Aramark

Good morning and welcome to Aramark's first quarter 2021 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 on a listen-only mode. We will open the conference call for questions at the conclusion of the company's remarks. I will now turn the call over to Felice Cassell, Vice President, Investor Relations and Corporate Affairs. Ms. Cassell, please proceed.

Thank you. And welcome to Aramark's first quarter. fiscal 2021 earnings conference call and webcast. I hope those listening are doing well. This morning, we will be hearing from our Chief Executive Officer, John Zilmer, as well as our Chief Financial Officer, Tom Androff. 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 risk factors, MD&A, and other sections of our annual report on Form 10-K and our other SEC filings. Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found in this morning's press release as well as on our website. So with that, I will now turn the call over to John.

Thank you, Felice, and hello, everyone. First, I would like to wish all of you a bright year ahead that includes good health, and a return to a more conventional way of life for all of us. As we progress through the new year, I'm exceptionally encouraged by the resiliency of our business through this unprecedented period, as well as the considerable opportunities emerging for Aramark. This morning, I'll highlight our first quarter performance, provide insight into our immediate expectations for the business, and share our progress in Aramark's accelerated growth strategies. We remain committed to unlocking significant value for our stakeholders. Importantly, we continue to promote an ownership mentality within the organization. Having just approved an employee stock purchase program that provides employees an opportunity to participate more broadly as owners of the business, we believe this action will further align our people, values, and performance. Turning now to the first quarter, revenue was in line with expectations that we articulated in last quarter's earnings call and subsequent disclosures. with organic revenue down 36% year over year, consistent with fourth quarter fiscal 20 organic revenue levels. These results reflected various stages of client reopenings, as well as the expected timing shift within higher education as the majority of schools we serve intentionally concluded the first quarter early to preserve the ongoing ability to keep students safely on campus. Our teams across the business demonstrated unwavering resolve by effectively managing and maintaining extraordinary cost discipline that resulted in an AOI drop through rate of 20% at the low end of our stated expectations. This dedication contributed to a free cash flow improvement of $225 million compared to the prior year period while reflecting seasonal outflow in the quarter. We maintained ample cash availability with approximately $2.4 billion at quarter end. As we commenced the new fiscal year, our performance demonstrated continued stability across all business segments as we navigated the effects of COVID-19, while simultaneously working with clients in preparing for a business reemergence. U.S. food and facilities reported an organic revenue level in line with the preceding quarter, as each business sector managed various stages of client activations. We added prominent new clients for our U.S. portfolio, including most recently Florida State University, as well as drove improved retention levels. Education served clients operating both in-person and hybrid learning models. As noted earlier, higher education reflected shortened semester schedules that also resulted in reduced catering and retail activity that typically spiked during the holiday season. The second semester is currently underway. We continue to serve approximately 90% of client locations in some manner, with our clients experiencing a higher student population on campus than during the fall semester. In K through 12, the team did a tremendous job navigating through changing client operating models and strategically designing menus and customized services to meet the needs of communities. Whether the students attended classes in person or joined virtually, while participating in our curbside meal pickup, as we continue to offer the universal government-sponsored meal programs. Approximately 70% of the districts we serve are in a hybrid setting, with many districts in the process of resuming increased in-person learning. This promising progress gives us considerable optimism for the business. Sports, leisure, and corrections improved slightly quarter over quarter as we entered the new fiscal year. Sports and entertainment began to activate as certain NFL teams introduced fans at a limited capacity based on local regulation. The NBA and NHL are implementing various strategies for partial attendance in their upcoming games. Leisure maintains steady performance as the team ramps up for the anticipated increased activity in national parks as we head into the spring season. Lastly, corrections remain stable. As we experience a longer recovery in business and industry, we are developing innovative solutions to offer clients that go beyond their traditional office setting. This includes the launch of Munch Mail a few weeks ago, an exclusive home delivery option that provides curated gourmet offerings. The B&I team has already fulfilled tens of thousands of client orders across the country. Facilities and other has essentially returned to historic levels largely from significant success in offering additional project-oriented services. The facilities team is currently deploying educational digital content to clients that provide new insights related to innovations occurring within the business. We are pursuing numerous cross-selling opportunities in this area given the heightened demand for safety and hygiene. Healthcare remained relatively stable, and the team has worked tirelessly to provide capabilities in telehealth and mobile ordering, in addition to offering post-care meal delivery to patient homes, extending the boundaries Aramark operates for clients. International performance improvement quarter over quarter was driven by the team's ability to effectively leverage our expertise in managing complex and evolving government-mandated restrictions, specifically in Europe. Our healthcare and extractive services businesses exhibited particular resilience across the portfolio, with China once again driving nearly double-digit revenue growth. The international team continued to win broad-based new business, totaling over $100 million in the first quarter, while simultaneously delivering strong retention rates. Uniform services offerings remained in high demand, and the team committed to implementing additional value-enhancing strategies, including the expansion of our adjacency services that drove double-digit year-over-year growth in this area, and investments in growth resources, which are already demonstrating productivity in recent sales conversions, and the ongoing implementation of our ABS route accounting system integration that provides significant scaled efficiencies while offering enhanced service capabilities to clients. In supply chain, we are progressing well with our priorities focused on value creation, innovation, culinary collaboration, and supplier development. As we pursue this mission, we're ensuring that our operating teams have the right tools to simplify their efforts. We introduced a new system that will serve to improve spend visibility, optimize adherence to programs, and uphold Aramark's commitments to sustainability, supplier diversity, and local regional suppliers. This approach has proven exceedingly advantageous represents promising future opportunity as we strategically leverage our spend pools. Lastly, as part of Aramark's Be Well, Do Well ESG commitment, we just released our Sustainability Impact Report that highlights our efforts to further enable equity and well-being for millions related to healthy eating initiatives, employee resource capabilities, diverse owned business partners, and tuition support for qualified frontline associates. Our strategies are centered on sourcing responsibly and operating efficiently, while mindful of our ongoing focus on margin progression. Before turning it over to Tom, I would like to highlight the recent election of Bridget Heller to Aramark's Board of Directors. Bridget is a highly respected business leader with 35 years of experience in food, health and wellness, and consumer care, with an extremely impressive track record of accelerating growth at several Fortune 100 companies. while simultaneously championing diversity and inclusion. We're thrilled for the opportunity to have Bridget join the board and to leverage her extensive value-creating experience. I will now turn the call over to Tom for a detailed financial review of the business.

Thanks, John, and good morning, everyone. Before we begin, I want to also commend our teams around the globe on their collective ability to rapidly adapt to the current environment. while maintaining an unwavering commitment to safely serve our clients. Their focus and dedication continue to be reflected in our strong operating and financial performance. As John mentioned, while our results remained impacted by COVID-19, the first quarter materialized as we discussed on the last earnings call, including stable sequential quarterly organic revenue performance across all segments, a favorable AOI drop-through rate of 20% on corresponding revenue decline, and continued effective cash flow management, resulting in an improvement in free cash flow of $225 million compared to the same quarter last year. These results enable us to maintain ample cash availability of approximately $2.4 billion at quarter end. For the total company, organic revenue was down 36% in the quarter compared to the prior year, in line with the preceding quarter, and a considerable improvement since the trough early in the third quarter of last year. U.S. food and facilities reported an organic revenue decline of 45% versus the prior year, similar to the fourth quarter. All lines of business had stable revenue trends with the exception of higher ed, which was unfavorably affected by the early completion of the academic semester and nearly all of our operations. And facilities, which benefited from higher frequency of services, provided for existing clients an increased demand for project work. International organic revenue was down 29% compared to the prior year, which reflected a modest improvement compared to the fourth quarter of fiscal 20. Teams continued to effectively navigate the government-imposed restrictions while also benefiting from the impact of delivering strong new business and retention rates. Organic revenue in uniforms decreased 10% versus the prior year, also a relatively consistent performance compared to the fourth quarter of fiscal 20. Growing demand in ancillary safety and hygiene services was offset by increased government-imposed restrictions, particularly in Canada. The investment in additional growth resources throughout the quarter, as well as improved sales productivity, continues to establish the foundation for future growth within this segment. The company reported adjusted operating loss of $9 million in the quarter. Once again, our operating teams effectively managed in-unit product, labor, and other direct costs, to appropriately serve clients based on their specific needs while preparing for an anticipated increase in business activity. This purposeful balance led to a favorable AOI drop-through rate of 20% on corresponding revenue decline. Corporate expenses on an adjusted basis were up $7.5 million compared to the prior year, primarily from higher equity-based compensation expense put in place to reward and inspire the organization to drive shareholder value creation. Adjusted EPS was a loss of $0.31 in the first quarter, largely due to interest expense, including that related to the $1.5 billion bond issuance last April. On a GAAP basis, Aramark reported revenue of $2.7 billion for an operating loss of $20 million and a diluted loss per share of $0.32. Now let me turn to cash flow. As is normal due to the seasonal cadence of the business, specifically within higher ed, Free cash flow was a use during the first quarter. However, through disciplined cash flow management, the outflow of $180 million was $225 million better than prior year. A strong focus on working capital improved cash flow more than $200 million, coupled with slightly lower capital expenditures and smaller accrued expense and deferred income payments more than offset lower net income compared to the same quarter last year. The company's strong cash flow and liquidity position provide a platform to advance our capital allocation priorities. First, we will continue to invest in growth through the disciplined use of capital to facilitate new business wins and invest to drive results in existing client accounts. Second, we will continue to be opportunistic with targeted and accretive tuck-in acquisitions. Third, we will look to de-lever. As previously announced, we repaid $680 million on our U.S. revolving credit facility in October. Later in the quarter, we were paid an additional $416 million on our U.S. revolver and receivables facility. These proactive payments, totaling $1.1 billion, are expected to result in an interest expense savings of approximately $12 million over the remainder of the fiscal year. And lastly, we remain committed to returning value to shareholders through the Board's approval last week of our upcoming quarterly dividend of 11 cents per share payable on March 3rd for shareholders of record on February 17th. We continued to participate in the appropriate country-specific government-assisted programs, including benefits from the CARES Act in the U.S. Through these global programs, we received approximately 38 million of labor credits in the first quarter to offset the cost we incurred globally related to the retention of employees and for absorbing 100 percent of the benefit costs associated with furloughed employees. Under the CARES Act, specifically, we had deferred remittance of federal payroll taxes, as well as approximately $6 million of income tax benefits in the quarter related to NOL carryback modifications. We will continue to pursue opportunities to optimize the available stimulus programs as appropriate. Finally, I want to provide an update of our view for the remainder of the fiscal year. appreciating the pace and exact timing of recovery is evolving. We will continue to leverage our resilient variable cost operating model while investing in the business with a growth-oriented long-term mindset. Based on our current expectations, we anticipate organic revenue improvement over the course of the year with a modest improvement in business activity in the second quarter compared to the first quarter. An adjusted operating income drop-through rate of 18% to 22% in the second quarter as a result of improved operating efficiencies while continuing to invest in growth resources and preparing for client reopenings. AOI margins are expected to sharply improve in the second half of the fiscal year as we transition from managing a drop-through rate to driving margin progression. And free cash flow for fiscal 2021 raised to neutral to positive $200 million. dependent on the pace of recovery and timing of underlying revenue growth based on the delivery of strong cash flow management results in the first quarter. Thanks for your time this morning, and now I'll turn the call back over to John.

Thank you, Tom. I am immensely grateful for our exceptional teams around the globe who demonstrate an unwavering commitment to best serve our clients, employees, and communities, resulting in Aramark's latest inclusion in Fortune's most admired companies, as well as being named the best place to work for LGBTQ equality by the Human Rights Campaign. As we focus on our extraordinary future, we remain highly committed to executing transformative actions across the business to capitalize on Aramark's extensive growth opportunities. Our belief in the company's success has never been stronger. Thank you for your time, and operator, please open the call now for questions.

Thank you. We'll now begin the question and answer session. If you have a question, please press star then 1 on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset before pressing any numbers. In order to accommodate the participants in the question queue, please limit yourself to one question and one follow-up. Our first question comes from Ian Tafina with Oppenheimer.

Thank you very much. Good morning, everybody. Great to hear from you guys. The question would be on the free cash flow. You took it up. You took the range up. Just trying to understand what's driving that. You seem to be very confident, the quarterly dividend as well. What are you seeing that's giving you the confidence and maybe how you think about the business as COVID wanes? And then I'll follow up. Thanks. Thanks.

Sure, Tom and I can both address this. First of all, we are extraordinarily confident in our management team's ability to manage through the variations that affect the business due to COVID-19. We've been able to demonstrate very strong cash flow management results over the course of the last nine months. We believe our team is very well positioned to continue to do that. And generally, we believe that the business is improving quarter to quarter and will through the balance of the year. Tom, do you want to add some commentary?

Yeah, I think it's just that. I think we're getting more comfortable with the environment of how our clients and suppliers are working with us on receivables and payables and and certainly how our teams are managing the inventory if you just talk about core working capital management. So more and more comfortable as time goes on there, which gives us some confidence as well as the team's ability to manage CapEx.

Okay, great. And then can you guys just touch upon the bidding environment? What are you seeing there? you know, maybe versus last quarter and then also maybe year over year. And then also, you know, I know you guys have really been working hard on pitching to customers what Aramark is able to deliver, you know, almost like a new Aramark. Is that sort of resonating with customers right now? You know, and what are you sort of hearing from them as far as feedback about that, you know, what you guys have done as far as the changes? Thanks.

Yeah, wow. Okay, that's a good question. Well, first of all, yeah, we think that the messaging is resonating very well with clients and customers. You know, that Aramark's evolution in our recommitment to a hospitality culture and serving our clients and customers, you know, has been received very, very well. And from a cultural perspective, the people in this organization are extraordinarily committed to doing what's right for the business, you know, just are making – heroic efforts around the world to really serve their customers. And I think that's resulting in significant improvement in retention rates, and it's being demonstrated also in our ability to sell new business around the world and have strong results throughout the international sector. In the last quarter, in terms of new business growth, we're seeing strong results domestically. With respect to bidding activity, we are seeing very strong pipelines in the business. with significant additions across the enterprise, and we're also seeing significant self-op conversion opportunities begin to appear across a number of different businesses, some of which would not historically have looked at outsourcing as a way of serving their customers. So we see continued opportunity in the bidding sector. The business is, or in the bidding of the business, I would say that the companies in this industry have been very disciplined about the bid process. Obviously, we're all very focused on operating our individual businesses and cost containment and cost management, but we see significant opportunity for growth going forward, and that's why we continue to invest in growth resources across the enterprise.

All right, great. Thanks so much for the call.

Our next question comes from Richard Clark with Bernstein.

Hi. Good morning. Thanks for taking my question. Just a question. Tom, you hinted that from the second half, you're going to stop talking about drop-through rates and start talking about a margin recovery. What signals that sort of change in language, that change in mentality? And I'm sure you're aware that your European counterparts kind of dropped the drop-through language in this year. and have already turned to that kind of margin guidance profile. Anything we should think different about Aramark that they're still seeing some drop-through maths maybe compared to your European peers?

No, I don't think there's anything unique about it. I think we're just finding it a little easier to talk about the business and explain the business and manage the business to a drop-through rate as we're pre-lapping COVID with the declines. And as we flipped In the second half of the year, you know, it would be a growth measurement. And so I think it's just that natural evolution as you begin to lap the end of March that that nomenclature will change.

So maybe just as a follow-up to that then, can we assume that sort of from the second half, your margin recovery becomes a little bit less volume dependent or will you still be dependent on sort of volumes getting back for margin to come back?

I think it's a bit of both, but certainly the margins help in areas like uniforms where it's got a bit more of a fixed cost base, but certainly not completely dependent on the volume recovery.

Okay. That's very clear. Thank you.

The next question comes from Jafar Misrahi with Exane D&T Paribas.

Hi. Morning, everyone. It's Jafar from Exane. Two questions for me, please, if that's okay. Firstly, on this revenue to EBIT drop through, obviously 18%, 20% or 22%, they're all significantly better than anyone would have assumed a year ago. But if I can be picky, global competitors like Sodexo, I would calculate that they're actually talking about a drop through below 15% in their new guidance. And that 15% is a level you actually did acknowledge was theoretically achievable in the past. So my question is when you talk about investing in growth resources. Is this something you could quantify in dollar terms? And would it be fair to assume you're probably at a 15% drop through, but then you're making those investments into the business?

Yeah, I would say that that's probably a relatively, that's probably a good assumption. You know, I'm not going to specifically identify the dollars, the growth investments. They come across a range of different businesses, and for competitive reasons, I really don't want to disclose what I'm doing with respect to adding salespeople and sales resources. We've been very explicit about the number of people we've added in uniformed services. We added 150 last year. We're adding an additional 100 this year on the uniformed side, and that's making significant progress, and the sales productivity is ramping up pretty rapidly. On the food service side, we continue to add resources throughout a number of the lines of business, if you will. So we did guide early on that we believed if we were in a long-term cost-cutting environment, we could get drop-through down to the 15% range. But we've been very disciplined about doing what's right in terms of the long-term health of the business. We have not made a single cut to a growth part of the organization or the marketing organization. We've been very disciplined about cost containment and cost management at all levels of the company, but we're still focused on accelerating growth in the future. So I would say we're managing the business, we're controlling it very effectively, we're focused on the priorities that we have for the business, and there may be differences in terms of both mix and seasonality between us, Compass, and Expo that might drive some of that difference as well. But we think we're doing the right things for the business, and we're focused on our strategy, not theirs.

Super. Very clear. And actually, my follow-up would have been on that specific case of uniforms, actually. So that sales push is still happening. Is there a date – at which you stop and reflect and decide more clearly if the uniforms business can be significantly improved under your leadership with those investments or whether it's due for a more open-ended strategy review.

Yeah, well, that reflection has already taken place. I know that the business can significantly improve, you know, that we can improve both margins and growth rates in that business dramatically by taking the actions that we're taking and We see significant improvement as a result of the ABS implementation. We're transitioning the sales organization from one that was roughly one-third the size of Centos to one that has a significantly greater level of resources. So, yeah, we believe the business can strongly improve, is beginning to show that improvement. And so we're focused on that, on effectively changing that organization and making it as competitive and as profitable as we possibly can.

Super. Thank you very much.

Thank you. Our next question comes from Tony Kaplan of the Morgan family.

Just a question on debt pay down. Given it seems that you've weathered the storm pretty well to this point and cash flow is trending positive, can you talk about the decision to still have so much cash on the balance sheet? Just looking forward now, how are you thinking about the pacing and scale of pay down as the economy recovers?

Well, we're certainly looking at it. We were prudent back in April and will continue to be prudent. There's still uncertainty out there. We all know that. Certainly the vaccine is starting to roll, and there's other positive signs, you know, from a macro standpoint. But, you know, we've all seen things change fairly quickly, and we just don't want to get too far ahead of ourselves. So we're looking at it, you know, a couple of progress payments, so to speak, last quarter, and we'll continue to review that as we go.

Okay, that's helpful. And then within Uniform, can you talk about any success you've had integrating the ABS routing system and the financial benefits you're seeing when beginning to convert routes to this system? And then can you just remind us of the timeline of when this should be fully implemented and any long-term margin savings you think you can get from that?

Yeah, that's a great question. First of all, we are rapidly deploying ABS throughout the business. We anticipate that we'll have somewhere in the range of 75% of our revenues covered by the end of this fiscal year and that will finish deployment, you know, probably through the first quarter of next year. So that by January of 2022, we'll have the vast majority, if not all of the revenues to the company operating under ABS. We've undertaken this in a Obviously, a very difficult operating environment, but the team's done extraordinarily well. We've got multiple teams doing implementations across the enterprise. And as you are probably aware, there's certainly pre-work when we go ahead and do these conversions in our existing facilities. Plus, we're converting the former facilities that were operating on ABS to the new updated version. So there's multiple conversions taking place. In those locations where we've transitioned to ABS from our old route accounting system, the margin improvements are dramatic and the customer service improvements are dramatic. It allows us to spend much more time with our customers, to have 100% customer visitation schedules, to have our business in the field managing the business as opposed to having to manage the accounting aspects of it. So they are significant. and we're seeing progress across all of those operations. Those results that were demonstrated during the pilot, we're seeing those results replicated as we move through the organization, and we're very excited about the long-term margin enhancement potential of this conversion. And I think in the past we've talked about a couple hundred basis points of margin improvement that we can articulate from the impact of ABS.

Thank you. Our next question comes from Andrew Steinerman with J.P. Morgan.

Hi there. I wanted to talk about, Tom, your comment that you expect modest organic revenue growth improvement in the second quarter year-over-year fiscal quarter compared to the first quarter of the 36% decline. I just want to make sure that I'm understanding that point correctly. In particular, how are you thinking about those last two weeks of March of this quarter, which, you know, hits the Easy comps, in other words, are you saying maybe mid-30s revenue declines organically from now until five weeks from now and then growth in the last two weeks of the quarter? And if that is the way you're lining things up, could you just give us a sense of if volumes stay just where they are now, how might that year-over-year growth look like in those kind of last two weeks as we enter that kind of new period of easy comps?

Yeah, Andrew, it's really hard to dissect two weeks in March and tell you exactly what I think at this point in time, again, because things, you know, continue to be, you know, positive but, you know, subject to change. So, you know, we saw the first steps of modest improvement in January, primarily, as we said in our guidance, and primarily in the U.S., So we remain hopeful and we'll stay very diligent on our costs because, you know, a month doesn't necessarily make a trend, but we're confident based on January that the modest improvement will be there. And to your point, that's exactly how the mask is going to work, that we'll, you know, continue to show, we believe, some improvement the first sort of two-thirds of the quarter and then should show some growth right at the end.

Right. But could you just give me a sense of if volumes stayed the way they are now, the way they are now, not showing improvement, and just mathematically when we got to that kind of last two weeks of March period, what type of growth would we be entering?

You're just not prepared to give that level of granularity at this point.

Okay. Fair enough. Thank you very much.

The next question comes from James Ainley with Citi.

Yeah, good morning, good afternoon, everybody. I'm interested to hear what maybe some of your B&I clients are saying to you about their plans to get people back into the office. And I'm thinking more particularly about how clients are planning their future office locations, how they can configure the space. And you mentioned, I think you said munch mail. Can you expand maybe about how clients plan to use that and whether they're thinking maybe about hybrid models where you've got some people on-site, some people off-site, but they provide some kind of food service between those two groups.

Yeah, I would say companies are still wrestling with what their eventual office situations are going to look like, particularly the pure white-collar kinds of locations. And I would say that it's a range of, there's a range of viewpoints. We have many customers who are basically saying, we're coming back, we're committed to our space, we're committed to bringing our employees back together, and that's extraordinary and important for our culture. Therefore, that's what we're going to do. And we have some companies who are evaluating having return-to-work strategies that include some return to the office and some work from home. So it's just a very broad range. Hard to say that there's any trend yet in terms of what the impact might be for the business. But the good thing is our operating model and our service capabilities are so flexible, we can adapt to serve whatever the client wants us to do for them, whether that includes just an in-office environment or a combination of service capabilities to serve customers at home and in an office location. So We have been busy designing solutions to serve our customers' needs across that range of opportunities and have the flexibility to go ahead and do whatever they need us to do for them. So we'll adapt. I'm very confident of that. But we have such a large range of different kinds of customers that it really is, at this point, there's really no definitive solution. model, if you will. In the blue-collar sector, most of those companies are back to work and operating in location because they need to have employees on site in production capacities and the like. So the mixed environment, both white and blue-collar operations, most of those operations are returning to work. So it'll be a broad spectrum, I think, for several months. that evolves in business dining. That's the one business where we think we really have a much longer tailwind in terms of a longer recovery period, if you will, to get that business back to normal levels. But, you know, it's still too early to say how it will end up.

Thank you. Our next question comes from Manav Patnais with Barclays.

Hi, this is actually Greg on the line today. I was hoping to just talk about the food services Salesforce retention. I think you've talked about a couple of efforts around employee engagement and senior management retention and all of that. So just hoping for some more color on efforts around engagement and incentivization on the Salesforce side for food services. Thanks.

Sure. With respect to engagement, I think we have a terrific team of sales leaders. We have an organization now that is very much committed to the growth focus of the enterprise and incented on growth. So you have both the operating team as well as the sales team working very closely together to achieve the growth objectives of the company. So a very high level of engagement. We've redesigned incentive programs to address growth. the sales force. We've changed commission structures, enhanced commission structures in such a way to really allow them to earn very significant improvements in potential income. And, you know, so frankly, we're very, I think they're very excited about their prospect. And we've got a very good team. We're growing it. We're adding people throughout the business. We're adding resources to almost all the lines of business. And so I think that's exciting for our organization to really be focused on growth, be engaged. Our entire team has incentives for growth built into their incentive compensation for this year, including the senior management of this company. So it's singular focus and one that's got the entire company engaged, not just Salesforce.

Okay. And then I also wanted to quickly hit on delivery seemed on, you know, across almost all of the food services segments, delivery is a theme. Do you view that as sort of a transitory offering during this period, or do you think that becomes more of a permanent part of the strategy going forward? Thanks.

Yeah, I would say we're prepared to whatever evolves with respect to delivery, and whether that's on campus, whether that's in B&I locations, or whether it's patient at-home services, you know, we're prepared to go ahead and offer that service and have that capability designed and developed and ready to be implemented where necessary. So, you know, I think there are some parts of the business where it will become permanent, particularly inpatient delivery of meals. That inpatient at-home support is very important for the health of of patients when they return from a hospital setting, and that's an area that our hospital clients have really begun to focus on and find to be a very effective service offering. I think it will have some more permanent implications in BNI and we'll have solutions developed or we have solutions developed to go ahead and serve that need. and we'll continue to try to take advantage of that marketplace in both partnership ventures as well as direct offerings.

Thank you. Our next question comes from Shlomo Rosenbaum of Stiefel. Hi, good morning.

Thank you for taking my questions. Hey, John, I just want to talk a little bit on the uniforms business, and you might have touched on this in your comments or maybe Tom did earlier. the uniform's growth seemed to be kind of flat, maybe down a little bit more. I think it was like 8.6% decline last quarter, like 9.8% this quarter. Does that have to do with, like, the geographic impact? Like, was there more shutdowns in Canada or something like that? I'm just trying to kind of contrast that with some of the consistent growth I've seen, you know, with you beforehand and, you know, what I'm seeing in like with Cintas where they made more progress in the last quarter in terms of, you know, year-over-year improvements on a sequential basis. I don't know if there's a geographic difference over there.

Yeah, thanks for the question, Shlomo. There's really two differences. I think the geographic difference is one. Obviously, the restrictions in Canada have been very dramatic, so that's impacted the Canadian results much more. than the U.S. results. And so that is definitely a factor. Also, geographically for us, our concentration of business on the West Coast reacted pretty significantly in December to the shutdowns in California. And then the business mix across the enterprises, we have a little bit more of a hospitality focus, restaurant focus. And so the shutdowns that affected restaurant operators where they had to serve in limited capacity and then had to shut down during various time periods impacted us more significantly than it would have sent us and our other competitors. So I think it's primarily shutdown-related and geographic mix-related more than anything else. I think in our core business, you know, we're very comparable in when we disaggregate the business and look at all of our competitors, we think our year-over-year growth rates are very, very similar with the exception of those geographic differences and the mixed difference.

Okay, great. And then if you wouldn't mind just commenting a little bit more, you talked about it through the year in terms of companies that have been kind of self-service looking to more outsource. and the time period that it would take for that to kind of show up in the numbers. Are you seeing that kind of snowballing? In other words, are you seeing more activity as time goes on in terms of companies looking to outsource more? And if that is true, do you think that that could potentially overtake the headwinds that we're seeing kind of in the B&I sector where it's really taking a while for people to return to office, particularly in the white-collar jobs?

Yeah, that's a good question. And I think, yes, we are seeing an acceleration in that self-op conversion opportunity trend, if you will. And we are seeing some closures of new accounts included in that Sacramento State University, for example. It's a self-op conversion that we'll be taking over that was recently announced. There are lots more in the pipeline. I can't really identify them because from a competitive perspective, I don't want to give my competitors any information about things that I may be working on. But I would say generally the trend is accelerating, and there are opportunities being presented to us across a range of business types health care, universities, facilities, sports and entertainment conversions that are very significant.

Thank you. Our next question comes from Steven Graveling with Goldman Sachs.

Hi, thanks. Can you just remind us of where retention rates are? What is the ideal rate you'd be targeting and how the changes to incentives may also impact retention in addition to spur new contract wins?

Sure. Great question. First of all, retention is running, you know, at very high rates right now. And, you know, we see continued improvement across the enterprise in all the businesses we operate, including uniform service. We have higher retention than our historic standards. You know, we're targeting ultimately a corporate goal of 96%, 97%. I would say at this point we're operating at a level higher than that, but, of course, you know retention is a metric that only goes down. So today we're operating at very high levels of retention. We've had very good results across the business, and we're very excited about that. We did also include retention as the element of our incentive compensation programs for the operations team as well as sales retention specialists. So, yes, we're all very much focused on it. We're seeing significant improvement, and we expect to be able to deliver very good results in this, and we want to hit that long-term target of call it 96% to 97% of corporate retention on an annualized base.

That's helpful. And one quick clarification on the uniform segment. Based on your comments, is it fair to assume that excluding the headwind from some of the government restrictions in Canada, growth would have sequentially improved? And should we generally assume that you would have a step function improvement once these are lifted, or do you have to rebase and build off of that lower base because you lose some sales opportunities or demand permanently?

Yeah, you know, that's – I think you'll see an acceleration of growth once the restrictions are lifted. We saw that as restrictions were eased during the summertime. We were able to recapture significant revenues very quickly. I would say there are elements of the business that have permanently shut down. There are customers, restaurants, small businesses that have closed as a result of COVID that were our customers, and so there will be some decremental impact from that. I can't really tell you what that number is today, but we anticipate that we'll be able to sell our way through that. One of the reasons that we continue to be very bullish about this business is the productivity that our new account sales managers are delivering on both ancillary services like first aid and as well as for rental revenues. So we feel very good about our ability to overcome any of the closed business kinds of impacts that we may face or our competitors may face as a result of COVID-19. Thank you.

Our next question comes from Jay Hanna with Bank of America.

Hey, guys. This is Jay calling for Gary Bisbee today. Just going back to some of the prior questions with regard to increased flexibility and new offerings within particularly the B&I customers of yours, I mean, how do you expect costs to trend within a lot of those accounts as they begin to reopen and you start to see some of these new services and new demands from these customers?

You know, that's a great question. You know, I would say that, you know, our contract types essentially today are, allow us to pass along any of those increases in cost for providing those different kinds of services. And definitely the development of alternative service models and approaches will, as those get implemented and impacted on a more permanent basis, those will be baked into our contract structures. So I don't anticipate any margin implications for Aramark. You know, we may find that we actually have margin improvement potential as a result of some of these secondary offerings that we're adding to that core contract. So, you know, the cost will be variable, and we think we can manage through those to effectively deliver a service offering for our customers. Okay, great.

And then back to the uniform business, for the customers that have stayed open, have you seen any sort of sustained reduction in the actual number of uniform wearers on the customer sites, or have you seen that trend back positively, or any other insight there would be appreciated?

Yeah, you know, I haven't seen that level of granularity with respect to the data. I would tell you that based on it, if I look at base business versus base business, and extract the closed accounts, it looks to me like the weekly revenues are holding as they return, that the number of wearers is pretty consistent location to location, particularly when you look at the blue-collar operations. But, again, I haven't done that level of analytics in terms of the total business, so hard to really hazard a guess, if you will.

Thank you. Our next question comes from Hamza Mazari with Jack Rees.

Hi, this is Ryan Dunning filling in for Hamza. How much more room do you guys have to move toward management fee contracts from P&L? Is it only in particular verticals? What does that mix stand at today? What would make you revert back to P&L contracts in the future?

Yeah, I would tell you that it's different by vertical, obviously. In the P&I sector, those contracts are all management fee now, very few P&Ls left in that business. They were all renegotiated as part of our strategy with respect to responding to the changing needs for our customers during the original days of the pandemic. And they would revert to P&L when populations and facilities are back to more normalized levels and they can support a profit-loss operation. We're hopeful that we get to the point where we'll be converting them back from management fee to P&L at some point in the future. In terms of our other contract types or our other verticals, if you will, they have different contract structures. In higher education, those contracts have been We're operating under memos of understanding or letters of understanding with our university customers as they're impacted. But I think, you know, throughout the organization, you know, we're committed to doing what's right for our clients and our customers. We're committed to doing what's right for our shareholders. And so we'll manage through the contract change process in a very disciplined way to be able to meet everybody's needs in that respect. We've been able to do that historically. We responded very rapidly during the initial days of the pandemic to change contract structure, and I anticipate we'll be able to evolve and adapt as we come out of this and don't expect any significant long-term impact with respect to the overall margins of the company or the overall profitability of the company.

Got it. Thank you. And for my follow-up, how are you thinking about the sports business and anything you're hearing there now from implications from a successful vaccine rollout?

Yeah, I think right now you've got both the NHL and NBA working through crafting solutions for their arenas. And obviously this also is something that's impacted by local jurisdictions, both political and the the health environment and local jurisdictions driving some of that decision-making. You know, Major League Baseball for us is a significant contributor during the spring and summer months. At the present time, it looks like spring training is planned to start on time. It'll be roughly a one-month spring training and opening day somewhere around the 1st of April for teams, and those teams are working with their local jurisdictions and the league to go ahead and develop approaches. I think the fact that the NFL was able to have a complete season without any missed games with fans in attendance outdoors, in stadiums gives us a lot of encouragement that Major League Baseball will find a solution that also allows fans to be in stadiums and that as higher vaccination rates occur and incidence of infection and hospitalization rates drop, you'll see an acceleration of the opportunity for fans to be in sports venues. We anticipate that we'll have some recovery in the third and fourth quarter coming through Major League Baseball and sports and entertainment. And we're excited about those prospects, you know, to have fans back in ballparks.

Thank you. I'll now turn the call back over to Mr. Zillmer for closing remarks.

Again, thank you very much, everybody, for your time this morning. We're extraordinarily excited about the prospects. company and, frankly, just the resilience of this business and the efforts of, I think, the best management team in the industry and just an extraordinary bunch of people running this company day-to-day, people who really dedicated their lives to hospitality and serving customers. are doing a terrific job, and I just want to thank all of them for the work that they do. I'm so proud to be leading this organization and to be a part of a reborn Aramark. So thank you very much, everybody.

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