Aramark

Good morning and welcome to RMARC's third quarter 2021 earnings results conference call. My name is Paul and I'll 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 the 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 Solis Cassell, Vice President, Investor Relations and Corporate Affairs. Ms. Cassell, please proceed.

Thank you, and welcome to Aramark's third 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 US GAAP can be found in this morning's press release, as well as on our website. With that, I will turn the call over to John.

Thanks, Felice, and thanks to all of you for joining us today. This morning, I'll provide a strategic review of the business, as well as highlight the significant opportunities ahead that we believe will contribute to Aramark's strong and profitable growth trajectory. In the third quarter, revenues improved as the quarter progressed, led by an accelerated pace of client reopenings in the United States, particularly within our sports and entertainment and leisure portfolios. This upward momentum continues largely due to our team's dedication to serving clients and focusing on our growth agenda. Our ongoing commitment to be a trusted partner has led to significant new year-to-date business and high levels of client retention that exceed 96%. The selling season in higher education just finished, and we achieved a record number of new account wins driven by historically high closure rates. a testament to our investment in leadership, sales resources, and training. In the past few months alone, we've added numerous higher ed institutions to the client portfolio, including the University of South Carolina Beaufort and St. Peter's University. And we are in the process of finalizing additional contracts that are preparing to begin operations for the fall semester. We are also extremely proud to announce we've added five historically black college and university clients this year, including North Carolina Central University and Elizabeth City State University. We continue to expand and extend our current partnerships and are pleased to announce that we have finalized a 10 year contract with the University of North Carolina at Chapel Hill extending a 20 year partnership. Beyond higher education, new business wins occurred throughout the organization, including our B&I sector, adding Walmart's headquarters, and our sports and entertainment business, gaining the athletics programs for the University of Arizona and Virginia Tech, just to name a few. And in K-12, we now provide food service to the Fort Worth Independent School District, a significant self-hawk conversion. We are seeing greater first-time outsourcing activity with nearly half of our wins in the U.S. segment coming from self-op conversions this fiscal year, up from historical levels of approximately one-third. In our international segment, we proceeded to win broad-based new business across all geographies that most recently includes the addition of the University of Toronto, Mississauga. We're pleased with our overall sale progress to date, and there are additional significant opportunities in our pipeline that we expect to close in the coming months, as well as into our new fiscal year. Turning now to Aramark's performance in the third quarter, organic revenue increased 34% year over year and reflected ongoing sequential quarterly improvement. AOI margins grew to 3.6% in the quarter, driven by cost discipline and scalable operating efficiencies. In reviewing the quarter by business segment, U.S. food and facilities drove an organic revenue increase of 52% year over year, resulting in solid sequential quarterly revenue improvement. Education began notably recovering before the final bell of the academic year. The team is aggressively preparing for the upcoming fall semester when we expect essentially all clients to return to in-person learning. K-12 continues to benefit from universal government-sponsored meal programs that are extended through June of 2022. In higher ed, we're providing additional meal flexibility, new offerings, and digital innovation. This includes the launch of Food Lab that features rotational menu concepts, unique product introductions, and seasonal events, in addition to premiering Restaurant Row in partnership with local restaurant entrepreneurs. Sports leisure and corrections demonstrated significant improvement, especially at the end of the quarter. The NBA steadily increased fan counts throughout the playoffs, and all of our Major League Baseball clients moved to full capacity by July 1st, aside from the Toronto Blue Jays, who just returned home last week, permitting partial fan attendance. Leisure kicked off the recreational season, that typically begins in late May, with strong visitor frequency following record reservation demand. Corrections has already returned to pre-COVID levels. The sector has experienced highly encouraging trends as many return to typical summer activities, attending baseball games, concerts, and the national parks. In the coming months, we are also gearing up for full capacity expected throughout our NFL portfolio. Business and industry experience an uptick in activity throughout the quarter as companies execute return to work strategies, we expect a greater proportion of clients to be in person post Labor Day. Many clients are offering food services as an added incentive to further attract employees back to the workplace that includes adopting subsidized pricing or offering complimentary meals. And we've recently implemented our artificial intelligence and touchless payment technologies in many of our client locations to create speed of service and compelling grab and go options. Facilities and other has outperformed pre-COVID levels driven by more frequent and comprehensive services. The facilities business had great success in vertical sales, extensively expanding its offerings to existing client locations. Healthcare steadily improved, largely reflecting increased retail activity as visitor restrictions eased. The business is expected to greatly benefit from heightened demand and elective procedures that had been delayed due to COVID. Our acquisition of Next Level Hospitality officially closed on June 4th and has already contributed over $23 million in revenue, which we believe is indicative of the growth opportunities for it ahead. International continues to effectively manage through various stages of geographic recovery as a team exhibits ongoing agility and responsiveness in addressing real-time client needs. Organic revenue increased 28% year-over-year, with areas such as China already surpassing pre-COVID levels, and Chile operating at high capacity driven by mining services given the very high demand for copper. From serving world leaders and delegations at the NATO summit in June to the athletes at the Olympic and Paralympic villages, it is a privilege to provide clients the support that they need. Uniforms continues to make progress in its strategies to optimize new sales resources, in addition to implementing the ABS rollout currently underway. Organic revenue increased 5% in the third quarter compared to last year, as most base volumes rebounded. We have seen a slower recovery in our hospitality business, approximately 20% of pre-COVID revenues, and the Canadian market where government-imposed restrictions were still in place throughout the quarter. Adjacency services, including first aid and restroom management, once again drove double-digit growth, and we continue to see a significant opportunity to expand these offerings. Retention rates have improved 300 basis points, and customer satisfaction scores increased to 10% higher than pre-COVID levels, a reflection of the transformative actions underway. In supply chain, our team has been effectively managing through market and category needs, working in close collaboration with our clients and supplier partners. This includes leveraging our significant purchasing scale and a broad bench of cross-channel partners. We're also deliberate in our menu design, given the inflationary environment, and apply flexibility on menu alternatives as appropriate. While it's not our preference, we are able contractually to pass on increases in supply chain pricing. Supply chain's overall focus remains to optimize spend, ensure availability of innovative products, honor our commitments around local and diverse suppliers, and stay true to our sustainability efforts. On the labor side, we're confident in our ability to appropriately navigate the current marketplace. We have a strong talent acquisition team and compelling programs in place designed to attract top-tier talent, including our newly instituted employee stock purchase program, all featured in our recently launched Aramark Careers website designed to create an optimal candidate experience. Aramark is consistently recognized as an employer of choice and highlighted as one of the world's most admired companies by Fortune. We've been successfully implementing strategies to mitigate labor costs led by discipline scheduling protocols and efficient resource management aligned with demand, as well as differentiation through innovative technology. We're also able to benefit from our scale by utilizing our full employee base and leveraging client locations in adjacent geographies. Lastly, I'm extremely proud of our Be Well, Do Well commitment that continues to make important strides to reduce inequity and improve the health of those across the globe. Through our Healthy for Life initiative, we were honored to have recently been recognized by the American Heart Association with a reward for meritorious achievement based on our efforts to promote better nutrition and lifestyle. We are also appreciative to just be named as one of the best companies for multicultural women by Sarah Mount, as well as one of the best places to work for disability inclusion, with a score of 100% on the Disability Equity Index for the fifth consecutive year, a reflection of our dedication to create equity and increase access to opportunities for our team. Before turning it over to Tom, I want to take a moment to thank our board member, Calvin Darden, for his many contributions to Aramark following his retirement announced a few weeks ago. Cal closely partnered with me to create our Executive Diversity Council that is focused on leveraging diversity, equity, and inclusion to elevate our culture, drive business outcomes, and advance positive social impact. We wish Cal the best. Now, Tom will provide a detailed financial review of the business.

Thanks, and good morning, everyone. Over the next few minutes, I will discuss our financial results in the quarter, as well as provide our outlook for the remainder of the year. As John mentioned, we are encouraged by the continued base revenue recovery in the quarter tied to improved levels of business activity throughout the portfolio, as well as increasing contributions from net new business. The accelerated pace of client reopenings, driven primarily by the sports and entertainment and leisure businesses, contributed to the organic revenue reaching 73% of pre-COVID levels, compared to just 55% during the third quarter last year. These improving trends have extended into the fourth quarter. New business winds continue to build within all segments, and the pipeline is robust as we approach the new fiscal year. With the education selling season just finishing, the K-12 and higher education businesses should deliver their highest level of annualized new business revenue since Aramark's IPO in 2013. And the uniform segment, fueled by the sales investments made over the past 18 months, along with our international segment, are on pace to approach record levels of new business revenue as well. We will provide annualized components of revenue growth and summary of wins detail on the year-end earnings call. Adjusted operating income was $106 million in the quarter, resulting in a constant currency AOI margin of 3.6%, up over 250 basis points from the second quarter. Higher profitability across all segments was driven by rebounding sales volumes combined with effective cost management, partially offset by ongoing investment in growth resources and inventory write-downs for certain PPE and uniforms. Corporate expenses increased primarily due to higher equity-based compensation associated with the company's incentive strategies to align the organization with shareholders. Adjusted EPS was $0.03 compared to a loss of $0.69 in the same period last year. This significant improvement was led by the profitability drivers just discussed, as well as a partial quarter interest expense benefit from the 500 million debt repayment completed in early June. In the third quarter, Aramark generated net cash provided by operating activities of 12 million and spent 101 million on capital expenditures, resulting in a use of 89 million in free cash flow, typical based on the historical cadence of the fiscal quarter. Net cash from operating activities benefited from increased operating income as well as strong working capital management. Capital expenditures continue to be managed with purpose to drive performance in existing accounts associated with client reopenings and support growing new business activity. Through nine months, the company has driven a $309 million year-over-year improvement in net cash provided by operating activities, combined with a favorable $15 million variance in capital expenditures to produce a $324 million improvement in free cash flow. This strong year-to-date result was led by improved operating income and effective working capital management, as well as the benefit of deferred payroll taxes and a $94 million federal tax refund that occurred in the second quarter related to the CARES Act. Note that we continue to participate in the appropriate country-specific government assistance programs from which we received approximately $130 million fiscal year-to-date in labor credits. These credits offset the costs we incurred globally related to the retention of employees and for absorbing 100% of the benefit costs associated with furloughed employees. As a result of our solid performance and free cash flow, we had over $1.9 billion in cash availability at quarter end, allowing us to advance our capital allocation priorities including our acquisition of Next Level and dividend payment in the quarter. We remain well positioned to evaluate additional deleveraging opportunities while balancing our disciplined use of capital investment to facilitate new business wins and drive results in existing client accounts, as well as pursue select accretive M&A. As previewed last earnings call, we took further actions this quarter that strengthened our balance sheet in addition to debt repayment, including refinanced $833 million of the 2024 Term Loan B credit facility to extend maturity to 2028, closed a three-year extension on substantially all of our revolving credit facility, as well as term loans A and C to 2026, reflecting approximately $400 million. upsized our revolving credit facility to $1.2 billion, increasing cash availability by over $200 million, and most recently, finalized an extension of our existing receivables facility by two years through June 2024 to provide additional financial flexibility. These refinancing actions, together with the $500 million debt repayment mentioned earlier, are expected to result in a quarterly interest expense savings of approximately $3 million going forward. I will now briefly review our gap results. Consolidated revenue was $3 billion, operating income was $74 million, and diluted earnings per share was $0.13. Results for diluted earnings per share included the benefit of a non-cash gain on an equity investment in the San Antonio Spurs of $138 million, partially offset by a non-cash loss of $61 million from the termination of certain defined benefit pension plans in Canada. Exiting the pension plans was a proactive action to eliminate uncertain future liabilities. Before moving to our outlook for the fourth quarter, I want to quickly review a few key modeling assumptions. As you can see in our third quarter results, the performance of next level hospitality will be excluded from organic revenue and adjusted operating income metrics until we lap the acquisition date in Q3 of fiscal 22. And beginning in the fourth quarter, our share count is expected to be approximately $258 million, with the increase driven by the timing of equity-based compensation, as well as the cumulative participation in the employee stock purchase program. So let me wrap up by sharing our outlook for the remainder of the fiscal year. We are extremely encouraged by the upward trends of the business, while appreciating the exact pace and timing of recovery is evolving as we continue to monitor the broader environment. While developing and executing a wide array of client reopening plans, we will leverage our resilient variable cost in-unit business model, continue to implement our supply chain strategies, and drive above unit operating efficiencies. Based on our current expectations for the fourth quarter, we anticipate continued organic revenue recovery reaching 80% to 85% of 2019 levels, adjusted operating income, margin in a range of 4.5% to 5%, and free cash flow outlook raised to generating $150 million to $250 million for fiscal 2021, driven by an expected strong seasonal cash inflow in the fourth quarter associated with the higher education business. Thanks for your time this morning, and now I'll turn the call back over to John.

Thank you, Tom. I'm enormously pleased with our business execution in successfully reopening client locations, now at an even more accelerated rate, combined with driving our growth strategies that are expected to result in record new wins by the end of this fiscal year. And this is just the beginning. Our teams across the globe are our greatest asset, and I want to personally thank them for their heroic acts that are driving trust and confidence in Aramark's prosperous future. Thank you, operator, and we'll 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 1 on your touchstone phone. If you wish to be removed from the queue, please press the pound sign 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. Jafar Nistari from Exane BNP Paribas is online with a question.

Hi. Hi, everyone. Thanks for taking my question. I've got two short ones, if that's okay. Firstly, just on the September reopening outlook, It looks like you have solid visibility now on which clients want to be back at which levels, et cetera. You're guiding on revenue. You've also tweaked the cash flow guidance to reflect the working capital that comes with those reopenings. So I'm curious whether this September reopening also has an impact on margins, and in particular if there have been any reopening costs. in your Q3 operating profits or if there will be reopening costs in Q4 that are included in your margin guidance and effectively if they're one-off that provide upside into next year. And then just briefly, I couldn't help but notice that we've almost discussed procurement as a division. You've promised some more disclosure on net new business, gross new business, retention, all those components. So far, you've refrained from making any reporting changes or disclosure changes, so just curious if there's a batch of those coming from the fully results.

Yeah, I'll take that last question first, and then Tom will address the first one. Yes, we don't recognize new business wins until we have a signed contract, so we are always hesitant to go ahead and name those accounts until we have the document in our hands. That is our general approach. And so even though we have new wins that are under letters of intent, we wait until we have a signed contract before we announce them. And we always wait for our clients to give us their approval to do so. So our intention is to document our new business wins for the year and our year-end call when we'll catalog those opportunities and those wins from the year. And we'll give a greater level of detail at that time.

Yeah, and on the margin question, certainly Q4 is shaping up to be a little bit more uncertain given the events of the last few weeks. So the reopening within business dining in particular, a little bit within education, K-12, you know, will include some uncertainty and costs above the unit level. that we're factoring into that guidance. As we try to, in B&I, engineer the work week is the phrase we're using, and understand when people will be in, how many people will be in, the flow that will be recreated for the companies that are coming back after Labor Day. That all comes at a cost. Our first priority is to serve our clients and to be you know, fully staffed for what they expect to come in, but I think there is still a lot of uncertainty client to client as to those coming back, what that will take. So, you know, we're client first. That could carry some cost, you know, transitory in the quarter as we reestablish ourselves and we factor that in.

All right. Thank you.

Gary Bisbee from Bank of America is online with a question.

Yeah, hey, thanks. Good morning, guys. Maybe just following up on that last comment, you know, the reopening commentary all positive, the trends in the quarter good. I didn't hear much mention of, until Tom's last comment, sort of Delta and how that may be changing it. What is the recent increase, you know, done in terms of what you're seeing from client activity today and or... discussion or planning around reopening. Is there any meaningful changes you're seeing at this point?

Yeah, thanks for the question, Gary. Yeah, we are seeing some customers defer their reopening dates by 30 to 60 days, and we're seeing that in the B&I sector. But I think people are still taking a wait-and-see attitude based on the timing of the Delta variant and what impact it might have on their businesses. So, You know, I think we've been able to show in the last year and a half that we can adapt and pivot to whatever the circumstances are to manage the expectations for the client. And so we're poised and ready for when they come back. And that will result in some cost incursion in the fourth quarter as we get ready for those customers to return so that we have adequate staffing in terms of management and people So we believe there will be a slight delay in the recovery in B&I as a result of the Delta variant. We don't believe that that will have an impact on higher education, sports and entertainment. It's really limited mostly to companies and their return-to-work strategies.

Okay, thanks. And then on the really positive new business commentary you provided, Is there any way to tease a part out of that, how much of the improved performance this fiscal year results from the many strategies you've put in place to really prioritize growth and winning business versus just, you know, a positive environment where the self-op guys want to get the heck out of running it themselves, given the complexity of doing so in a pandemic? And, you know, to the extent that's not easy to tell, I guess if we just, think more longer term? How are you thinking about pipelines of business looking even beyond this fiscal year and the positioning to continue to deliver strong new business going forward? Thank you.

Yeah, that's a great question, Gary. And absolutely, I think our strategy, the changes we've made to leadership, the additional sales resources, the sales training and development activities that we've engaged in over the course of the last year and a half have really paid significant dividends. And it's resulting in very significant win rates, higher closure rates than we've had historically. And I think that's a testimony to the quality of the leadership team and the quality of the sales team. And so even though we are seeing more self-op conversions, you still have to win those conversions. You still have to compete. for those wins, and nobody hands you the business. So, you know, I think it's a result of those improved capabilities and the improved focus and, frankly, the incentive compensation approaches that the company has taken and that the board has adopted towards incenting net new sales growth or net growth for the leadership team. So I think those are all components of it. but I think it's primarily due to the improvement in the quality of the people and the improvement in the quality of the offerings that we're putting in front of customers.

Thank you.

That's great.

Shlomo Rosenbaum from Stiefel is online with a question.

Great. Thank you. Good morning, and thank you for taking my questions. This one might be more for Tom. Tom, could you kind of quantify the impact of, like, inflation on the quarterly results and, you know, kind of your expectation for 4Q, maybe just some more color on what's happening exactly with the wages and with the, you know, the input costs?

Yeah, for Q3, you know, there wasn't a massive, you know, impact in the input cost. I think they really started to accelerate right at the end of the quarter. as we get into this quarter. I mean, we're expecting the U.S. in the fourth quarter to be, you know, sort of in the 3.5% range on product costs. You know, Europe, well below that. It's remained actually below expectations at the moment, so there's a bit of an offset there. You know, Asia being pretty steady and as about as expected. You know, the impact is really just coming through the U.S. business on product costs. And as you well know, the business model is set and we're pretty adept at being able to manage those costs. As always, we're trying not to lean completely on passing that through as our contracts primarily allow us to do and and manage it in other ways to provide that value to customers. So it's not really a driver too much for us in the Q4 guidance. We feel we can manage through it both on the product cost and the labor side.

Great. what was going on exactly in the uniforms division? Maybe you could talk a little bit more about the PPE write-down and then just in general, you know, kind of the expectations for the acceleration of revenue growth in the fourth quarter and, you know, whatever outlook you can give beyond that if possible.

Yeah, you know, just to frame it, uniforms, the uniform business has largely recovered to pre-COVID levels in the core business. So, you We do have significant linen operations that have not fully recovered. That is probably the biggest source of the shortfall. Restaurant operations have not returned to using tablecloths and napkins, even though they may be very robust businesses at this point. So linen still continues to be soft. And the Canadian operations had significant restrictions still through the end of the third quarter. So You know, we like what we're seeing in uniformed services. We're seeing a solid pace of recovery in the core business. And, you know, Xlinen and Canada, the business has largely recovered to pre-COVID level. We continue to see opportunities on the growth side. Retention rates are significantly higher than historical averages, and we're seeing very high closure rates. in new business wins. As you know, we've added significant numbers of sales resources over the course of the last year and actually the last two years. So we're encouraged and, you know, we think the pace of recovery will continue in uniforms and hopefully we'll begin to close the gap on the linen side of the business at some point here in the near future.

What about the write-downs?

And then, yeah, the write-down is A year ago, basically, we jumped into PPE and really built an inventory to be able to serve our clients, be able to sell it to third parties. KN95 masks, which were initially quite popular, were deemed through the CDC to be, you know, inadequate for medical purposes. So there's a stock of that inventory that we've been writing down as it's been very slow moving.

Thank you.

Ian Zafino from Oppenheimer is online with a question.

Hi, great. Thank you. Very good quarter. Thanks for taking my question. I kind of want to just talk about some of the new wins here. You know, I know you mentioned, first of all, can you tell us maybe specific areas where you think most of this business is coming from or should be coming from? You know, what areas in our education? And I think B&I has been big areas, but is it really exclusive to that? You know, what are the areas there? And also, is there any one area specifically that maybe you see more competition in or less competition in? I know you talked about self-op being somewhat competitive, but is that more competitive, less competitive than what you're seeing and just kind of overall, you know, where you see the opportunities? Thanks.

Yeah, you bet. Now, I think the industry has always been highly competitive, particularly amongst the big three and then all the various regional competitors as well. So it's always been a highly competitive industry, and really that hasn't changed. Everybody's working hard to sell new business. We've enjoyed success throughout the enterprise. We've highlighted wins in higher education, and we've highlighted the Walmart corporate headquarters, for example. But we've also had very significant wins in the facilities business, some of which we haven't disclosed yet but will shortly as we have those signed contracts that significantly add to the facilities component of the business in food manufacturing and other areas of the company. We've enjoyed good success in healthcare as well, both on the retention side as well as new account wins. So I would say it's very broad-based. We're enjoying very significant success in terms of new account wins, and we'll be very excited to talk about it in its totality at year-end. This is a point-in-time kind of business. We have retention that we started 100% and we work towards year-end, and when we finish, we can report the number for total retention and Right now, it's trending at 96% and above, and we're very pleased with that. The new account wins are at a record pace, and we'll be very happy to disclose them by name when we have the contracts signed in our hands. Most importantly, it's very broad-based. It's not limited to one business or another, but we've enjoyed particular success in higher education, in B&I facilities, and in uniformed services this year.

Okay, great. And, Tom, can you just talk about cash flow a little bit with the raise? Is that a function of the cadence of the recovery being smoother than you expected? Are there any other drivers involved? that are driving that increase? Thanks.

Yeah, I think if you go back a year, I mean, certainly the bond issue a year ago was out of caution. You know, I think John and I believe that, you know, the business was resilient enough and certainly the cost base variable enough to manage through the massive uncertainty that we were all facing a year ago. So, you know, that cash, as you know, that billion five was not used and needed. And so, you know, the business has really just delivered on that variable cost base we've all seen it this past year and been very proud of the business and its ability to execute what the teams have brought. And so, you know, the cash flow generation, I think, hasn't been surprising. It's a It's got its normal seasonal cadence, quarter to quarter, but by and large is a relatively working capital neutral business, which is, you know, very attractive. We've been able to manage, you know, CapEx appropriately without sacrificing, you know, any of the needs of the clients. So, again, we've been very pleased with how the cash flow has been managed throughout this past year and, you know, this – solid base that we've had cash availability, and now we're in the position to start to de-lever.

Okay, great. Thank you very much, and I'll talk to you guys later. Thank you.

Thank you. Tony Kaplan from Morgan Stanley is online with a question.

Hey, guys. This is Jeff Goldstein. I'm for Tony. Thanks for taking my questions. I just wanted to ask on uniform, margins came up quarter over quarter, but are still fairly below 2019 levels, even though, like you said, revenue is getting fairly close to even there. So I imagine this gap is still driven by investments in the business. So maybe you can confirm that and then just talk about when we would expect to see these investments roll off and for more margins to move closer to 2019 levels.

Yeah, that's a great point. Yes, it is still related to the investments that we're making in the ABS rollout and to the investment in new account or new sales executives. the significant and, frankly, the write-down of PP&E that also contributed to the softness in the margin, you know, going in the previous quarters. So we do see the trajectory beginning to return with the start of the new fiscal year as some of those costs roll off and as we lap the new account sales executive additions. And as we begin to see the benefits of the ABS rollout begin to accrue in the operations as well. So we see the improving trajectory. We've talked a lot about what kind of expectation we have for that. And we believe we'll begin to realize that beginning in 2022. Okay, great.

And then I'm curious what you're hearing from your higher ed clients in terms of the fall environment. Are you expecting fully in-person learning with full attendance? Do you anticipate any continued pressure on enrollments there? Are universities looking for more unique services given the environment? Maybe things around delivery. Maybe just some broader thoughts around the higher ed environment going into the fall would be helpful.

Sure, you bet. I was with a university president on Friday of this week, as a matter of fact, and they are planning for full enrollment and full participation in class learning. There is an expectation that throughout the higher education community that classes will largely be in person, and they may make some modifications, but they'll be relatively small, and their expectations are that enrollments are going to be at very high levels, given the fact that you had many students defer from prior years from prior year into this year to start their on-campus experience. So the commentary inside of higher education is all very strong, and we're planning for a very robust reopening. In fact, some of the universities are going to be starting up here in just a very short period of time, and our people are working full-time day and night to be ready for those students to get back to campus. All right, thanks for the caller.

Andrew Spannerman from J.P. Morgan is online with a question.

Hi, it's Andrew. I heard you say new wins are at a record pace year-to-date, and I also appreciate the client retention number of 96% is a high number for you. So I just wanted to make sure I'm putting these two things together correctly. So when I put them together, I think you're saying – Net new sales year-to-date is notably higher than the year-to-date number in recent years. I think that's what you're saying. I'm not expecting a number, but I just want to make sure that's what you're saying. And then on the other part of that equation, the 96% client retention that you shared with us today, which is obviously an awesome number, my question is do you feel like that rate might be benefiting right now from renewal decision deferrals during COVID and and that number could inch down as we get into a post-COVID environment?

First of all, your math is 100% correct. Absolutely, net new business significantly improved over prior years, and as a result of those significant new business wins and high customer retention. So, it's our expectation that we will maintain this retention rate going forward. You know, there may have been early in the year some slowness in terms of the activity level with respect to new client, I'm sorry, to client contract changes, but I would say that pace has accelerated throughout the year. You know, we've been We have a very active pipeline of new account wins. We've been very aggressive in terms of renewals and retention. And so it's our expectation that we'll maintain this number moving forward. That's always been our goal to be there in this 96 range. And so we're very pleased that we're there. I don't believe it's COVID affected. I think it's the result of performance and delivering on our client expectation. and the very proactive retention efforts that we've undergone.

That's great, John. Thank you very much. Thank you, Andrew.

Andy Whitman from Baird is online with a question.

Yes, thank you. I wanted to ask one question, one just kind of technical detail question here. First on facilities, you mentioned in the press release, and the numbers show it, that you're your revenues are up over pre-COVID and that's great. I think in the prepared remarks, you made some comments around cross-selling. I was just curious as to the nature of those cross-selling new work that you experienced in the quarter. Are those related to like deep cleaning services or other things that could be tied directly to COVID or are they, I don't know how you'd call it, other services that will be provided during the longterm, even if COVID were to go away tomorrow. And then my second question is, I guess this is probably for Tom. It has to do with uniforms and the installation of ABS, which is obviously progressing along nicely there. Any way you could quantify the costs incurred for those transition costs to installing that? I just want to make sure that those are not excluded from the adjusted EPS number. So those are my two questions. Thank you.

I'll take the facilities question first. We don't count project cleaning as a new account win. That's just base revenue growth in an existing account. These new wins and facilities are new services provided to either existing or new customers. That large components. We have existing customers that have made the decision to outsource large components of their facilities management model over the course of the last year and have transitioned from self-op to conversion. And in some cases, those include additional services that they were self-performing and are now transitioned to our facilities group. So Yeah, all new business wins, not, you know, not base business growth.

Yeah, on AVS, the installation costs are not adjusted out. And I will consider, you know, putting together, you know, a bit of an overview into next year as we complete the project, you know, and provide some guidance as to, you you know, the cost and the benefits going forward, if that would be helpful. So we'll consider that, disclosing those two pieces of information around the ABS project at a later date.

Okay, we'll look forward to that. Thank you.

James Ainley from Citi is online with a question.

Yeah, morning, everybody. Thanks for taking my question. Two questions, please, if I might. Firstly, on B&I clients, can you talk about how maybe they're structurally reconfiguring their restaurant spaces maybe to allow for or to compensate for the low attendance in the office but maybe get higher participation as a result and whether there's sort of capital required from yourselves to support that reconfiguration. And then just secondly, just on B&I, sort of temporary nature of some of the contract terms that you've had over the last year, 18 months. Are those largely rolled off, or should we expect them to roll off over the next quarter? Thank you.

Yeah, with respect to the contract terms, we haven't seen a significant shift back to P&L yet. You know, we're still operating most of our B&I locations on management fee contracts. And we don't have, there is not an expectation of an accelerated pace of shifting back. We think that'll take some time as companies ramp up their strategies and return to work environments. You know, some companies are considering changing the configuration in terms of the way that customers will be served. Those are mostly technological kinds of implementations like touchless payment technology, grab-and-go kinds of opportunities, convenience opportunities. So not significant capital investment required to make those kinds of changes in existing operations. And even in those organizations that are going to have remote working kinds of or hybrid working experiences, we don't see structural changes to the surgeries as being necessary or required. We do see many companies adopting more aggressive subsidized payment plans or subsidized approaches to food service as an inducement to get employees to return to work. We see many companies considering going back to free meals, which we think will certainly drive participation significantly. And then the whole safety and security protocol environment, we see taking some time before that really evolves to pre-COVID activities. So we think participation will rise naturally just because it'll be easier for people to take advantage of the serving environment in their existing facility rather than leaving the building and coming back. So we do see higher participation as a result of this moving forward in the B&I sector and think that that'll be very beneficial.

Very good. Thank you.

Ethan Grambling from Goldman Sachs is online with a question.

Hi, thanks. I guess another follow-up on the new business wins, and I know you're going to give more detail coming up, but is there any color that you can provide directionally on the onboarding timing as we think about the sales contribution and also any margin impact as it relates to these new contracts, which sometimes start at lower margin rates? Thanks.

Yeah. Timing typically, given if you take the total blend of business wins across higher ed, business, dining, healthcare, et cetera, typically about 40% of that is in-year and the balance rolls into the following year as a basic metric. In terms of margin, yes, you're absolutely right that typically in the year of opening, between startup cost and just general unit inefficiencies, that will start at a lower than average unit contribution and then build from there.

Yeah, we typically see a learning curve as we open new accounts. Obviously, higher ed tends to open all at one time, so you have a big burst of activity in the fall period. Same with the K-12 business. So that's immediate impact almost beginning in the beginning of the fiscal year. But B&I wins are spread throughout the timeframe. And even though we've been awarded the account in, say, June, it may not open for us or transition until December. So there's some timing in terms of the opening that may impact the in-year volume. But as Tom said, about 40% generally affects the in-year sales. So So we're excited by the new business wins. We see significant growth coming from new business, and we're excited to see those new accounts open and begin to contribute to the organization.

That's helpful. Maybe one other follow-up, and again, I know it's hard to have a lot of visibility on 22, but are there any one-time items, discrete things that you can at least flag to us as investors? Thanks.

Not that, no. We're sitting here looking at each other now.

Yeah, but Tom and I are staring at each other going, hmm, I think nothing that comes to mind.

Awesome. Thanks so much. Well, best of luck.

Thank you.

Richard Clark from Bernstein is online with a question.

Hi, good morning. Thanks for taking my questions. I just want to just look at your Q4 guidance. You're talking about revenues maybe being back within 15% of 2019, but the margin will still be sort of only about 60% of 2019 levels. I know you've called out a few factors in that, but the general kind of industry guidance has been margins should get back ahead of volumes. Is that your expectations? And is that the last 15% needs to happen? Is this about renegotiation? What are the steps now to get margins back to 2019 levels and above?

Yeah, I think it's just continued progression. That last 15% matters, as you saw on the way down last year. So I think the uncertainty, as I talked about earlier, certainly doesn't help. right now. You know, we like certainty and we like predictability. We can schedule staff order more appropriately and efficiently with certainty. So that's playing in a little bit right now, but, you know, that's transitory. But, you know, we still feel very good about, you know, getting back to 19 margins, you know, ultimately beyond because, you know, as we grow, we're going to leverage our above unit cost, we'll continue to build the supply chain and power of that with growth and just generally operate more efficiently in unit as we improve our retention rates. So all those things still hold, but I think given the phase we're in now, we've got to be client first as we reopen, making sure we do it safely and appropriately. play this a little bit long.

Yeah, and I would just add, as Tom said, that 15% does matter. The incremental profit on that last 15% is extraordinarily high because we've got all the labor back and the management back and generally all the fixed costs in place to go ahead and recover back to 100%. So that 15% is important, but it is not subject to negotiation. It is not We're not waiting for clients to give us approval to do things. It's really all about creating the efficiency as employees return to the work environments. And you would see if you broke down the businesses, some will be a pre-COVID margin, some will be slightly below. And as you would expect, those businesses that haven't fully returned to work are where we have the margin gap still. But in the other businesses, you see margin recovery coming rather rapidly as they get back to pre-COVID levels.

Thanks for that. And maybe just a quick question on your sports leisure and corrections division. I mean, I would expect corrections part of that is probably pretty stable compared to 2019. You know, we're hearing lots about national parks being at record attendance. Your overall revenues there still in the quarter are about $200 million lower than they were in 2019. So just maybe we want to understand the bridge there. Is that just all the sports component that's still a long way off capacity? Maybe what's your anticipation for that into the fourth quarter?

Yeah, it is. As John mentioned, I mean, sports is the driver there. If you go through the timeline of Major League Baseball reopening, everything really with the quarter cutting off June 30th-ish, that's right when things were fully reopening. And so this quarter really had partial attendance at best in all of our facilities. So it was the primary drag.

Yeah, and on the national parks side, while we're seeing record demand at – at Lake Powell and at Yosemite, the operations at Denali are still largely shut down as cruise ships have not returned yet to Alaska. And that park is primarily fed by cruise ship traffic. So even though it is open and operating, it has not returned to pre-COVID activity levels and probably won't until next summer when cruise ships are back operating in the Alaskan corridor. So So that would be probably the big impact item on parks. The rest of the parks operating at very high levels with very high demand. Okay, that makes a lot of sense. Thanks for the call. Thank you.

Hamza Mazzari from Jefferies is online with a question.

Hey, good morning. Thank you. On just the new business wins, could you maybe comment on who you're gaining share from? I know you mentioned self-op being sort of half of your wins versus one-third historically. I guess on that, do you expect that to continue going forward because of better sales execution and maybe COVID? And then maybe just talk about who you're gaining share from as well in the same answer, if possible.

Sure. Well, we're winning accounts from a broad base of our competitors. I don't want to single anybody out in particular, but I would say that, you know, we've got, you know, as we've achieved a A very high level of self-op conversion wins across a range of the businesses that we believe will continue. You know, we think that that trend will continue to evolve. It may not stay at the 50% level. Maybe it will drop back a little bit. But we see continued interest in self-op conversion across a range of businesses and a range of industries. So we expect that we'll continue to have very good results there. In terms of share gains from competitors, I would say it's consistent with past performance. We win some from Sodexo. We win some from Compass. We win some from regional competitors, and they win some from us. So it's a very competitive industry. We try to develop programs that are consistent with our clients' expectations and strategies, and we try to offer proposals that offer them the best solution. I'm not so much worried about who I'm competing against as making sure that the offering that I design and the offering that I customize for my clients is best suited to serve their needs. And that's how I think about winning, by winning the customer, not winning against my competition.

Got it. Very helpful. And just my follow-up question, on the uniform side, could you maybe talk about where you are in terms of adding, you know, further ancillary services to your product line, whether it be, you know, first aid or other stuff. Maybe if you could talk about where you are there. I know you touched on the ABS software, et cetera, but maybe on the ancillary services side, just update us there. Thank you.

Yeah, we certainly can. We continue to enjoy double-digit gains in revenue and new accounts on the ancillary services, and that would be primarily first aid and restroom services. Those two offerings, we still have a lot of runway available to us in our existing client base and obviously against competitive accounts. So we see those as the two primary areas with with first aid being probably the primary execution strategy, and we'll continue to focus on that going forward. I don't anticipate adding any other kinds of services. I really just want to focus on those two. They're both high margin, very accretive to earnings, and we've got the existing sales staff and support in place to go ahead and execute on those strategies, and we're winning those at double-digit rates.

Thank you so much.

Thank you.

I will now turn the call back over to Mr. Zillmer for closing remarks.

Again, thank you, everybody, for joining us this morning. We really appreciate your support of the company and the hard work and dedication of the Aramark team. I can't say enough about the performance of this organization over the course of COVID-19, we're proud to lead it. We're proud to be here and looking forward to a strong close to this fiscal year and on to a great 2022. Thank you very much.

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