Q4 2023 Aramark Earnings Call
Yeah.
Good morning, and books to Aramark 's fourth quarter and full year 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 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 call for questions. After the conclusion of the Companys remarks, I will now turn the call over to police yourselves Senior Vice President Investor Relations and corporate development and MS. Michelle. Please proceed.
Thank you.
And welcome.
Earnings Conference call.
Good morning.
From our CEO, John Zillmer as well.
Tom.
There are accompanying slides.
This call that may be through the webcast.
Are also available on the IR website for easy.
Yeah.
Our notice regarding forward looking statements.
Yes.
During this call we will be making comments that are forward looking.
All right.
Yeah.
Or implied.
Sure.
Uncertainty unemployment.
Including those discussed in the Restauranteurs MD&A and other sections.
Sure.
Hum.
We also will be discussing certain non-GAAP.
A reconciliation of these items.
Can be found in our press release and IR web.
With that I will now turn the call over to John.
Thank you police and thanks, everyone for joining us this morning, Tom and I will provide a detailed review of our fourth quarter and full year fiscal 'twenty three results and key performance drivers, including net new business. Our growth teams continued to deliver including significant new business wins closed in just the past few weeks, which I would work.
Shortly.
I'm proud of the work, we've done to strengthen performance and culture and I'm eager to capitalize on the numerous numerous opportunities our client focused approach continues to generate.
We'll also preview our performance expectations for the year ahead with show positive momentum entering this new era for Aramark. Following the completion of the uniform services spin off.
We will take a moment to highlight the results for uniforms at a high level and Kevin and Rick will provide more detail in our upcoming earnings call progressed US now an independent publicly traded company.
Aramark performance this past fiscal year demonstrated the progress we've made towards our strategy and financial goals outlined at analyst day, nearly two years ago, resulting in a stronger balance sheet and improved profit margin performance and meaningful sustainable growth.
Over the past year organic revenues grew nearly 16% and adjusted operating income increased 34% on a constant currency basis.
Free cash flow was $334 million.
That included a payment of deferred payroll taxes related to the cares act as well as transaction and restructuring costs associated with the spin off free cash flow before these items was $471 million, which along with higher EBITDA and over 800 million of net debt reduction throughout the year resulted in a 1.4 times leverage ratio improvement.
From the prior year to 3.9 acts at year end.
Adjusted EPS increased 50% on a constant currency basis compared to prior year.
As part of these results global FSS, consisting of the foodservice for the U S Foodservice international and corporate reportable segments drove organic revenue growth of nearly 18% and NOI growth of more than 46% on a constant currency basis.
And then the uniformed services segment organic revenue grew five 5% and AOI increased 10% year over year on a constant currency basis.
The uniform team's strategic initiatives contributed once again towards improved profitability in the fourth quarter.
AOI grew 15% on a constant currency basis, and NOI margin reached 11, 8% nearly 70 points basis, nearly 70 basis points better than the third quarter, and 106 basis points better than the fourth quarter of last year.
We believe the pathway for value creation that Kevin and Rick outlined at the best at Analyst Day in September It was taking shape and are excited for their promising future as a standalone company.
Turning now to global SaaS net new business with a growth mindset now well established our net new business momentum continued achieving a four 3% to prior year revenue high retention rates and strong new business wins drove growth in this priority area. The.
The hospitality culture that we continue to cultivate and enhance has resulted in strong relationships with our clients. We've also been opportunistic and repositioning the portfolio within our next level of business as we create a new senior living offering, which we believe has enormous potential ahead.
Retention rates were 95, 5% with strength across the portfolio, maintaining the positive step changed versus our historical levels, even as the environment normalized this year.
Annualized gross new business wins totaled nearly $1 2 billion, representing eight 8% of prior year revenue.
Now entering another year of expected strong new business performance.
We believe that we are starting to reach a cruising speed in delivering consistent growth.
We added clients, both large and small across multiple lines of business and geographies among others. A notable win added in the fourth quarter was the Indianapolis Motor Speedway, one of the world's biggest sports complexes at home to the iconic MB 500 favor.
Favorable outsourcing trends continued throughout the year with 40% of our wins globally and close to 50% in the U S coming coming from self op conversions compared to around one third historically.
While we provide more detailed disclosures are on our net new business performance at the end of each fiscal year, our focus on driving growth is constant and just the first few weeks of fiscal 'twenty four we're off to a great start which includes having just been selected to provide food and nutritional services to one of the most admired and respected children's and PD.
<unk> institutions, Boston Children's Hospital.
We remain confident in our robust pipeline for fiscal 'twenty, four and expect to achieve net new business equivalent to 4% to 5% of prior year revenue for the third consecutive year.
Now turning to our fourth quarter results again exclusively focus on global FSS.
Overall performance reflected a strong top and bottom line across the portfolio revenue of $4 2 billion included organic gross revenue growth of more than 12% year over year, driven by strong net new business pricing and base business growth operating income was $220 million adjusted operating income was 256 million.
Representing an increase of 33% year over year on a constant currency basis.
Operating leverage from higher revenue and the maturing of new business from prior years as well as improved supply chain economics, and disciplined above unit cost management resulted in higher year over year profitability in the quarter.
The FSS U S segment increased organic revenue more than 10% compared to the same period last year and grew more than 24% on a constant currency basis.
Performance was driven by strong per capita spending and greater event attendance in sports and entertainment as well as continued favorable trends across the P&I sector as.
As we previewed last quarter, we've made notable progress on the price inflation lag within the education sector and corrections business.
This pricing partially benefited the fourth the fourth quarter and will be more fully it will more fully contribute to results in the first quarter of fiscal 'twenty four and beyond.
The FSS International segment grew organic revenue of approximately 9%, 19% year over year and increased more than 50% on a constant currency basis, even without the aim operations following its divestiture in April.
Performance in the quarter reflected strong results across geographies, including a busy events calendar and greater P&I participation rates in Europe strong mining activity in South America, and the start of the school year for higher education clients in Canada.
<unk> expenses were relatively flat year over year as we remain focused on above unit cost containment, while appropriately supporting the international and U S segments.
Collectively our performance in the quarter was a strong end of the fiscal year and sets a solid foundation going forward.
Given our strengthening financial profile the board of directors, just approved a 15% increase to our pro rata portion of the pre spin dividend the $9.05 dividend per share will be payable on December 8th.
We remain focused on driving our ESG and <unk> strategies, which resulted in the following recent accomplishments.
Aramark was selected as one of Americas greatest companies by Newsweek for our commitment to our sustainability footprint.
We were recognized as the best company for diversity equity and inclusion by Black enterprise.
Named a 2023 champion our board diversity in the form of executive women.
And just a few weeks ago, we announced our partnership with J P. Morgan Chase on our diverse supplier Grant initiative that is focused on assisting in diverse owned businesses.
Before turning the call to Tom I want to congratulate two exceptional aramark leaders on their well deserved retirement.
First Bruce fears with 40 years of stellar service to the company. Most recently as president and CEO of Aramark destinations Bruce's commitment to our business and stewardship to some of the country's most iconic places is legendary and we're grateful for all the years. He served aramark and this industry.
Sasha day will step into lead Aramark destinations returning to her roots, where she initially joined the company 20 years ago. Most recently Sasha served as chief Chief growth Officer for the collegiate hospitality business.
And Andy sit close president and CEO of Aramark, Canada since 2016 with his passion and focus on our results Andy established strong client relationships and elevated <unk> position as a Canadian company.
Steve Frisco has been named President and CEO of Aramark, Canada, Steve is expect extensive experience within the Canadian business, which he joined in 2000 and for having served in roles, including Assistant General Counsel, Chief Financial Officer, and regional VP for Canada's largest operations and most recently chief growth Officer I wish the.
To Andy and to Bruce in their retirement, and I know that Sasha and Steve will be remarkable in their new roles.
Tom.
Thanks, John and good morning, everyone.
23 represented another significant step towards delivering our strategic and financial goals.
Jon just reviewed are reestablished hospitality driven customer focused culture has resulted in a third consecutive year of strong net new business performance, which helped drive a 16% increase in full year organic revenue compared to prior year.
Adjusted operating income grew at more than twice the rate of organic revenue, resulting in significant margin improvement over last year, and we continued to meaningfully delever through focused cash management and strategic asset optimization, which when combined with ally growth led to a 50% year over year increase.
And adjusted EPS on a constant currency basis.
We also completed a major milestone with the uniformed services spinoff that we believe will drive enhanced performance and value creation as each independent business executes on its own distinct strategic vision.
As we move past this exciting inflection point for Aramark, our commentary today will be focused on the global food and facilities business in fiscal 'twenty four and beyond.
The fundamentals of the business remain unchanged, we expect to deliver profitable growth and margin through scale.
Revenue performance will continue to be led by net new business appropriate pricing actions and expanding our base business.
AOI growth, which is favorably positioned for outsized increases in the near term. We believe will be driven primarily by five factors first the profitability ramp of new business as a result of operational maturity inefficiencies following three consecutive years of adding new clients.
Next the recovery of the price inflation lag and expected benefits from recent trends related to the swelling of inflation.
As John mentioned, we made particular progress here and our education sector corrections business that benefited the fourth quarter and assuming continued moderation of inflation. We believe will continue to contribute to ally growth during the first quarter of fiscal 'twenty four and beyond.
Third the run rate from improved supply chain economics, both externally as product availability has returned to normalized levels as well as internally through enhanced purchasing compliance efficiencies from SKU rationalization.
It benefits from new deals driven by greater purchasing scale.
Fourth the continued recovery of unit profitability is middle of the P&L cost related to food labor and other direct stabilize coupled with the flexibility of our variable cost operating model.
Labor dynamics continue to improve compared to a year ago, particularly in cut collegiate hospitality, where we are no longer relying on excess of agency labor.
Our frontline teams continue to innovate and impressive ways to drive unit costs down without compromising the customer experience.
As just one example, we are using AI to streamline labor scheduling and more efficiently and effectively plan menus.
And lastly, the disciplined control and containment of above unit cost as we continued to create a fit for purpose overhead structure post spin that appropriately supports the remaining business.
The combination of all these factors being in play at once is expected to drive growth at a faster rate than revenue, even more so than our typical business model, resulting in an expected strong margin progression over the next few years.
As a reminder, we still expect the historic U shaped, our merc margin cadence with higher profitability in the first and fourth fiscal quarters.
<unk> related to seasonal peak activity in the education sector as well as the sports and entertainment to destination businesses.
Let me now move on to the fiscal 'twenty for outlook and then recap the halftime review update of our fiscal 'twenty five goals.
From Earmarks Analyst day back in December 2021, which were set for the total company including uniforms.
Recently, we broke out the original assumptions for just the global FSS business.
Our published materials. This morning include certain disclosures in more detail to help ensure we all we are all working from the same starting point.
In fiscal 'twenty four for our global FSS business. We currently anticipate organic revenue growth of 7% to 9% comprised of 3% to 4% pricing and 4% to 5% net growth.
AOR growth of 15% to 20% on a constant currency basis.
Adjusted EPS growth of 25% to 35% on a constant currency basis at.
And our leverage ratio of approximately three five times at fiscal year end as we continue to prioritize deleveraging to profit growth focused cash management and disciplined investment.
We are proud of what we accomplished in fiscal 'twenty, three and we have built solid momentum going into fiscal 'twenty four.
Assuming a continued easing of inflation over the next couple of years.
We believe that we remain on track to deliver the analyst day goals for fit for global FSS adjusted for the spin of the uniform business and divestiture of Aime services as follows.
Revenue of greater than $17 billion, we expect to hit this goal a year earlier than initially planned as captured in the fiscal 'twenty four outlook as a result of stronger net new business and higher than anticipated pricing over the past couple of years.
<unk> margin of five 9% to six 4%.
When we originally set our target following COVID-19 impacted fiscal 'twenty, one the global FSS AOI margin was one 2% just two years later <unk> margins increased nearly 350 basis points to four 7%.
Fiscal 'twenty for us is expected to grow more than twice the rate of revenue driven by the outsized growth factors just reviewed which we anticipate will deliver another significant jump in NOI margin this coming year.
However, due to 40 year high inflation experienced over the past two years and the price inflation lag and a few of the business lines. We now expect to reach the <unk> margin goal by fiscal 'twenty six.
Adjusted operating income remains on track to be in the $1 billion to $109 billion range in fiscal 'twenty five.
Adjusted EPS and leverage we're not specifically broken down by segment. When we originally set these targets.
So I'd like to take the opportunity to share our latest thinking here for the global FSS business.
Adjusted EPS is expected to be in a range of $2 30 to $2 50 by fiscal 'twenty six simply as a result of the roughly 250 basis point rise in interest rates since analyst day.
The debt leverage ratio for the total company was originally targeted to be in a range of three to three five times by fiscal 'twenty five.
Since that time, we divested our interest in certain noncontrolling assets, including aim services and paid down debt.
With that we currently expect to be at the top end or just inside our initial target range in fiscal 'twenty for achieving our analyst day goal a year early as we just reviewed and in a range of $2 75 to 325 by.
By fiscal 'twenty five as we remain committed to deleveraging.
We have a lot of confidence in not only achieving these financial goals, but getting to and through each one as we continued to build a sustainable business model set on providing valued services in a highly attractive recession resilient growth market that can create long term value for our shareholders.
With the uniform spin complete in a new era daunting for Aramark as a focused global food and facilities provider, we couldnt be more excited for the future of the company.
Thanks for your time this morning John.
Thank you Tom I'm extremely proud of the milestones we accomplished this past year as our global team and I'm excited about the positive momentum we've generated for the year ahead. Our strong performance is driven by our commitment to our strategic priorities, which we believe have establish the groundwork for more opportunities and success to come both in the near term.
And long into the future with the spinoff now complete fiscal 'twenty four represents a new chapter in the company's history, we're confident in our ability to build upon what we've worked hard to establish leveraging the hospitality culture and growth mindset now firmly rooted within the organization.
Operator, we'll now open the call for questions.
We'll 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 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.
And also one on the the guidance please.
Q4 EBIT number.
I calculate as being 3% ahead of 2019, it looks like the 15% to 20% AOI growth into next year can be assuming it pretty similar 3% ahead of 2019 number for the rest of the quarters.
To come in 2020.
So I just wanted to add.
How conservatively you feel like that that guidance has been set.
The the moving parts are there.
And then.
Just a.
A more strategic question you mentioned on the supply chain and the benefits that can have on the margin from compliance scale and new deals I wonder if I could get a little bit more detail to help quantify that what is the purchasing volume of the GPO today, what percentage of that is in food items versus the other hospitality.
Items in procurement and then what proportion of the sites today are in compliance and how much do you expect that to.
Drive improvement going forward, thanks very much.
You want to start with supply chain sure I'll start with supply chain.
First of all compliance is that just statistically measure.
Ross the contract foodservice business so those.
Our statistics are reviewed with each operating business every month they have a.
Our goal in terms of their overall compliance and are working very hard to achieve.
To achieve those numbers there is always opportunity in the last year that that was significant because of the disruption that occurred in supply chain over the course of the last couple of years. So our compliance numbers are very very close to optimal.
We continue to push into.
To get units to purchase the right products.
From the right suppliers. So there is always opportunity.
To improve upon that but in general I'd say I'd say, we're very close on the compliance numbers.
The GPO.
Spend today I don't think we disclosed with the total GPO spend is.
Yeah, it's about 16 billion down about $16 billion.
<unk>, which includes both our contract foodservice.
Revenues as well as the spend that we manage for our clients.
Through <unk> and the other GPO is we operate so.
We have significant scale and we work very aggressively to utilize that total spend to benefit both our clients as well as aramark as we continue to manage new deals with suppliers and manufacturers.
And that supply chain team is very expert at optimizing for all of those contingencies.
So we're very comfortable with the potential growth for the GPS we have significant opportunities to grow both domestically and internationally.
And the GPO market and we see continued supply chain economics improvement as a result of that focus growth we're back in that area.
And Harry I think on the margin question.
As a conservative if you play it off against either 22, or 19 and I'm not sure how relevant 19 is anymore.
Given the spin in different economic dynamics versus.
Five years ago five years ago now.
But we're very thoughtful about what we're trying to accomplish here in building. This sustainable model, we all know what chasing margin does.
And it doesn't end well so where.
Continuing to move the business forward.
Thoughtful way trying to balance retention.
New business growth.
Our client needs.
We're very happy with the progression of the margin off the low of one 2%.
In 'twenty one.
<unk> improved it by 350 basis points. So far we'll continue to progress it we still feel as I said very comfortable and confident in.
The goals that we set out with some adjustments for timing.
We will continue to push through that if there is an opportunity to move to SaaS, which would probably be driven off a stronger easing of inflation over the next.
Few quarters couple of years, we will do that.
Or will have that opportunity if it goes the other way it will be a bit of a headwind. So overall, we feel good about the number.
I don't know, if it's conservative or not but we'll continue to do what's right for the business.
Yeah, and I would and I would just add final commentary to that is that we're off to a good start in the quarter.
See continued improvement in the.
Slow moderation of inflation, that's our expectation built into the model and built into the plan and if inflation continues to use more rapidly than certainly we will be able that we are well positioned to take advantage of that as we discussed in our commentary we have made significant progress on the price recovery.
Those benefits and those businesses that were lagging and we saw that in the fourth quarter and we continue to see that play out in the first quarter in early days so.
So we're confident in the targets and as Tom said, we have a commitment to the goals that we established at Investor day, we see ourselves.
Those goals and getting through them.
Going even better than the longer term and the long term.
Thank you.
Our next question comes from Neil Tyler with Redburn Atlantic Your line is open.
Thank you and good morning, John Tom.
I think I'll start by following up on <unk> question about the margin in your comments there so.
The guidance suggests that if I'm calculating correctly the.
Basis points improvement will be a little bit better than your typical operating leverage but not significantly and so I wanted to ask.
With the comments you just made in mind.
What extent your sort of reinvesting in the business in order to maintain growth just to really in operating costs.
First question.
And the second part of that I suppose it is.
Now whether you.
The business this way, but can you compare.
Gross margin in unit margin on business won versus business lost over the last say 24 months.
Got it.
Sort of taste for any structural change in the profitability of the.
The business Thats coming in thank you.
Okay.
Yes.
The margin is is this one is always lower that that business loss.
Churn is we're getting up to the cruising speed at the counter referred to.
Is the headwind we've talked about for the last couple.
A couple of years, but yeah.
As we as we consistently.
Build that.
That cog.
It levels out over time, and that's where we'll get to hear over fiscal 'twenty four and fiscal 'twenty five.
The normal model in my mind this is.
Six 912 model, so that to some folks before.
In a normal basis, 6% top line, 9% bottom of 12% EPS.
<unk>, probably be a bit outsized for us on EPS because of the as we delever.
That yields probably a 20 basis point margin improvement in the normal course of things.
We expect to double maybe triple that.
Over the quarter, if you take the guidance.
This year. So it is quite outsourced in our outsized and I think that that has the opportunity that fiscal 'twenty four.
25, and even into 'twenty, six and obviously to hit the goals.
Everybody is doing the math.
What we have to do but we feel confident in that so I think it is the next couple of years is quite outs outsized AOR growth margin growth compared to the normal model, which would probably be around 20 bps.
Okay. Thank you sorry, I wasn't I wasn't particularly clear in the first part of the question Tom I apologize I mean, I really meant that.
Whether that would sort of contracts you have delay.
Deliberately leaving behind that were sub optimal in terms of their profitability. So I wasn't thinking of actually sort of on day, one necessarily and that switch, but when you look at each.
Each of those portions at the cruising speed, whether there's much difference in the profitability of the bits that you can.
You've lost versus gained.
No I don't think so.
Not ultimately to your point I mean, Maryland.
<unk>.
Kind of provide a good strong margin for us.
Over time once once we get it fully implement are up to speed and operational.
But no I don't I don't know, how you feel John but I don't see any business that we've been booking that has any different margin profile than we have in the past one of the things the mantra inside the organization is profitable growth. So it's not growth at all cost its growth that is margin accretive and earnings accretive.
That is what the organization is focused on so if you look at the portfolio of business that we've sold over the last three years and this consistent ramp up to growth.
All met our pro forma targets and are in our performance expectations for returns on invested capital and other and the other metrics, we utilize to evaluate the new accounts as we sell them. So so no there hasnt been a structural change in our expectation.
There hasnt been a structural change in the value of the business, we've sold relative to the business that we've that we've lost over that period of time. So I'm highly confident the growth engine as designed will stimulate this margin recovery that everybody is so anxious for us to achieve.
And we believe in it and and we see it happening in the business.
I think if you if you relate.
Yes, I think as we get through the balance of this year. We will see continued strong performance and continued strong growth leading to that margin recovery.
And hitting the expectations, we've set for 2025 and 2026.
Understood great. Thank you very much.
Yes.
Thank you. Our next question comes from Ian Zaffino with Oppenheimer. Your line is open.
Alright, great. Thank you very much.
Impressive results here.
I know you guys, indicating kind of that U shape, but could you maybe give us a little bit of color on how October is going and some trends you can maybe point to kind of what gives you confidence in the guidance.
Yeah, I would say we were very pleased with the results in October one month does not a year make but we are very pleased with the results.
Excuse me as you know.
Our units report to us on a on a weekly basis, we see the results as they come in.
As we indicated we've seen improved performance in the price recovery.
Area, particularly in corrections in higher education that bodes very well for the balance of the year in terms of that.
Earnings improvement so October.
Also we had.
Some significant new business wins, some of which we've just talked about Boston children's and many others that were still working to get to final contract. So we're we're very pleased with the with the early stages of this fiscal 'twenty four.
Because we're through the first five or six weeks.
Yes.
Thank you. Thank you.
Our next question comes from Andrew <unk> with JP Morgan Your line is open.
Hi, This is Alex on for Andrew Steinman.
Just wanted to ask on net new FSS net new inclusive of Merlin appears to be down 18% year on year.
In 2023 is that a fair characterization and then how should we think about the puts and takes around net new maybe.
Verticals, where you're seeing traction maybe verticals also where you're seeing share loss and then I'll follow up with a question on margins as well.
Yeah, well, we're not seeing any verticals with share loss. So that's an easy question to answer I think we're seeing growth across all the businesses and had net new pretty much across the board.
There are some years that are bigger than others based on the size of the wells that we might sell in any given year like Merlin last year being such a significant component of that but this last year represented our third best historical performance for growth for net new growth. So.
We're very pleased with the result, and one of the things that people have to remember is that while we measure it in fiscal year terms and report on it in that on that basis.
Sales activity is driven by the clients decision dates and so many of the decisions that leaked into 'twenty. Four for example were decisions that we would have expected potentially in 'twenty three so we don't see.
You don't see the change from year to year as we performance drop off we just see it as a kind of a lag and decision making around some of those large customers and large clients some of which are very significant in size.
So again, our third best performance ever last year in terms of net new and again contributing to that three year history, a three year track record of net new growth.
Quite frankly, a significant change from the history of the company. So we're very pleased with it.
Got it Sean Thank you so much and then on margins.
If I interpret this right.
Sort of pro forma margins were up something in the range of 80 to 90 basis points in 2023.
Your guide seems to imply something closer to 40 basis points. This year and then that would have just sort of.
Pick up perhaps a little to hit the now fiscal 'twenty six target of at least five 9%.
Is that a fair framing and then is there anything sort of in this year that is specifically.
Compressing that optical margin.
Yes, I think the margin this year was.
Over 90.
Roche and 100 bps improvement.
We saw a little bit of tailwind.
Covid, particularly within the P&I.
This year, so that helped drive that outsized performance.
Yes.
Again, the margin is something that is a result, not a cause for us.
Continue to focus on driving the <unk> dollars.
Retaining our clients.
Reinvesting in the business.
And so it's a balance of all that as we move forward.
I'll say it again.
Confident in being able to achieve the financial goals into 25 and 26 as we just laid out.
So I don't know what else to really say, except for we're feeling confident about that and continuing to balance and do the right thing for the business.
When it comes to driving profitability as a result the margin.
Yeah, I'll just add the final commentary on that.
We are optimizing for growth retention and earnings improvement.
As a result of all that.
Growth that were achieving and so we're.
We are focused on the margin we get it we understand that the marketplace will reward us for improving margins over time, but we think the best way to consistently deliver margin expansion is to grow the business and achieve that margin through scale.
And so we're optimizing to achieve those objectives over a period of time and I'm not worried about 10 bps. This year versus 20 bps next year I'm more worried about achieving that sustainable growth model and maintaining it.
And continued continuing to deliver for our customers day in and day out Canada. The margin is an outcome of that strategy.
It's not the strategy.
So.
We're confident we believe in the goals and.
We have the team in place to go ahead and deliver on it.
And if we get lucky and inflation Wayne's more rapidly.
Then youll see that translate into improved margin performance over time as well.
Just very hard to predict where we are today as you probably saw CPI was unchanged.
The announcement this morning.
But CPI does not reflect the inflation rate that we project for food product around the world, which is closer to five or 6%.
And our teams look at food inflation by business unit by market basket byproduct category. It's a very detailed analytic that we have to evaluate it and so we've baked that into our assumptions and if we have been conservative.
I think ultimately that plays well to our advantage as we continue to negotiate new terms, new agreements with our suppliers and with our customers.
Thank you Tom Thank you John.
Our next question comes from Heather <unk> with Bofa. Your line is open.
Hi, Good morning, Thank you for taking my question.
So to start I was hoping you could talk about the cash flow statement.
Now that you have spun off that Seth.
But your free cash flow profile looks like perhaps maybe help us shape, what conversion looks like and any cadence around around the cash flow quarter to quarter.
Yes, the cadence shouldnt change much at all because.
Global FSS business was really the driver of that seasonality. So you'll again see a big outflow in Q1.
Big inflow in Q4 as you have seen in the past.
Uniforms cash flow was fairly consistent quarter to quarter throughout the year. So youll see the same cadence.
Just slightly lower numbers in terms of conversion rate.
We're probably looking at about a 40% Oi conversion.
As we as we settle out through this year.
Really stand up.
Food and facilities only business.
It probably is going to be the best best benchmark, We've got a couple of things this year.
Sure.
Note on free cash flow. So we do have some hangover transaction costs that we talked about from the spin that we're paying in the first quarter are roughly $35 million to $40 million and then we do have the taxes on aim services sale that we'll pay in the first quarter as well of about the same amount.
I think overall that again, you'll see the same cadence.
About 40% <unk> conversion as a target.
And less than that this year given these.
Two one off items that I talked about.
Got it that's helpful and then as a follow up question with regard to lesser margin question, but more of an operating question over the last two years, you've had to make adjustments with menu.
And your Labor force and operations to help offset what we're seeing with regard to inflation.
As as food cost inflation waves, it's still there how are you thinking about menu and operations can you unwind some of that or do you think this is sticky and youre kind of happy where you are today.
No I think our I think our operators have done a great job of adjusting menu and service offerings to meet the to meet the.
Inflation issue head on and I think we're largely through it.
And so now.
We're really at a.
At a place where I think we have kind of a new normalized.
Our operating model and a new normalized menu structure, we don't see the need for additional changes there.
And I think the product supply issues that were prevalent over the course of the last couple of years have all essentially been normalized and so our people are really able to go ahead and structure the programs the way customers want them. So I think we're very comfortable in today's environment and we do believe that over time.
We're getting back to a much more consistently.
On a normalized environment with respect to inflationary cost pressures, both for food and labor as labor availability has improved as well.
Thank you very much.
Our next question comes from Andrew Wittmann with Baird. Your line is open.
Oh, great. Thanks for taking my questions guys I guess.
I heard a couple of things in your remarks.
Our margin drivers you talked about the maturing of all the new business that you sold recently.
In particular.
<unk>.
That indicates to me like if youre selling new business. All the time, there should always be some new business that needs to mature.
It's going to give you a margin benefit it might suggest that.
Maybe your focus is more going to be on delivering the profit margin targets that you've set out here rather than maybe as aggressively growing the top line. Obviously you always wanted to do both but I guess, John philosophically to hit the margin targets do you have to pivot a little bit more.
To lean into the margin and the operational performance to deliver the bulk.
Normal gains here over the next two or three years.
Really no.
We see growth as a path to margin expansion in that.
Growing consistently over time leads to.
Both AOE.
Our improvement in terms of a dollar in terms of dollars and in terms of margin and it comes from a couple of different sources Andy.
Hum.
Both the growth in terms of the profitability from the new accounts that are added which does scale up over time as well as the improved economics on supply chain spend so as we add new business as it provides additional spend for supply chain to manage to craft better deals with suppliers and manufacturers, which leads to improved economics for everybody.
So as you know in the supply chain World you get paid for growth.
And so you might get X number of dollars per case, if we're if we're buying at a certain level and we get X plus.
We're buying more so the growth feeds of supply chain economics, and then it also creates additional leverage with respect to overhead because we don't need to add significantly above unit costs.
We're as we're growing the business.
If we're able to grow the overheads at a rate that's much slower than the growth rate of the company.
So by maintaining that consistent growth profile over time, we deliver the margin expansion that we all that we all seek.
To shut the growth down or to focus more on margin as opposed to growth would actually be counterproductive and that's frankly, what the company did.
Back in the mid teens back in.
The earlier days post IPO of the company went on our margin March and stopped growing and that's what led us to the to the point, where we needed to make a significant strategic change. So we see growth as the optimal strategy and we can consistently deliver margin expansion through that growth.
And but we're also focused on managing the middle of the P&L and we want our people to get better and better every day at managing food cost labor cost and direct expenses. So we give them tools and technology to go ahead and manage the middle of the P&L.
More and more effectively as well so as inflation moderates managing that middle of the P&L. It gets easier as well. So it's not just about pricing its about managing that cost structure at the same time. So so.
So, but we think growth is the primary driver and we will continue to be.
The strategy of the company.
Great and then just one quickly here for Tom I, just looked at the share count. It looks like you guys are estimating at 270 million share outstanding number here for fiscal 'twenty four in the quarter you just reported your $2 63.
That was up about 1 million shares.
About three 4 million shares year over year.
It seems like the number of share increase is.
As unusually high this year is there a lot of shares vesting.
Here that were that were coming to vest in the first quarter or something or what's driving the somewhat.
Larger share count, yes, two components to that one there's roughly usually about $3 million of normal dilution as we go year to year.
And then secondly, you've got the sort of re basing of the remain co employee share options and restricted shares from the spin.
So because of that the math in essence of the spin of about a $7 million total.
<unk> 4 million related to the spin and three just as normal the normal dilution.
Okay makes sense. Thank you.
Sure. Our next question comes from Toni Kaplan with Morgan Stanley. Your line is open.
Thanks very much.
Wanted to talk about new business.
Very strong for the past couple of years now.
I just wanted to ask if you could sort of compare.
And you alluded to it a little bit in the first.
First question I.
Asked previously, but just could you talk about the sales force a little bit more if you compare the number of salespeople you have now versus when you started has that gone up meaningfully.
It just increases in productivity that has been accelerating with new business has it been the technology or the decentralization.
That sort of talks to the sustainability of this accelerated new business going forward.
Sure it's actually.
Actually all of those things first of all.
You May remember as we as we joined the company. We went ahead and made significant investments in sales infrastructure.
And a couple of different ways first by adding sales resources to the street.
That level has been now constant probably for the last.
Three or four years. So we made the initial investment is.
As we joined the company, we made some changes in sales leadership and we downstream the sales function back to the business units. So it's now sitting in the geography closest to the customers.
That way the hits, it's much closer to getting to where the job needs to get done.
And so we invested in those resources back three years ago and the level of reinvestment. We've made over time has been.
Essentially de Minimis sales manager here, a salesperson they're dependent upon.
Yeah business unit strategy, so there hasnt been a quantum change since our initial reinvestment in.
In that business, so what <unk> seen over the last three years has been enhanced productivity and increasing sales volume for each sales manager based on their time in territory based on their time back in the business, which was really our strategy to begin with we wanted people to be working in the lines of business in the territory.
Areas that they were responsible for and that led to significant ramp up of their other productivity. So.
We don't see the need for continued reinvestment, we think we're at a steady state in terms of the number of resources that we have we're always we're always looking to optimize.
And we may add a person here or there depending on the total opportunity set but in general we feel like we're in very good shape from a sales structure perspective.
Tom I don't know if you have anything you want to add to that yeah. No I think the only thing I'd add is that time in territory is so important in that just will continue to build strength in the sales forces.
Work there their pipeline in a territory for multiple years in a row, because as we've talked about a lot.
Hello to contract in this.
Our business can vary anywhere from a few months to many years and so are the stability in the workforce, which is still three years young in terms of this.
Close to or over 40% increase from from.
Fiscal 19 and before.
Is still getting their sea legs, and still developing that stability in their markets. So I think it will close rates and productivity will continue to improve.
Great and international had a very strong quarter of growth again.
Wanted to ask if there was anything that really has been driving the improvement there and how you see that going.
Into 2024 with regard to sustainability of growth in international.
Yeah, I would say, yes, they have had another terrific year in terms of net new growth.
<unk> across.
All geographies and I think that is driven in large part by the stability of that Tom just described the international sales organization was largely intact and in place.
Before we before we rejoined the company. So that organization has been more stable and they've been working those territories more consistently over a longer period of time. So I think that that's that's worked to their advantage.
It is also very helpful that we have a very disciplined and focused strategy with respect to growth in those geographies, where we really want to be and so we're consistently focused on those markets and are consistently focused on those businesses.
And we're not we're not out planting flags in new countries, we're really focused on those geographies, where we have the right to win and compete in a competitive advantage.
And that's translated into continued performance improvement. So yeah, we feel very good about the international team and their productivity and in.
And we've been the beneficiary of significant stability in those markets.
Perfect. Thank you.
Our next question comes from Shlomo Rosenbaum of Stifel. Your line is open.
Hi, Good morning, Thank you for taking my questions.
First question I, just wanted to talk ask you a little bit more detail on the pricing catch up in education and correction space.
Is the effort that you made over the last couple.
A couple of quarters in terms of the contract renewals as debt.
Really kind of fully catches up.
The inflationary pressures that you saw or is there any further efforts that are going to be needed next year, and then I have a follow up on that for part of the business.
Yeah, I think we're I think we're going to be I think we're very close to being caught up.
In both of those businesses will continue to work to improve.
In in pricing across the enterprise not just those businesses as we continue to see the need for price recovery and as inflation continues to be somewhat persistent on the food side. So we're going to be very diligent about making sure that we continue.
Continue.
And elevated pricing strategy to recover those costs going forward and but I think we're in very good shape.
Particularly compared to where we were last year when inflation was running 10% to 12% in those businesses and we ranked not able to price for it. So I'd say, we're largely caught up and we will continue to work to improve across the enterprise and get it and get even better.
Okay, great. Thank you and then just a follow up you mentioned in passing the strategic positioning makes little hospitality I know theres been no changes in the marketplace for that business. Since you bought it maybe you could talk to us a little bit about the strategic repositioning and whether you think that business can get back to kind of the strong growth rates. It had before you bought it.
Okay.
Yes, we think first of all the addressable market is.
Very significant and we have.
Worked through developing at all.
Kind of a new additional service model to what next level was initially providing so we're expanding the range of services and the capabilities.
And focusing.
Really on the senior living.
Business as well, which is multiple billions of dollars in terms of addressable market and opportunity largely self op.
And so we think that represents a very significant growth potential there.
There is still growth potential in the core business that next level operated.
And what it's doing so well at so we will continue to look at both sides of the business, both senior living as well as skilled nursing and will bring a balanced approach to growing that that part of the business.
Thank you.
Our next question comes from Josh Chan with UBS. Your line is open.
Hi, Good morning, John and Tom.
I guess you mentioned food.
Clear.
Could you talk to the shape of food inflation that you would expect through the year, what's baked into guidance and then how does that kind of shape.
Shape through the year.
Yes.
Based on our assumption of approximately 5% to 6% food inflation globally now its different by market.
It's five 5% in the U S.
For the overall inflation rate for our expectations, it's a little less in Canada, a little higher in Europe.
And a little lower in Asia. So we do it on a blended basis.
Based on the size of the organization call it somewhere in the range of 5% to 6%.
And.
That's what's built into our assumptions and built into our planning models for the year and built into our negotiation discussions with our clients and customers.
And so.
That is based very specifically on individual market baskets byproduct for instance.
We expect to meet to be up five 9% in 2024, we expect fruits and vegetables to be seven one so we have and then.
And <unk>.
Kitchen supplies down at 1% right. So we've got a very detailed market basket of products by business unit that we buy.
We monitor for for our locations on a monthly basis. So that's the overall assumption.
And and if inflation continues to moderate and we see a lowering of those expectations. We'll we'll keep the street informed us as to what we're seeing and when and as to how we see it affecting our balance of the year.
Okay. That's really helpful color I appreciate that John.
And then I guess circling back on the on the normalized margin improvement that Tom mentioned earlier.
Definitely understandable that this year will be an outsized year of improvement because of the price inflation catch up I guess, how do you think about 25.
Outside years together.
Items, such as contract maturity supply chain they seem to be relatively normal course, so so how should we think about <unk>.
Margin improvement beyond this year.
Yes.
Tom will jump in here as well, but I think youll see continued margin improvement and an outsized performance in 'twenty four 'twenty five and 'twenty six.
As we continue to see the normalization of these phenomenon.
That you've that you just described new business maturity, we will have ramped.
Business for 'twenty, four and 'twenty five.
And the business sold over the course of the last couple of years, the price recovery lag or price inflation lag will be largely done in 24 will continue to see drivers.
Outsized margin performance and supply chain throughout the cycle. So we will continue to get better in 'twenty four 'twenty five and 26 as we add scale in <unk> and improved supply chain economics, we expect SG&A over that time period to also be managed it below at below growth rates in the business.
So.
So they're all drivers to outsized margin performance and we see that I mean that model playing out.
Consistently.
Yes no.
Same thing I think all five of those factors play into 'twenty, four and create the outsize.
<unk> growth.
Most of those still play into 25.
<unk> made at the new business hitting that cruising speed sort of drops off as a factor into 'twenty six.
We've included this in the slide is our overall view.
How these things play out over the mid term.
But the but we're getting down to the core where growth.
Supply chain leverage which begets.
<unk> leverage.
And we continue to manage the middle of the page.
Move into that sort of 20 bps long term sustainable.
Model, but over the next two to three years, it's going to be more than that.
Okay, that's great color and thanks for the time guys.
Our next question comes from sorry, our last question comes from Stephanie more with Jefferies. Your line is open.
Hi, good morning, Thank you.
Good morning, good morning.
Good morning, just wanted to touch on the guidance outlook.
For fiscal 'twenty four its a pretty tight range, but I was just curious as you look at both ends of the range, whether you pick a OE growth or EPS growth, maybe you could talk about some of the factors that would contribute to hitting either either ads kind of assumptions around the macro inflation pricing et cetera.
Alright, Sir thank you.
Yes, I think it's the same.
Once we just talked about.
With inflation being sort of the.
The Big factor I think the sharper it would decline and become a non factor I think that creates upside.
It ticks back up over the levels. John just just ran through I think that becomes a little bit of a headwind.
Again, we talk about huge increases in.
New wins.
We've got good progression baked into the plan and we would expect that if there was a lot of oversized wins.
A bit of a headwind.
Fortunately, which we don't want it all.
We underperformed on new business that would probably be a margin help. So you can go down each of the lines and Ed sort of worked through a plus and minus scenario on each I think with inflation being the overarching theme and there is to to what May help us.
Overachieve or percent of bit of a headwind.
Yes, I would second that I think if there is one key driver that I would call out as being a potential risk or benefit to the to the range it would be that inflation number.
And the expectations.
Around it.
We're all very hopeful based on what we see in the marketplace today and based on the actions that the team has taken in terms of pricing recovery, we're very hopeful that that will lead to.
Improvement so that we can be trending towards the upper end of the ranges.
Too early to make that call.
But that would be the one key driver I would focus on I think all the rest of them, whether it's new business maturity SG&A supply chain. Those I think are going to be very consistently delivered.
Against those objectives, and so that would be the one variable I would be I would be most.
Focused on.
Got it I appreciate the time thank you.
Thank you I'll now turn the call back to Mr. <unk> for any closing remarks.
Perfect well. Thank you very much everybody really appreciate the time and attention this morning, and the support of the company.
As we've said we are very confident in the performance. We're very pleased with the year end and very confident in our performance for 24 and in the expectations that we've set.
For 25, and 26 as well.
We're committed to this strategy and we're going to grow this business and deliver improved earnings and improved margins over time.
We're here.
To deliver on the commitments, we've made not only to our shareholders, but to ourselves as well. So we're all big believers in the strategy and big believers in this company and we're going to go deliver.
Thank you very much.
Thank you for participating this concludes today's conference you may now disconnect.
Okay.
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Okay.
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