in.
High confidence.
The pricing would help you.
Achieve or exceed the guidance.
On the revenue and operating income for the quarter for the year. Thank you.
Yes, I would just add that I think.
Inflation continues to moderate and we don't see any unexpected economic.
Consequences.
We see continued improvement going into the.
Fourth quarter as we've discussed we see continued improvement going into next year really is.
And exciting time inside the company, we feel very good about the results for the quarter and I feel good about the trajectory for the fourth quarter for the year end.
We're very resolved.
In terms of delivering very strong results. So.
I would say the inflation outlook is improving and that has a potential.
Impact opportunity going forward so.
I will summarize the call basically by saying Thank you very much for your support of the organization. We're excited about what's going on inside the business, we feel good about the third quarter we.
We feel.
Very good about the opportunity to go ahead and get the spin completed at the end of the fiscal year, we've made very significant progress around a range of activities.
Balance sheet.
Improving profit performance improving margin performance and <unk>.
Solid growth. So we're pleased with where we are have a lot of work to do and we are committed to delivering for our shareholders. So thank you very much everybody.
Thank you for participating this concludes today's conference you may now disconnect.
Yeah.
Okay.
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