Aramark

Good morning, and welcome to Aramark's second quarter 2021 earnings results conference call. My name is Justin, and I will be your operator for today's call. At this time, I would like to inform you that this conference is being recorded for rebroadcast, and that all participants are in a listen-only mode. We will open the conference call for questions at the conclusion of the company's remark. I will now turn the call over to Felice Cazell, Vice President of Investor Relations and Corporate Affairs. Ms. Cazell, please proceed.

Thank you, and welcome to Aramark's second quarter fiscal 21 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 Undruff. 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. Good morning, everyone, and thank you for joining us today. The strategic actions we recently executed, combined with our financial results released this morning, reflect our ongoing commitment to drive the business to new heights of success. In a matter of weeks, we've announced an upsized revolving credit facility and debt refinancing, a proactive $500 million debt repayment, and an acquisition that creates an additional revenue channel in the rapidly growing senior living industry. This morning, I look forward to reviewing our second quarter performance and discussing the current state of the business as we advance strategies that align with our commitment to deliver value for stakeholders. The transformation occurring has resulted in newly awarded clients, including Northeast Georgia Hospital and a self-op conversion in the B&I sector with the addition of Corning Incorporated, a Fortune 500 company and leading innovator in material science. We also expanded our role at the University of Hartford, where we earned the facilities business, another self-op conversion. With the higher ed selling season underway, we're extremely pleased to be entering into new agreements with nine universities of the Pennsylvania State System of Higher Education, the largest provider of higher education in the Commonwealth. With these new agreements, we will be serving 11 state-owned colleges and universities within the state system. We're excited by these recent wins, and remain highly optimistic about the extensive pipeline of opportunities. Turning now to the second quarter, revenue was in line with our expectations articulated in last quarter's earnings call and subsequent disclosures, with organic revenue down 26% year over year, improving compared to the first quarter, and laughing when we began to experience a significant impact from COVID in the prior year. The team's unwavering efforts to thoughtfully reopen client sites throughout the organization led to sequential quarterly revenue improvement across all segments. As sales volumes in the business began to reemerge more meaningfully, we maintained extraordinary cost discipline, effectively managing the AOI drop-through rate to 15%, better than our outlook of 18 to 22%, and returning to positive operating margins. While we continued to invest in growth-oriented resources, AOI performance was driven by improved operating efficiencies. This disciplined approach contributed to strong free cash flow generation of nearly $260 million in the quarter, representing an improvement of over $150 million compared to the prior year. Cash availability totaled $2.6 billion at quarter end, providing the financial flexibility to execute the strategic actions I just articulated. such as enhancing our capital structure and pursuing opportunistic mergers and acquisitions. I'd now like to review the performance by business segment in the quarter. U.S. food and facilities reported solid sequential quarterly improvement with key drivers in each business sector. Education gained momentum as more students entered in-person learning environments compared to the fall. In higher education, we're enhancing the on-campus experience to offer university communities added stability, flexibility, connection, like-mindedness and innovation. Our unique approach to creating a hospitality ecosystem was recently highlighted in Food Management Magazine. In the K-12 sector, approximately 70% of school districts across the U.S. offered greater in-person or hybrid learning, with the USDA continuing its universal meal program just extended through June of 2022. Sports, leisure, and corrections improved modestly with the anticipated spring season just underway. In the second quarter, the NBA and NHL introduced fans at partial capacity based on local regulation. Leisure maintained steady performance with solid early attendance at national parks, and corrections reported year-over-year growth. In recent weeks, we've seen an encouraging opening in Major League Baseball, with our portfolio collectively operating at approximately one-third of attendance capacity at this time, and we expect increasing fan counts over the course of the season. We've implemented innovative technology, including self-ordering kiosks, mobile ordering, grab-and-go markets, just to name a few. In leisure, we're experiencing record reservation demand for the upcoming recreational season. In business and industry, additional client locations open throughout the quarter while companies adopt evolving return-to-work strategies. We are experiencing early signs of success in solutions that extend the traditional office setting, including munch mail, Our home delivery offering launched last quarter that has already experienced increased online ordering traffic with conversion rates doubling. Quick Eats, our award-winning walk-in, walk-out digital concept utilizing artificial intelligence, is another business offering that is strongly resonating with our clients and has applicability to other areas of the business. Facilities and other demonstrated success in selling more frequent and comprehensive services as clients remained heavily focused on safety and hygiene, particularly as locations began to increase in-person activity. We continue to anticipate particularly heightened demand in this business. Healthcare continued to report gradual improvement as visitor restrictions eased and elective procedures increased. The team has worked tirelessly to create unique automated patient care experiences from the time of admission through discharge that include customized post-care meal delivery options to best serve ongoing dietary needs. International demonstrated modest improvement quarter over quarter, balancing strong performance from healthcare in China and extractive services in Chile, with government-imposed restrictions in other geographies, particularly in Europe and Canada. The team continues to impressively pursue growth, now having won over $150 million in broad-based new business since the start of the fiscal year, while simultaneously delivering record retention rates. I'm also extraordinarily pleased to announce the addition of Chris Garside, a seasoned food service industry executive who many of you likely know. Chris joins us next week to lead our international growth strategies. Uniforms reported improvement quarter over quarter, while aggressively managing areas of the business that were affected by government-imposed restrictions particularly in Canada. We continue to focus on value-enhancing initiatives, including adjacency services expansion, which once again delivered double-digit growth in the quarter, strong productivity from investments in growth resources that have resulted in improved retention rates and improved closure rates, and ongoing progress in our ABS integration, with this capability-enhancing system on track to reach nearly 75% of revenues by year-end. With the remaining market centers shortly to follow, these efforts collectively contributed to record high customer satisfaction scores. In supply chain, we continue to optimize our spend pools and refine our relationships with the right suppliers to provide the best economics and access to innovative products. We are also focused on our commitments to diverse suppliers, local and regional suppliers, and sustainability are leveraged. In addition, our simplification efforts with field procurement technology and process optimization are making considerable progress. We launched our employee stock purchase plan to all eligible U.S. employees in early April with a goal of expanding globally. The program delivered very strong participation in its first enrollment period with over 85% of those enrolled set to become first-time Aramark shareholders. This initiative aligns our people, values, and performance while reinforcing an ownership mindset within the organization. Before turning the call over to Tom, I'd like to take a moment to review our recent agreement to acquire Next Level Hospitality announced two weeks ago. Next Level will strategically expand our presence in healthcare within the high-growth senior living industry, specializing in skilled nursing and rehabilitation facilities. This provides an opportunity to immediately participate in a largely unpenetrated, highly self-operated category with significant untapped potential to best serve this growing demographic. The business commands comparable margins to us driven by culinary innovation, quality service offerings, and client excellence. We know the team extremely well and are excited to work together in driving our combined capabilities and expertise. Lastly, I would like to share that Jeff Gilliam, who leads our healthcare division, will retire at the end of this calendar year. I want to thank Jeff for his many contributions to the company. I'm also pleased to welcome Bart Carriker as our president and CEO for healthcare. Bart is a healthcare veteran with over 20 years of industry experience. Throughout his career, Bart has played an instrumental role in driving significant growth, improving closure rates, and building a culture focused on growth. We look forward to Bart's meaningful contributions. And Tom will now provide a detailed financial review of the business.

Thanks, and good morning, everyone. As John mentioned, during the quarter, and specifically over the past few weeks, we continue to execute strategies that strengthen the business, whether it's bringing in new talent, acquiring new businesses, driving operating efficiencies, or repaying debt. We're committed to positioning the company for profitable growth, providing exceptional service to our clients and customers. While our performance remained affected by COVID-19, revenue in the quarter reached over 70% of fiscal 19 levels. Increased business activity throughout the portfolio and strong client retention rates contributed to improved revenue performance across all segments. U.S. food and facilities reported an organic revenue decline of 31% in the quarter, compared to a 45% decline in the first quarter, with all sectors contributing to the improvement. A solid quarter-over-quarter result, even as we begin to overlap the effect of COVID, that, as a reminder, started towards the end of the second quarter last year. Progress was led by the education sector, which benefited from greater in-person learning and the heightened demand in facilities and other from higher frequency of services, as well as increased project-oriented activity. International organic revenue was down 26% compared to the prior year, reflecting a modest improvement from the previous quarter. The team continues to tactically navigate government-imposed restrictions, particularly in Europe and Canada, while simultaneously driving growth initiatives. We're extremely excited about the addition of Chris Garside, as John mentioned, whose extensive background in the industry will further complement the strong and experienced international team. Organic revenue in uniforms decreased 9% versus the prior year, a slight improvement over the first quarter. Early signs of accelerated client reopenings from areas of the business that have been heavily impacted by COVID-19, as well as continued growth in revenues from adjacency services, were offset by continued lockdowns in Canada and U.S. West Coast operations. Adjusted operating income was $30 million in the quarter, increased sales volume, combined with unit operating efficiencies and above-unit cost discipline, led to a positive adjusted operating margin of 1.1% and an AOI drop-through of 15% of the corresponding revenue decline. Bottom-line performance was better than the previously articulated expectation of an 18% to 22% drop-through for the quarter and included continued investment in growth resources and the ABS route system rollout in the uniform segment. Corporate expenses increased year over year, primarily due to higher personnel and benefit costs, including the impact of equity-based compensation awards made late last fiscal year, expense related to the rollout of the new employee stock purchase plan, 401k company match costs, and bonus accrual compared to the same quarter last year. Adjusted EPS was a loss of 24 cents. Due to our proactive $1.1 billion debt repayment of our U.S. revolver and receivables facility, interest expense in the second quarter was $4 million less than in the first quarter. On a gap basis, Aramark reported revenue of $2.8 billion, operating income of $5 million, and a diluted loss per share of $0.30. Now let me turn to cash flow. Through positive operating income performance, as well as effective management of working capital and capital expenditures, the company generated $259 million in free cash flow during the quarter, reflecting $151 million improvement compared to the prior year period. Note that the quarter included a $94 million federal income tax refund due to NOL carrybacks in fiscal 2020 associated with the CARES Act. Smaller accrued expenses within the S&E business and lower deferred income payments within higher ed also contributed to the favorable year-over-year free cash flow result. In addition, we continue to participate in the appropriate country-specific government assistance programs, including benefits from the CARES Act in the U.S. Through these global programs, we received approximately 42 million of labor credits in the second quarter to offset the costs we incurred globally related to the retention of employees and for absorbing 100% of the benefit costs associated with furloughed employees. We will continue to pursue opportunities to optimize the available stimulus programs as appropriate. Strong pre-cash flow performance resulted in cash availability of $2.6 billion at quarter end. Consequently, we made strategic use of capital to advance our priorities that included debt repayment as well as refinancing to extend maturities and executing an upsized revolver. Collectively, the actions taken on capital structure will reduce net annual interest expense by over 14 million, of which approximately 4 million of that savings will benefit the remainder of the year. Going forward, we will continue to look at additional deleveraging opportunities, but balance that with the disciplined use of capital investment to facilitate new business wins and drive results in existing client accounts, as well as pursue selective, accretive, M&A. On the topic of mergers and acquisitions, I want to share additional insight regarding our recent announcement of an agreement to acquire Next Level Hospitality. Founded less than five years ago, this business has quickly grown to over $160 million in annual revenues, highlighting the growth potential in the $16 billion highly underpenetrated senior living industry. New contracts require minimal startup costs and have a strong profitability ramp. Business has generated high single-digit operating margins and is focused on providing a premier culinary experience and high-quality environmental services. Next Level will continue to be run separately under its own brand, but we will leverage the full-scale of Aramark's resources where appropriate to help accelerate the business's growth. We expect Next Level to be accretive to Aramark's earnings by early fiscal 22, and the deal is expected to close later this quarter. subject to customary closing conditions and regulatory approval. We continued our commitment to return value to shareholders with the announcement this morning of our quarterly dividend of $0.11 per share, payable on June 9th to shareholders of record on May 26th. And finally, let me wrap up with an update of our view of the second half of the fiscal year, appreciating the pace and exact timing of recovery that is evolving. We're encouraged by the current momentum of the business and will continue to leverage our resilient variable cost operating model while maintaining a growth-oriented long-term mindset. Based on our current expectations, we anticipate continued organic revenue improvement over the course of the fiscal year, adjusted operating income margin of 4% to 4.5% in the second half of the fiscal year with incremental quarterly progression, free cash flow of neutral to $250 million for fiscal 2021, dependent on the timing of underlying revenue recovery, raised by $50 million on the top end of the range. This will include efficiently managing working capital and CapEx investments associated with reemerging business activity and the pipeline of the new opportunities we have in front of us. Thanks for your time this morning. Now I'll turn the call back over to John.

Thank you, Tom. Before taking questions, I want to reiterate that the actions we are currently undertaking not only position Aramark as a key enabler in the broader recovery, but also provide a strong platform to drive long-term sustainable growth and success. The immense opportunities that originally brought me back to the company are materializing, led by our vision to be the most admired employer and trusted hospitality partner a company that's rooted in service to do great things for our people, partners, communities, and planet. Thank you very much for your time this morning. Operator will now open the call for questions.

Thank you. We will now begin the question and answer session. If you have a question, please press star, then the one on your touchtone telephone. If you wish to remove yourself from the queue, please press the pound key or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. In order to accommodate participants in the question queue, please limit yourself to one question and one follow-up. And first online with a question is Kevin McVeigh from Credit Suisse. Your line is now open. Great.

Thanks so much, and congratulations on the results. I guess this would be for John or Tom. You know, obviously, really, really good results. know as i've always thought about our mark part of our really encouraging thesis was the potential to accelerate the organic growth um given some of the balance sheet actions obviously a couple with next level things like that how should we think about the potential to accelerate the organic growth and you know even coming out of covet it seems like clearly you're going to be a share gainer so any thoughts on you know accelerating organic growth, I guess, even within the context of kind of the two to four? How should we think about that longer term?

Well, I mean, we're, I think, Kevin, if I understand the question, We are trying to get ourselves in a position where we've got flexibility. We want to pursue organic growth and have the capital available to do that where it's needed. We want to be able to reinvest in our sales force and training and the number of people that we have out there. I think we're taking a balanced approach when we look at how our balance sheet is fixed. We'll supplement with, like we've done with Next Level, some opportunistic and strategic M&A. And so, again, provide that flexibility for us so that we don't miss opportunities that are in front of us.

Yeah, and I'll add that all the investments we've made over the last, even during COVID, over the last 12 to 18 months have been focused on organic growth. The additional sales resources in both the food service sector as well as the uniform sector, the additional leadership development activities, the leadership additions to the company have all been focused on creating a growth environment and really focusing on that as a key aspect of the company's value creation proposition. We see organic growth as the key to our future success. We're making those investments because we believe in it. And we're enjoying significant results as a result of that investment with key new wins that we've described over the course of the last year and significant opportunities with a very robust pipeline. You know, we're very encouraged by our organic growth on both the food service and the uniform side as well.

That's helpful. And then maybe a comment just on the dynamics of the facilities and other business across the other and markets? I guess just are you seeing more linkage between education, sports, leisure, business and industry, and then ultimately healthcare, you know, post-COVID, you know, again, more linkage across facilities from a cross-sell perspective and, you know, how should we think about that just relative to the uniform business as well?

Yeah, we are absolutely seeing higher levels of activity in the facilities services area across multiple segments with increased outsourcing taking place in B&I, higher ed, healthcare, and the like. So we are experiencing that. Very strong demand, as we mentioned in the script, for those services as companies come back and increasing in-person activity in those locations. So it is touching all the various business units And we're very encouraged by that activity. That particular business has performed very well during the pandemic throughout, and we expect it to continue to have very strong growth prospects going forward. Additionally, on the uniform side, we're seeing additional requirements for cleaning and sanitation services as well in the ancillary or adjacency services offerings that we bring to bear. And so we believe that that will continue to have an impact on the growth rate for AUS.

Thank you. And our next question comes from Richard Clark from Bernstein. Your line is now open.

Thanks for taking my questions, and congratulations on the good set of numbers today. Just as a starter here, just wondering, you're talking about incremental performance improvement through the rest of the year. Whether you could give a sense of how the quarter looked? maybe how April has looked and how you're looking into the early bit of May in terms of your organic growth and where maybe you're seeing that incremental improvement to this stage.

Well, the improvement is, as we said, fairly consistently across the board. We're pleased by that. Everybody is moving forward. You know, April continues the trend. We're just looking at those numbers literally as we speak. And, you know, we expect, we don't see anything different at the moment that would cause us to not continue to move forward in the manner that it's been going for the last couple of quarters. So we're encouraged by that. You know, looking further than that, Don't know yet. We're staying cautious and prepared for whichever way things move. We're certainly prepared to reopen at a pace if it accelerates. So we're encouraged by the trend at the moment and what we've seen in April. but still not quite ready to say that things are going to reopen at a fast pace yet.

Maybe just a follow-up and probably related to that. You've raised the top end of your free cash flow guidance, but kept the bottom the same as it was before, flat. Quite unusual, I guess, to widen a range with one more quarter of information. You know, are there scenarios, and maybe you can talk about what might drive you towards the lower end of that range, or are you expecting to sort of be trending towards more the higher end?

Yeah, that's a good question, and we did talk about that a bit, and I think in full transparency, there's a couple of scenarios that put us on each end. You know, the low end is really that scenario where things, you know, progress decently throughout the summer, and then there's a bit of a sharp reopening rate at the end of the year. So there would be a working capital outlay to really reopen the NFL stadiums coming back full, higher ed coming back full, and sort of that that push right there at the end of the fiscal that would create a work capital outflow to prep, but not have the benefit of the revenues and profitability in the year, so really just a timing issue. That's that scenario. The upper end of the scenario, which is our bias at this point, is a more linear and continued reopening, as we've seen over the last couple of quarters.

Richard, this is John. I would just add a couple of comments on the original part of your question as well, and that is that the pace of recovery, we are prepared to advance the ball regardless of what happens. I think we've been able to demonstrate over the course of the last year that the management team can quickly respond to a changing environment. And so if the pace of recovery accelerates, we'll be well positioned to take advantage of that. It really will be driven by our clients' interactions and decision-making with respect to how fast they bring back employees or associates. And it'll also be driven by rates of vaccination and rates of improvement in the sports and entertainment sector. So we're well positioned. We see, as many do, we see some light at the end of the tunnel. A little bit early yet to make the call in terms of how that will unfold over the course of the next few months, but we're excited by the opportunity in front of us.

Thank you. And our next question comes from Ian Zappino from Oppenheimer. Your line is now open.

Hi, great. Thank you very much. Very good quarter, very good performance. You know, wanted to just maybe spend some time on higher ed. You know, I know you had a big win there. Just walk us through that, you know, how competitive was it? You know, what was your, you know, your competitive advantage, you know, in that win? And I believe you've been hiring a bunch in higher ed and education. So is that sort of one of the fruits of the move there? Or how should we be thinking about that? Thanks.

You know, we are certainly encouraged by our selling season in higher education. I think our operating team is doing a great job. And the sales team doing an extraordinary job of building on the pipeline and the opportunities that are coming to the market. You know, that particular win, I think, All of the business success that we typically enjoy across the range of businesses is because we have developed a proposal and a customized solution that fits the needs of that particular customer. And so in the case of the patchy win, I think our team demonstrated to the Pennsylvania system that we understood their needs very effectively. that we've had a strong partnership in the past in some of the universities that we had already served. And so the result of that, both very good performance as well as, I think, an extraordinary proposal resulted in their selecting Aramark for that win. So we're always focused on the quality of the solution, the customization, and the solution set that best fits that customer's needs. And that's what typically drives our wins. not only in higher education, but across our various businesses. And so, yes, we are out there in the market. We strongly believe that we're going to have a very strong selling season and a very strong fall as businesses continue to reopen and higher education reopens fully. And so we are out there hiring people very, very rapidly.

Okay, great. And then a question for Tom. How should we be thinking about inflation, labor, you know, labor availability or shortages, and maybe what you're seeing there? Thanks.

Yeah, you know, it certainly is top of mind right now for all of us. On the food side, as you know, the model is such that we're able to flex menus and move through certain inflation issues on certain products. So we'll leave that to the units and to our supply chain to get opportunity buys and really create menus that help mitigate that for us and for our clients. Contractually, in many cases, we're able to pass that on, particularly in this environment, more of a cost-plus based environment. Same thing on labor. Probably a little bit more of a pressure, but as I've said before, it's the one certainty in my 20-plus years in the industry is there's labor inflation, labor pressure, so it's not anything we haven't dealt with. But we do see opportunities to mitigate those costs. but also we'll feel the labor pressures over the next couple of quarters as things settle down. But, you know, we'll manage through that both in the way we schedule, the way we hire, the way we reopen, and then, again, ultimately through contractual rights.

Thank you. And our next question comes from Jafar Mastari from Exane.

bnp your line is now open hi morning everyone thank you for the h2 margin guidance that's helpful it looks like you're going to deliver h2 margins in line with what global peers expect to do maybe even a bit ahead that so i just wanted to maybe go back to q1 and q2 where i think it's fair to say you were behind peers in terms of operating margins. Let's call your margin Brodie Breakeven. You said previously that you could have been higher, but you chose to invest in the business. So I'm curious if you're now able to quantify the investments you made into the business over the last six months in dollar terms and help us understand how you're thinking about the ROI on those investments, things like the ROI route accounting system, the new sales team members in both divisions, et cetera. How much was it in total, and how does it eventually all pay for itself?

Yeah, that's a level of granularity of probably not – wanted to go into, but certainly the cause and effect is, as you've mentioned, and we've been very resolved through the past year to continue on with the investment, as John mentioned, primarily with sales, both in uniforms and food facilities. We're building that capability as we go a little further along in uniforms, started a little earlier. and then in certain productivity areas like the ABS investment. We'll reap the benefits of that over certainly the quarter we are and will continue to, of course, for the next couple of years and beyond. So we feel very comfortable with the return on investment that we'll get from it. And, you know, again, are very committed to it. Both John and I have seen the model work and, you know, are confident that we can deliver it here, too.

Yeah, I would just add, you know, we've been very consistent in terms of our discussion with respect to these investments that we've made over a period of time, you know, beginning even last year with the You know, the additional salespeople added in food and support services, and we continue to make strategic investments in terms of adding additional salespeople, additional sales resources and capabilities. And, you know, so we're taking a very disciplined approach. I think you're beginning to see, as you saw in this quarter, you're beginning to see that the improvement in We're seeing record retention rates across the enterprise, not only in food, but also in uniformed services. Those are a direct result of the investments in those areas. And so I think the long-term payback for those investments is quickly becoming evident. And we're continuing to be disciplined from a cost management perspective, but we're focused on the long-term growth of this enterprise as being the real driver of long-term shareholder value creation. And so we're disciplined but focused and will continue to be.

Thank you. And I guess as a follow-up, you're seeing the results of those investments on the new business side, and you've mentioned a few of those wins. But just for the sake of transparency, could you talk about any contract losses that we need to be aware of? I see that Compass will be operating Central Michigan University from June. So that's one. It's not a huge one, but that's one that's going away. So maybe just the other side of the net new business picture.

Well, I would tell you that we're not going to talk about specific losses, although you mentioned one that's obviously one that we're Not happy about losing, but that does happen in our business as it does for our competitors. Some of our recent wins have come from them as well. But I will tell you that we are enjoying record high retention rates across the enterprise in food and support services as well as in uniform services. So I think the net new numbers will bear that out as we close the year. You know, we're obviously in the midst of the selling season, so hard to say what the actual number will be at year end, but we're very encouraged by the results year to date and where we're positioned and the wins we've been able to recognize so far. So we're very, very pleased with the net net result.

And thank you. And our next question comes from Steven Grambling from Goldman Sachs. Your line is now open.

Hey, thanks. On the senior living side, some of your peers have been in this segment for a while with some success. What are the competitive barriers to entry as you contemplated the acquisition versus perhaps building something yourself? And what are the biggest benefits Aramark brings to the transaction?

Well, you know, first of all, this is a very underpenetrated segment. It's obviously there's $16 billion worth of revenue potential in this sector. It's an area where we haven't participated for many years. We were not focused on that segment. And frankly, our larger competitors haven't really been focused on this segment either. They have relatively small positions in it as well. Next Level was very attractive because of the quality of the management team, the organization that they had been able to build in a very short period of time. and their focus on a high-end culinary solution in a segment that traditionally didn't have that as a solution. So they've been able to grow the business very, very rapidly by offering a great combination of management talent as well as culinary capability. And that's why we've selected to operate that brand independently. The next level management team will continue that growth focus. And we're excited about those prospects. Really, it's an area that we believe we can compete very aggressively in and grow very rapidly, and that it does have significant self-op conversion potential. And the business is much more oriented towards systems kinds of sales now than it has been historically. Instead of one-off facility sales, there are system sales with large, chunky opportunities. That's what attracted us not only to the sector but to Next Level as a company, mostly the quality of the management team and the significant growth potential that's there in that segment.

I think I'd add in terms of what Eric Mark brings to the table and why I think it was exciting for both Next Level and ourselves is besides the obvious, you know, benefit as they continue to grow. You get to that point in time where you're going to have to add a lot of administrative support. Rather than having to do that, they can leverage our base. We bring procurement opportunities for them, of course. So those are the two basic sort of blocking and tackling benefits. But I think there's also a culinary innovation and level of resource that we bring that we can add to what they've already brought to the industry. And then facility technology. We've got a very advanced group and an advanced set of technologies in our cleaning and environmental services, and we'll pair that up with theirs and hopefully make both better and advance those. I think there's some good but overlap, even though they'll be run under their own brand, you know, we'll, again, very thoughtfully put together the businesses in the right ways at the right timing.

Fair enough. And then maybe a follow-up for you, Tom. You gave a number of items in the quarter and year-to-date on free cash flow that were impacting the numbers that were reported. As you've raised the top end of the expected range for the year, how much of that is incremental confidence in the business versus upside in the quarter from some of the factors that you cited?

It's a bit of both. So certainly some of the factors I mentioned have helped to the upside. But I think the business is also operating well. very effectively and efficiently, and just core working capital, receivables, payables, inventory, which has lifted some confidence in our range as we've moved through the first half of the year.

Thank you. And our next question comes from Andrew Steinerman from J.P. Morgan. Your line is now open.

Hi. I just wanted to talk a little bit about the operating efficiencies that you've invested against. Those are things like the supply chain enhancement, the systems upgrades, and other operating efficiencies. I was wondering if you'd be willing to quantify what level of revenue Aramark has to reachieve to return to the pre-COVID operating margins Aramark had at the time.

I've said less, and I'll stand by that. How much less... not quite ready to put a number on it, but certainly less. We'll get to our pre-COVID margin before we get back to the $16 billion-ish revenue level.

And maybe, Emma, just one more comment. Obviously, the system upgrade, which is within the uniform business, when you get back to prior peak revenues on uniform, where do you feel like the margin trajectory is going for uniform?

Yeah, good morning, Andrew. I think we've consistently talked about significant margin improvement as a result of the ABS implementation. And we expect that as we complete that implementation, that the margin trajectory will be significantly improved. We've talked in the past about a couple hundred basis points of margin improvement as a result of that implementation coming from a variety of areas. We don't see anything during this rollout that leads us to change that, you know, to lower that expectation. So, you know, we believe that we'll have very strong margin improvement as a result of both the ABS implementation as well as the secondary benefits that come from that by improving retention rates and improving closure rates on new account wins.

And thank you. And our next question comes from James Ainley from Citi. Your line is now open.

Yeah, good morning, everybody. I just wanted to pick up on the comments that you made earlier about very high levels of retention, please. It feels a bit that the industry has seen some stalling of processes over the last year. and that's helped support retention. Are you now seeing evidence that those processes are being kind of kick-started, and hence why you're starting to see some more new wins coming through? And is that the kind of driver of those new wins from here? Thanks.

Yeah, I would say the level of new account activity is back to a pretty much normal pace. You know, the companies that had deferred decisions have gone back into the the mode of going ahead and going through bid processes, but we've enjoyed very strong proactive retention efforts throughout our business. We're seeing a lot of proactive renewals of contracts in the organization. I would say it's a combination of two things. Improved retention has come as as well as the recognition of many organizations of the quality of the job that Aramark had done during both pre and during the pandemic. So, you know, I think that's driving retention more than anything else. But we are seeing, you know, increased activity across the various business units. In terms of bid processes, the pipeline is very active across all segments, both domestically as well as internationally.

Okay, thank you. And maybe as a follow-up, could I ask you for maybe some similar color on the M&A pipeline? I think there was some thoughts that early on in the pandemic, there may be some opportunities to pick up distressed operators. Are you seeing that or is that kind of faded? And how competitive are the bidding processes in M&A transactions?

You know, I would say that early on there were a couple of opportunities to look at companies that were, rather than use the term distressed, I would say look at companies that were, you know, that were looking for strategic partners. And, you know, we passed on several of those opportunities because it wasn't a good business fit. It wasn't a strategic extension of capabilities for us. And in some cases, those companies had what I would characterize as low margin profiles in certain sectors. So we did look at some opportunities. I would say that that has been relatively quiet. The kinds of opportunities we're looking for are really strategic extensions into markets that represent both new opportunities from a self-op conversion perspective, as well as kind of capability and service extension opportunities in our core business. So we do have a very active pipeline of opportunities that we're always considering, but we will be very disciplined. M&A is not our primary growth strategy, organic growth is our primary strategy. So we'll be opportunistic, but we'll also be very selective in terms of those things that we pursue.

Thank you. And our next question comes from Manav Patnayak from Barclays. Your line is now open.

Thank you. I was just hoping, you know, the 4% to 4.5% AOI margin you have, you know, what kind of drop through have you baked into that number?

Now that we're coming into the other side of COVID, we're obviously moving away from that as a benchmark or a metric on the upside. So I haven't really looked at it from that angle. We're looking at margin now back to sort of the traditional healthy upside way to look at the business.

Okay, fine. And then, you know, just on the free cash flow, I apologize if I missed this, but, you know, how much was the CARES Act kind of tax benefit either this quarter or what's baked into the year? And, you know, if you should think about that kind of rolling off the following year or how we should, you know, try and do that.

Yeah, so the CARES Act, we've got two major things going on. One is the reimbursement of carried costs for furloughed employees and government reimbursements internationally. Those are offsetting, so they're not a help or a hurt this year. They're just there to offset carried costs so there won't be a detriment next year. The NOL carry forward, the refund that we received for that through the CARES Act, you know, was it cash flow benefit this quarter and this year, which we will not have next year, which is one of the reasons we do want to call that out.

Thank you. And our next question comes from Slow Mo Rosenbaum from Stiefel. Your line is now open.

Hi, good morning. Thank you for taking my questions. My first question has to do with kind of the new wins and the prospects in the coming quarters. John, you talked in the past about some of the, you know, no programmers becoming programmers. And can you talk a little bit about what we should expect over the summer? Because we're coming into a pretty big sales season, particularly in higher ed. Should we see a lot more of that kind of coming through and really validating and illustrating that the pandemic net is going to be a benefit for the industry and Aramark in particular?

Yeah, I would say we are seeing significant self-op conversions in multiple business segments, both in facilities, in B&I, in higher ed. There are, you know, we're seeing that. And we've got some, we're working on some opportunities today that are very non-traditional in nature, which I really can't disclose because of the strategic value of those opportunities. I would say yes. We do see an increasing trend towards outsourcing. We do see that evidenced in both of our wins so far this year. Corning, for example, one of the last really big self-op B&I opportunities was a great win for the B&I team. And again, on the facility side. So yes, as the short answer, we are seeing more... self-op conversion and we expect it to continue.

Okay. And then can you talk a little bit about what you're hearing from the higher education clients of yours in terms of their plans for reopening in the fall? What are they looking at right now? What kind of visibility are they expecting? How much more in-person are you really expecting to see any material hybrid? How should we think about that?

Yeah, I would say we are anticipating a very robust fall season with virtually all universities being in-person, on-site. The discussions have been very pointed with respect to their intentions. I would say that You know, you never know. Things could evolve over the course of the summer. But if we continue to see the current trajectory of improvement in vaccination rates, in lowering of infection rates, et cetera, I think you'll see a very robust higher education season and, frankly, a back-to-school environment in the K-12 sector as well. So all of our conversations lead us to believe that that will likely be the case. And in some institutions, they're actually projecting housing shortages based on very high student demand for in-person opportunities. So I would say we expect a full higher ed season come fall.

Thank you. And our next question comes from Tony Kaplan from Morgan Stanley. Your line is now open.

Thank you. I was hoping you could give a little bit more color on what's going on with Uniform. Your growth was pretty similar to the last two quarters, and meanwhile, some of the public competitors have been improving. You mentioned the government-imposed restrictions in Canada, but just help us understand if you think that you're losing share or if that's not the case and whether you think it'll improve through the year.

Yeah, no, I would say we're definitely not losing share. In fact, I would say based on the level of new closures and the very high retention rates that we are maintaining or improving share in large part. I think there are two phenomena that are occurring that cause that variation, one of which is the geographic presence in Canada in our Our orientation in terms of the West Coast, as you know, the restrictions in California have been very strict. And so that business has been slower to respond. So I think our geographic orientation has been part of the issue in terms of the comp, as well as our focus on hospitality and linen in the hospitality sector. both domestically and in Canada. So those two issues really account for the vast majority of the difference. And as we see the business, as we see restrictions ease, we can see the rate of sales and the rate of average weekly rental volumes tick up almost instantaneously. So as the state of California normalizes, we'll see significant improvement there. And Canada is the same way. It's been very restrictive in Canada, so our business operations there are working very, very hard just to maintain the level of service and the sales that they have. So I would say those are the two reasons. And we do a very deep dive operating review in the business literally every month. And as we walk through the data, as we look through the data, those are the two areas that are evident to us.

That's really helpful. And earlier in the call, you mentioned that the Quick Eats program was resonating with clients and that there were some aspects applicable to other areas of the business. I was hoping you could just expand on what those might be, what opportunities you could get from that. Thank you.

Yeah, really, Quick Eats is a hybrid, artificially intelligent concept where you literally walk in the room and you select products off the shelf and you walk out and you're billed automatically to your credit card. So it's a contactless environment. Many employers look at that as being a very significant addition to their potential convenience store strategy, and that has applicability across all of our business units. It's one that is pretty exciting. It was award-winning last year, and we are very excited about the implementation of that concept. And it really is a touchless solution that people really respond very positively to.

Thank you. And our next question comes from Hamza Mazzari from Jefferies. Your line is now open.

Hi, this is Mario Portolacci filling in for Hamza. I'm sorry if I missed this earlier on the call, but could you just talk about your mix of cost plus versus P&L contracts and what that looks like today? And then maybe even going forward, should we expect that mix to stay pretty consistent? And then I guess just for reference, just remind us of how that's changed versus pre-COVID.

Yeah, if you think back to our previous discussions, the mix of cost plus contracts changed dramatically as a result of the implementation, particularly in the B&I sector, to that type of contract. And we haven't seen a significant shift back towards P&L. We do anticipate that as companies come back, and have their employees back in operations, that we will transition those contracts over time. But today, I would say there hasn't really been a significant shift. We're still operating at very high levels of management fee agreements or cost plus agreements in the B&I sector. In the other businesses, higher education, we've transitioned back to our normal agreements under most circumstances. So it's really more of a B&I phenomenon than anything else. And that will take time to convert as employees come back into their work environments.

Great, thanks, and then my follow-up is on just a turnaround. You talked about the investments being made over the past few months and years, and I know you're not quantifying the exact amount that you're investing, but maybe you can just give us a sense for what inning you're in, in that US core FSS business, and then maybe how much you think COVID has masked the work that you've been doing underneath the hood, and then are there any milestones that we should expect at least over the next year or two in that turnaround?

Yeah, I would say, well, certainly COVID has masked the impact of the work that's been done. We continue to invest in people and in resources in order to accelerate the organic growth rate across all the businesses. And so each of the business units has developed a three-year plan with respect to growth expectations. They're working through those three-year plans There's phased investment in each of the years, and we're working very aggressively to go ahead and achieve those individualized plans that the business units have put together. So we won't quantify the dollar amount, but I would tell you it is a significant investment on the part of the company. You'll see it in the earnings over the course of time as we continue to grow the business. and accelerate the growth rate. And the returns, every time we add resources, we have a high expectation for those to return profitability and to improve the ROIC in the businesses. So it's a disciplined approach. It's a measured approach. It's a multi-year approach. And we're very happy with what we've been able to achieve so far. And it will become more and more evident as as COVID recedes and you see the new account wins and the retention rates continue to rise. Thank you.

Just to add in to a lot of part of your question is the lift was heavier in uniforms in terms of what needed to be invested in, both the growth and productivity initiatives. So we're probably fifth, sixth inning there. We did start earlier on the food and facility side, primarily focused on the growth investments, probably third inning, fourth inning. I mean, we're making good progress, but we've got a ways to go. And, you know, we're excited about that and the benefits to follow.

Thank you. And our next question comes from Stuart Gordon from Barenburg. Your line is now open.

Yeah. Good morning. Just going back to the margin guidance, and I appreciate the comments that you're moving more towards thinking about the absolute margin, but if we just look at where consensus sits in revenues for the second half of it, $6.4 billion, it's going to imply a drop through to get that margin of between 6% and 9%, which is a pretty meaningful step change there. Given that it's already pretty strong at 15%, it's either that or you're beginning to see a reason to believe that the recovery comes much, much faster than is currently anticipated by the market. So just wondering if you could give us some color in that and whether there's any other moving parts in the second half that's going to make that drop through look so much better to give you the 4% to 4.5% margin tax.

Yeah, Stuart, like I said, I haven't spent a lot of time and I'm happy to be getting off drop-through rate as a metric, given that we're back into positive territory. So I've been looking, as I said, more at the absolute margin. You know, we feel comfortable with the four to four and a half. Again, you know, slightly revenue dependent, but as we talked about before, as long as we continue to progress, at the rate we have seen over the last two or three quarters. Again, April is in line with that expectation. We feel good about hitting that range. We don't need, we don't expect to need an accelerated recovery in the second half of the year to achieve it. So I think that's probably the best color I can give you at the moment. You know, it's not – that margin range isn't dependent on anything different than we've seen over the past few quarters from the top one.

Thank you. And our last question comes from Gary Bisbee from Bank of America. Your line is now open.

Hey, guys. Good morning. You know, a lot of comments and optimism around new business trends, and I realize the selling season is still ongoing. But if we just take a step back and look at the last year – of wins, of which there have been many you've called out, how does this compare to at least selling season to date to a pre-pandemic year? Are you ahead? Is it in line? And is that a win given the environment? Or just how would you think about that? And then the second part of the question, given the success with the self-op conversions, is there any risk that The whole industry, which is talking about that being a very positive trend today, is sort of pulling forward some of the future demand potential, you know, as a difficult environment, let more than the normal level of people to make that decision. Any thoughts on either would be helpful. Thank you.

It's interesting the way you phrase the question because it's, very accurate it's probably in line that the new business is probably in line with past years which is a win in the environment because as John referred to you know a lot of processes have been paused for the last year or so so that's sort of a win in and of itself and a testament to the teams we have in place and the growth culture that you know John's reinstituted here over the last 18 months and So we think we then leverage off that as the RFP processes get back more to our normal cadence.

Yeah. Yeah, it's hard to say how much of this business is pulled forward. There's certainly a heightened level of activity from a self-op conversion perspective and many companies who never considered it evaluating it as a possibility. But I would say the market has The market is so big and there are so many opportunities, I don't really see it as a detriment to future years in terms of opportunity. It might change the percentage of where the business comes from in any given year, but I would tell you that there are plenty of pipeline opportunities that are not self-op, that are really customers who are already outsourced looking to improve the quality of their services from other providers. So I don't know that pulling it forward is something that I would be concerned about.

And we talked about this before, Gary, that we don't see in prior nothing comparable to what we've seen last year, but in other instances, whether it was 08-09 or 9-11, SARS, all that before, there was always a little uptick. in the move to outsourcing out of those. And we're seeing that start to play out here, where there's not some massive rush, it's just, it's an uptick as people look at it more. Because it's, again, a very emotional decision to go from self-op to outsource. And that still tends to hold people back and them getting comfortable with the whole process. So don't be under the impression that there's this mass rush to outsource. to outsourcing as we think and hoped and anticipated. It's a nice bump up, and that, again, is the big runway that we have in this industry. You know, it's a nice place to be, but it's not sacrificing long-term growth.

Thank you. I would now like to turn the call back over to Mr. Zilmer for closing remarks.

Again, thank you all for joining us this morning. Really appreciate the interest and the questions and look forward to the opportunity to chat further as the days unfold. As I said, we are very encouraged by the results of the quarter and I want to say thank you to all those Aramark associates around the world. Just last week we had our employee appreciation day and the senior leadership team took the opportunity to express our gratitude towards the entire organization. And so, again, I want to say thank you to all of the people of Aramark for your hard work and great effort and your love for this company. So thank you very much.

Thank you for participating.

This concludes today's conference call. You may now disconnect.