Aramark

Good morning and welcome to RMARC's fourth quarter and full year fiscal 2021 earnings results conference call. My name is Paul 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 remarks. I will now turn the call over to Felice Cassell, Vice President, Investor Relations and Corporate Affairs. Ms. Cassell, please proceed.

Thank you, and welcome to Aramark's earnings conference call and webcast. I hope all of you are doing well. This morning, we will be hearing from our Chief Executive Officer, John Zilmer, as well as our Chief Financial Officer, Tom Andros. As a point of reference, there are accompanying slides for this call that will be viewed through the webcast. These specific slides collectively will be made available following our prepared remarks for easy access. Additionally, 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. 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 our website. So with that, I will now turn the call over to John.

Thanks, Felice, and it's good to be with all of you. Today I'll provide a strategic overview of our fourth quarter performance, recap our progress throughout fiscal 21 that included record levels of net new business. and share an initial view of the year ahead that we expect will build on the strong foundation for growth we've experienced this year. Our teams across the globe are committed to reaching for remarkable for our stakeholders driven by service, innovation, and growth. Over the course of the year, we executed on our strategic initiatives despite a challenging and complex operating environment. The cultural transformation in the business combined with our renewed close partnerships with clients and suppliers not only allowed us to navigate this unprecedented period, but also put us in a position to win and further increase performance levels across the business. In every one of our segments, we have made great progress. Among the highlights I'm most proud of, this year we meaningfully accelerated Aramark's growth trajectory by adding senior leadership talent and making organizational changes that significantly bolstered our industry and line of business expertise. including sales leadership in many key roles, by investing in growth-oriented areas of the business, by enhancing sales training and development programs, by further aligning our compensation approach with Aramark's strategic objectives, including net new business, which now represents 40% of the company's bonus incentive plan across the organization, by strengthening client and supplier relationships, and enhancing our operating infrastructure. I'd like to take a moment to discuss our strong fiscal 21 net new business performance, which we attribute to the ownership mindset we've been cultivating, our ongoing focus on innovation, and the scale of our platform. Our annualized gross new business wins sold nearly $1.25 billion, the highest in company history, representing 7.7% of pre-COVID revenue. This performance was broad-based across segments with particularly strong contribution from the education, and facilities in other sectors within FSS US. In higher education business specifically, we added a record number of new clients that further strengthens the portfolio of our largest business. Our new business wins extended across lines of business, geographies, and client size. In the United States, average annualized revenue for our new business wins was $3.4 million, emphasizing the breadth and depth of our ability to source clients large to small. our international segment continued to experience a broad-based, steady growth trajectory across all countries, specifically led by industries such as mining, education, healthcare, and BNI. Uniform's added to this performance, reflective of the investments we've made in growing this business. Our teams across the company are hard at work onboarding these new clients. We continue to benefit from greater first-time outsourcing activity, representing approximately 40% of wins globally, and nearly half of all wins within the FSS US segment derived from self-op conversions. Our strength in talent and new capabilities provide further differentiation in the marketplace and reflect how well we've adapted to the new normal. In fiscal 21, we also improved retention rates to 95.5%, 150 basis points better than our historical five-year average. We are targeting retention rates to ultimately reach 97%. Accordingly, the magnitude of new business wins, combined with significant improved retention rates, allowed us to achieve record annualized net new business performance. As examples of our progress, the annualized revenue of our net new business was over $500 million, five times higher than the average of the previous five years. The FSS US segment reported a notable improvement with record high net new business of nearly $300 million. following negative net new results in three of the prior five years, and international increased net new business to approximately 150 million, over 30% higher than its historical average. Each segment reached important milestones by increasing retention rates more than 100 basis points, led by uniforms with an improvement of 180 basis points. Collectively, this level of annualized net new business represents 3.1% of our pre-COVID level of revenue. Together with our typical base business growth, typically one to 2%, we are well on our way to our mid single digit growth goals. I'd now like to review Aramark's organic revenue performance by reportable segment in the fourth quarter that in total increased 37% year over year and reached 87% of pre-COVID levels. FSS US reported an organic revenue increase of 58% compared to the fourth quarter last year. as we implemented many of our newly created programs across sectors. We welcomed students and educators back to in-person learning at the start of the school year in both K through 12 and in higher education. Fans largely returned to stadiums at full capacity for Major League Baseball, and the National Football League season is underway. Our leisure business benefited from ongoing activity at national parks, and corrections had already returned to pre-COVID levels. BNI clients began to implement greater in-person return to work activity, although at a measured pace. At Aramark, we are fully back in our offices here in Philadelphia as of October 18th. Facilities continued serving clients with in-demand services, ensuring locations were ready and safe for increased in-person activity, and healthcare gradually improved as patient care began to normalize with a higher level of voluntary procedures, routine medical appointments, and hospital visitation. International organic revenue grew 21% year-over-year, driven by stronger performance in Canada and Europe. Sports and entertainment and education in our international geographies reported improved business activity with the pace of reopenings behind the U.S. Organic revenue in the uniform segment grew 5% in the quarter, driven by rentals and adjacency services, with hospitality clients experiencing increased levels of activity. Key areas of focus in Uniforms include higher growth rates in recurring business, customer density optimization, merchandise management, and enhanced back office utilization. As you saw from our announcement a few weeks ago, we're extremely excited to have Kim Scott join as President and CEO of Aramark Uniforms Services. I am confident that Kim's leadership and extensive commercial experience positions her well to accelerate profitable growth in this segment while simultaneously enhancing our employee and customer experiences. I look forward to Kim's meaningful contributions to the business as a member of our executive leadership team reporting to me. I also want to take this opportunity to thank Brad Drummond for his many years of service as he retires from Aramark. Now, I'd like to provide some perspective on a few relevant broader topics important to our business that have been top of mind in capturing the headlines for what seems like months. namely navigating a dynamic global supply chain and tight labor market. While we have seen supply chain disruptions in the food service industry, our scale, proactive management, deep bench of suppliers, and menu flexibility has helped us mitigate much of this for our clients. Our overall focus remains on leveraging spend, optimizing supplier relationships, and assuring availability of in-demand products, and honoring our commitments to sustainability and local diverse suppliers all of which will position us to continue to effectively weather this storm. We are also actively monitoring the markets for inflationary pressures and buying opportunities, relying on our use of fixed contract pricing and the ability to pass on market-driven pricing to moderate any near-term impact on the business. We are currently in active deployment of our new field ordering technology for our managed services business, which will streamline our operators' buying activities and ensure alignment with optimized supply chain programs. On the labor side, we continue to effectively adapt to the environment. We've been implementing strategies to mitigate labor costs led by disciplined scheduling protocols and efficient resource management aligned with demand, as well as leveraging technology in this area. We're also able to benefit from our scale by utilizing our flexible operating model, full employee base, and leveraging client locations in adjacent geographies. Additionally, I'm pleased to announce that we've taken a big step in our goal of reducing our environmental impact and carbon footprint by committing to establish a definitive target for our greenhouse gas emissions. When we finalize our goal, it will be a science-based target submitted through the Science-Based Targets Initiative, or SBTI. As you likely know, SBTI is a joint effort between the UN Global Compact, the World Wildlife Federation, and other international environmental auditing groups. This is important news for Aramark as we deepen our commitment to transparency in our environmental stewardship. I would also like to take this opportunity to commend the community service and passion exhibited by the Aramark teams globally. Our most recent Building Community Day consisted of thousands of team members leading nearly 80 virtual and in-person projects taking place in six different countries. I am extremely proud of our commitment to making a positive impact on people and planet. And now Tom will provide a detailed financial review of the business. Tom.

Thanks, John. And thank you everyone for joining us today. Over the next few minutes, I will discuss our financial results in the quarter, including detailed insight into the business as we frame the ongoing recovery and share our outlook as we enter fiscal 22. In the fourth quarter, and really since the start of COVID's impact on the business, We've continued to control what we could control. Whether that was effectively leveraging our variable cost-based operating model at the onset of the pandemic, implementing discipline strategies to strengthen our balance sheet, or taking action to invest and transform the culture of the organization, we are extremely proud of the progress we've made and recognize that this is just the beginning. Our performance in the quarter reflected our team's focus and resolve. Adjusted operating income was $165 million, resulting in a constant currency AOI margin of 4.8%, improving 120 basis points from the third quarter. Improved profitability was driven by strong unit-based cost management and the ability to leverage above-unit operating costs and SG&A across higher sales volumes. These drivers resulted in an adjusted EPS that was 21 cents compared to an adjusted loss per share of 35 cents in the fourth quarter last year. We also took action over the course of the year to manage our balance sheet, resulting in interest expense savings of over $10 million versus fourth quarter fiscal 20, which also contributed to the adjusted EPS improvement. In fiscal 21, the company delivered $480 million of year-over-year improvement in net cash provided by operating activities. This strong result was achieved through improved unit profitability and better than expected working capital management, as well as from federal tax refunds and deferred payroll taxes related to the CARES Act. Note that we continue to participate in the appropriate country-specific government assistance programs from which we received approximately $159 million in labor credits that were mentioned previously throughout the year. The improved net cash provided by operating activities, combined with the measured use of capital expenditures, helped the company generate $282 million in free cash flow, better than our previously stated outlook. At year-end, we maintained strong liquidity with over $2 billion in cash availability. Now let me briefly review our GAAP results. In the fourth quarter, consolidated revenue was $3.6 billion. Operating income was $132 million, and diluted earnings per share was 14 cents. These results included $86 million in revenue from next-level hospitality. It continues to be excluded from our organic revenue metric until we lap the acquisition in the third quarter of fiscal 22. As John mentioned, we are encouraged by the rebounding base revenues with organic revenue reaching 87% of pre-COVID levels in the fourth quarter, slightly better than anticipated due to the acceleration of new account openings and higher than expected pricing pass-through. The performance in the quarter was driven by many areas of the business that have already approached or exceeded pre-COVID organic revenue levels through the result of initial contributions from fiscal 21 net new business, pricing, and base volume recovery. In other selected areas, we are seeing some revenue streams within our portfolio continue to be impacted by COVID-19, such as retail and catering in the U.S. higher education and healthcare sectors, conference and convention centers, concerts and certain events in U.S. sports, leisure, and corrections sector, higher education in Canada and continental Europe, sports and entertainment in continental Europe, as well as hospitality clients and Canadian operations in our uniform segment. In addition, White Collar B&I, both in the U.S. and international, have had a longer recovery as companies have delayed their full return to the office. Collectively, we anticipate these revenue streams that we've grouped into a COVID index will show continued improvement in fiscal 22. As you can see on the slide, the non-COVID impacted areas of certain sectors, particularly within facilities and other, healthcare and education, as well as the uniform segment, are operating at or above pre-COVID revenue levels. Finally, let me share our fiscal 22 outlook. Based on our current expectations for fiscal 22, we project the following full year performance. Organic revenue growth between 23 and 27% over prior year, with revenue expected to approach pre-COVID levels by year end. The revenue outlook reflects a continued impact from COVID-19 in fiscal 22 of approximately 1.6 to 1.9 billion, or 10 to 12 percent of pre-COVID revenue, partially offset by net new business wins and pricing pass-through. Adjusted operating income margin in a range of 5 to 5.5 percent, with the second half of the year reaching 6 to 6.5. AOR Margin Outlook considers the $1.6 billion to $1.9 billion revenue impact of COVID-19. In many cases, the company has brought back operating and above unit costs in advance of full revenue recovery. As COVID impacted volumes recovery, we expect this transitional impact on AOI margin to unwind, allowing us to leverage the existing costs in the business, resulting in an incremental margin on the remaining COVID-19 volume recovery of 15% to 20%. AOI margin will be temporarily affected by the startup of new accounts, which typically have lower margins in the first year of operation with an acceleration thereafter. The magnitude of new account startups in fiscal 22 has grown meaningfully following recent new business wins. As we continue to deliver on our net new results in future years, those startup costs will be absorbed by the accelerating margin cadence of new client wins from prior years. At the moment, net new business is translating to approximately a 10 to 15 basis point headwind on fiscal 22 margins. Lastly, with global supply chain shortages that we're all managing through, we have been providing exceptional solutions for our clients to meet their needs. In some cases, this has resulted in utilizing secondary suppliers where our negotiated pricing is not always as favorable as with our preferred partners. While we are diligently managing this dynamic period, These off-program supply chain actions resulted in what we believe is a temporary cost increase in certain areas of the business as we work with clients to help them innovatively address. Through pricing, supply chain initiatives, and operating efficiencies, we expect to offset inflation. Free cash flow between $300 million and $400 million, which includes the upcoming December repayment of approximately $65 million of deferred payroll taxes associated with the CARES Act. An annualized net new business in the range of $550 million to $650 million, which would represent 3.5% to 4% of pre-COVID revenue, and an increase relative to the record performance achieved in fiscal 21 when we had over $500 million of net new business, or 3.1% of pre-COVID revenue. Together with the typical price and volume-based business growth of 1% to 2%, that is currently shrouded by the impact of COVID. As Jan mentioned, we are well on our way to our mid-single-digit growth goal. Ultimately, we expect to achieve mid-single-digit organic revenue growth with ongoing margin progression that reaches pre-COVID levels and beyond. We look forward to sharing more on our operational financial framework that we expect to deliver new levels of performance success at Aramark's upcoming Analyst Day in a few weeks. Thanks for your time this morning. John?

Thank you, Tom. Fiscal 22 is just underway with new client wins already occurring, as well as a robust pipeline of opportunity ahead. We're confident in our ability to build upon the momentum that we're creating. And finally, for those of you able to participate in our analyst day next month, Tom, myself, and the rest of the leadership team look forward to our time together. Thank you, everyone. An operator will now open the call for questions.

Thank you, sir. We will now begin the question and answer session. If you have a question, please press star, then one 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. Kevin McVey from Credit Suisse is online with a question.

Great. Thanks so much, and congratulations on the results and really on the II outcome as well. I think just that recognition really underscores some of the incremental disclosures you folks have been able to demonstrate since you've transitioned in, so congrats on that. Hey, John or Tom, you know, just really exceptional new business bookings. could we maybe talk about that a little bit, how much of it was competitive takeaways or new logos and, um, any thoughts as to, um, you know, just post COVID, is there a structurally higher level of outsourcing that you're starting to see as a result of just, you know, the increased challenges of kind of maybe, you know, folks that had been maintaining facilities internally just wanted to start there. Cause just really exceptional numbers around that.

Yeah. Well, thank you very much. Um, Absolutely, we are seeing an increased level of outsourcing. As we noted, 50% of the wins in the United States came from self-op conversion, and globally over 40% were from self-op conversions, first-time outsourcing events. So that is a significant tick up over the historical average. I would say the marketplace is still very competitive, and we are working very hard in every area. sales situation to not only retain our existing customers, but to sell our competitors customers when they come to market. So really, the industry hasn't changed, but there is an accelerated level of outsourcing activity that I think all the organizations will benefit from. And, you know, I think it bodes well for certainly the next 12 months and possibly well beyond. We're seeing customers both in our traditional marketplaces as well as some non-traditional opportunities come to us to consider. So we're excited about our prospects, but all in all, we're just really excited about all the businesses and the results they've been able to achieve, really re-energizing the growth culture of the company and really installing leadership that understands the lines of business and really are focused on that growth narrative, if you will. And I think the other significant impact item for us beyond what's happening in the marketplace It's just the focus, the cultural change, and the compensation change, which drives behavior as well. So we're excited about the results. We expect continued performance improvement, and we're going to continue to incent people to make that happen.

And just a quick follow-up, because I think the culture is so critical to Aramark. Just any thoughts on that? Because in addition to the wind, you're really seeing a dramatic improvement in retention there. Just what's driving that? And if I heard you right, I think 40% of bonus is tied to new business. Is that right? And then what's that been historically?

That is correct. And historically, it hasn't been a component of the senior leadership bonus element. It was focused on EPS and margin growth in the past. or EBIT or EBITDA. And so the board and the management team recommended making this change last year, and the results have been dramatic. And we intend to include this in our bonus programs going forward. I would say the cultural transformation has been fantastic. And what we've really done is we've reinvigorated both the hospitality culture and the growth culture. We've put people into positions that they know and understand, and they're committed to businesses that they love, that they grew up in, you know, with customer relationships that are longstanding. And that's driving the business improvement as well. So we're excited. We think we're in the first inning or the second inning. We've had great results this year, but we have very strong expectations moving forward.

Kevin, at this time, if I can just clarify one point, too. I think you meant this, but just to make sure. The bonus, the 40% target is based on net new business. So it factors in retention, which I think is really focused people as well. So if you win $100 and you lose $100, that gets you nowhere on your bonus. That's right. It's very helpful. Thanks again.

Thanks, Kevin.

Neil Tyler from Redburn is online with questions.

Yeah, good morning. Thank you. Two questions, please. First of all, in your outlook guidance, it seems that the operating leverage figures that you've offered point to around about $300 million headwind at AOI against the 2019 base. If I take the drop through that you've presented us with, If that's correct, can you perhaps, Tom, talk us through the other puts and takes that get us to maybe the midpoint of where you're guiding to this year? And then secondly, you mentioned the 10 to 15 basis point headwind on the margins of net new. But on a sort of normalized and gross margin basis, are you confident that the new business you're winning is of a sustainably higher margin than that that's being lost. Thank you.

Yeah, I'll start with the second piece with the new business that we're winning because it's fundamental to the algorithm, if you will, over the coming year. We've got a very robust pro forma process from the ground up, regardless of the size of the contract. And John mentioned the average Contract win this year was about $3.5 million. So that ranges from quite a bit smaller to bigger. And there's a lot of bread and butter accounts in there that may not rise to the level and usually don't rise to the level of, say, John and I reviewing it because the investment's very small and whatnot. So we need this rigorous process because all these little wins accumulate to a lot. And so the operators, sales folks, finance folks within the lines of business and countries work through these pro formas together. It's not just the sales team or just the operators doing it. It's reviewed. It does progress up the chain if there is certain levels of capital investment or if the annual revenues get large. So again, very rigorous process to ensure that we're getting a return, that we're getting a margin. that will, you know, be up at least around the company average over time. The bigger the counts we've talked about, the longer ramp up. And then obviously the cost plus versus P&L dictates sort of that margin progression over the lifespan of the contract. So a long way of saying that we feel confident that this startup, because we're coming off really a a zero growth base as we start to get into years two and three of this year's and start to lap what we're going to be winning going forward. This headwind disappears and starts to build on itself. So hopefully that'll make sense. But again, feel good about the type of business we're winning and that it ultimately be margin enhancing for us as we go forward. In terms of the build, you know, the schedule and what you referred to, it is roughly the COVID index headwind. I think you're about right around $300 million. Really trying to show on the one schedule in the deck how you would build back to, you know, pre-COVID level margins and how that factors in to it based on what our current outlook is. So if you take that $300 million and added on top of this fiscal 22 outlook plus factor in some of the supply chain and new business headwinds we're dealing with at the moment. You work yourself back to that high 6% plus margin just to show that we're progressing as we have. And there's a lot of noise in the system, but that we're managing through it. And ultimately, we think back to and beyond that. those 19 margin levels.

Thank you very much. That's very helpful. I would just add one comment not only to this question but in general that we have not as a result of we have not changed our return expectations or our profit expectations in order to accelerate this growth recovery or this new account net new business wins. Our return requirements are still the same. Our return on net assets, our return on invested capital requirements are the same. So this is not a phenomenon born of dropping our price. This is a phenomenon born of performance in improved activity levels and, frankly, great salesmanship.

Thank you. Very clear.

Tony Kaplan from Morgan Stanley is online with a question.

Thanks so much. I wanted to ask about the long-term algorithm that you set out in the release, just how to think about the pieces. Is it 3% new business, 2% price? You mentioned that this year new business was a little bit over 3%. I think next year 3.5% to 4%. Just trying to gauge what you think normal is long-term for new business and and price and any other factors that we should be thinking about.

Yeah, I'll start that, John, if you want to, and then you can follow up. Um, yeah, yeah. I think that's, that's sort of shaping it up. We'll talk a little bit more about it in a few weeks at the analyst day. Um, but you know, I think getting into that, that, you know, four, four to 5% net growth, uh, and then pricing volume being on top of that. We're really trying to de-emphasize the pricing component because again, we talk about, we're trying to bring value to our clients and to just pass through pricing that they could almost do on their own doesn't create a lot of value. So, you know, we want to drive this more through the healthy foundational strong new business, strong retention and then just pass through pricing or price appropriately, and then ultimately try to drive some, you know, air quotes, same-store sales on top of that. So the key driver here is the net growth, and we'd really like to get that up ultimately into that 4% to 5% range.

Yeah, that's absolutely right, and thanks for the question, Tony. You know, we want the key driver in the growth narrative to be net new, so improved retention, net new sales, and that call it four to four and a half percent range, potentially getting higher in some years as we have great results. And then some volume recovery as a result of enhanced marketing capabilities and enhanced programmatic support. So building base business volumes through increased participation at the component of it. And then we see pricing really as an offset to inflation to keep the the margins moving upward as we're able to accelerate the growth because there's so much margin opportunity and so much leverage opportunity as we build scale and get that growth engine running. But that's what we're really trying to focus the team on. We'll get our cost recovery through pricing. We'll mitigate costs through various other kinds of initiatives. but will really drive growth by selling new accounts, retaining our existing business, and then growing volumes in our base business.

Great. I wanted to ask my follow-up on education. It really surpassed at least our expectations in the quarter. You mentioned the record new clients in higher ed. So was it, from your perspective, and obviously you had different expectations than we did, Was there strength in more students coming back in person versus, you know, maybe what was expected? Or was it really the new client wins, you know, that maybe was better than expected?

Yeah, I think it's a combination. You know, I think the students returning to campus was roughly on our estimates, you know, some up, some down a little bit, depending on the individual university or county. So I think all in all, that was relatively neutral. But we had an extremely good new account sales year and a great retention year as well. So I think that was the key driver for higher ed.

Terrific. Thank you.

Ian Zafino from Oppenheimer is online with a question.

Hi, great. First of all, congratulations on the II Award. Pretty impressive. And also on the quarter. But, you know, question would be on the self-ops, and obviously you saw a nice increase there on the self-op conversions. Can you maybe talk about the areas where you saw the most wins, maybe also where you saw the least wins, and, you know, if you can maybe bring those up where you see an increase or an even greater increase and self-op wins.

Yeah, a couple of color points here. First off, we had very broad-based success across the enterprise, so almost all businesses had significant net new sales activity, with the exception of a couple that were impacted significantly by COVID. Think national parks, for example. The National Park Service did not Have any bid processes over the course of the last call it 24 months So so that business did not have significant net new performance as we would hope, you know We're always bidding on new opportunities, but that business is essentially just operating its current Business and doing it and doing very effectively but so not a lot of growth coming from them but other businesses like facilities had fantastic sales years significant self-op conversions and of activity on the facility side, which was very encouraging. And we continue to see increased demand from that business. As I said, higher ed had record wins, very strong performance in K through 12, big, good performance in B&I, both domestically and internationally. So it was a very broad-based successful year from a new account sales activity and from a retention perspective. So we're, we're very pleased about that. This isn't one account that we sold in one business. It's driving this results. It's very broad based level of activity from all the lines of business.

Okay. Thank you. And then, you know, follow up would be on the education side. What do we need to see to basically get back to pre COVID? You know, you talked a little bit about like, the retail and catering volumes were a little bit slower to recover. Is that a function of just students being back? Is it a function of take rates or any other types of restrictions? Maybe just give us a little color there. Thanks.

Yeah, I would say that that's really more of a function of campuses changing their business model, at least in the short term, until they work through the full recovery. So, you know, you're seeing less catering by administrations, student activity at pretty much normalized levels, the number of students, enrollments at pretty much normalized levels and meeting our expectation. But the campus administrations are not having big meetings and big conferences and those kinds of things. So that's that extraordinary catering that typically adds significant revenue growth to us. So I think that'll take a little bit longer to return. And so I would say it's that kind of a change more than a gap in terms of student expectation. Tom, I don't know if you have any other color you want to add to that.

No, that covers it.

Okay. So it's basically the B&I component of higher ed sort of the way to think about it.

Yeah, you could characterize it that way. Sure. Certainly.

All right. Thank you very much.

Thank you.

Andrew Stannerman from JP Morgan is online with a question.

Hi, John. I just wanted to go through the client retention a little bit, which obviously not only did you have an extraordinary year at 95.5%, you're ultimately targeting 97% over the medium term. I really just want to talk about kind of the 95.5% and kind of going into fiscal 22%. I surely heard that some of the contracts that might have been up for competitive bid in the whole industry, so this is not Aramark, this is the whole food services industry, just was really kind of pushed out a year because of COVID. And so my question is, do you see the same thing, some delayed RFPs, just kind of staying with the current vendor, which might make for the whole industry fiscal 22, harder to hold on to all the client retention gains in 21? Like, in other words, maybe Aramark's client retention has to recede before moving higher.

Yeah, no, that's a great question. But I think I would tell you that really 20 was the year that had significant activity levels depressed. And 21, in terms of our fiscal year, saw pretty normal levels of activity across all the businesses. And you know, so that, you know, in 20, there weren't any K-12 bids done, but last year there were, you know, that accelerated because you've got, you know, the legislative requirement to go ahead and re-bid. So I think we saw pretty normalized activity in our fiscal 21 from a re-bid perspective. Part of our retention, and we'll talk about this at the analyst day, but there were businesses that closed down. There were universities that shut down, there were businesses that shut down and just never came back. So some of that gap between what my expectation is at 97% and 95.5 is the fact that some of those businesses just shuttered. But we count those. When they don't reopen, we count it as lost. So there is a little bit of that impact, and we'll get into that on December 9th and make sure that we have a full disclosure on what that impact was in both 20 and 21. So it's very, very clear to you. But no, I would expect 21 was a normal year. I think 2022 will be a normal year. I think the only anomaly is that level of increased outsourcing activity that will drive further opportunities for us.

Great. Thanks, John.

Thank you.

Ashish Sabhadra says, from RBC Capital Markets is online with a question.

Thanks for taking my question. Again, a strong momentum in new business wind and really strong fiscal year 2022 new wind guidance as well. John, you mentioned robust pipeline and also you just in response to the last question highlighted increased self-op conversion opportunity. I was just wondering as you think about the 2022 new wind expectation, Is it still driven mostly by self-op, like 50% driven by self-op and the others from competitive win? Just wondering if you could provide incremental color on that front. Thanks.

Sure. I would say we have an expectation of continued first-time outsourcing activity in 22 that will impact the total percentage. I think we have an expectation that that phenomenon will normalize. We've always had about call it 35% of our wins coming from self-op. So that gap of 15%, you know, year over year over the historical average is significant in 21. And we've taken very strong advantage of that. Whether it still maintains that level in 22, hard to say. But my expectation is that we'll see continued significant impact from that self-op conversion process across a range of the businesses And so if it's 50, if it's call it 40% or 45, you know, I think that that's probably a good way to think about it. And if it continues to accelerate, you know, we'll disclose it as it happens. But we're very encouraged by the level of activity.

That's very helpful, Kalar. And maybe just a quick question on uniform services as the volumes have come back close to the pre-pandemic level and with a new leadership in place. Any incremental thoughts on strategic optionality for that business? Thanks.

Sure. I have to tell you, I'm very excited about Kim Scott joining the company. She has an extraordinary background as a commercial leader, as a growth-oriented leader, and we're very excited to have her join the team. And I think she'll bring new insights and a fresh perspective to the business I think the team has done an extraordinary job over the course of the last couple of years, really managing through COVID. In spite of the write-off we took on PPE, the company has worked very aggressively to get the ABS implementation done, to get the new business rates up, and to achieve record retention. So all in all, I'm very happy with Uniform's performance and excited about Kim's new perspectives and leadership moving forward. As we've said before, we always maintain strategic optionality, and the board will always be considering what's the appropriate next step. But for right now, we are focused on driving the performance of that business, and we think we have a great leader to do that.

That's very helpful, Culler. Thanks, and congrats once again on a strong quarter. Thanks.

Thank you. Thank you very much.

James Ainley from Citi is online with a question.

Great. Morning everybody. Thanks for taking my question. The question is, you mentioned the $1.6 to $1.9 billion of revenue still impacted by COVID. Could you sort of help us break down that revenue line in terms of industries? When do you think ultimately that revenue might come back and And where do you see some risk? And I guess kind of reflecting on comments from last time we spoke, you talked about Delta having delayed some in-person return to the office. I'd be interested to hear kind of what corporates are now saying about their plans to return. Thank you.

Sure. Tom and I will both take this. I would say the single biggest factor really is trying to understand the pace of recovery and trying to model it. And it's still a little difficult. Companies are still taking a very measured approach to return to work strategies. And so while we're excited by the activity and the changes that are occurring, it's very difficult for us to really model how that's going to unfold, particularly on the BNI sector, both domestically and internationally as various countries are impacted. by either other waves of COVID or by just a change in their governmental programs. So I think we've done, I think, a good job of trying to identify for the street what the impact is potentially for the year. But again, we are estimating based on our best understanding of what's happening in the business. Multiple businesses are impacted. Tom, I think you probably have some color you can add with respect to how that 1.9 breaks down.

Yeah, we tried, as John just referred to in the deck, we tried to break that down a little bit and show you the components, showing first that there's some core parts of each business that are back to or above 100% of pre-COVID levels, but then there are some areas, some revenue streams that are still relatively impacted or significantly impacted at the moment. The pace is You know, I guess as anybody's guess at this point, it's a smaller and smaller portion as we move along. You know, I would tell you as a bit of color that as you look over this first half of fiscal 22, particularly the first quarter, probably don't expect much movement. There's nothing really new happening in this quarter versus first quarter versus fourth quarter just finished. Matter of fact, as sports goes indoors, you know, could that, we're not sure what that's going to do, um, uh, in that area. So, you know, I don't, I don't see a great deal of movement in this, in this bucket, uh, over the first half. Um, but then as we talked about in the outlook, you know, seeing things returned to pre COVID levels, uh, or close to, you know, as we progress through the year and into the second half.

Okay.

Thank you.

As a follow up, could I, um, We asked for a bit more color in terms of the cost outlook. I mean, you talked about being able to pass on cost pressures in terms of price. But when you sort of look at the buckets of labor and food, what kind of price increase do you think you need to pass on in the year ahead?

Well, I hope – I say this a little tongue-in-cheek, but I hope very little. I mean – again we drive our value through cost control for our clients and so it's a bit of a dance that we we obviously need to recover our costs uh and and our teams do a tremendous job of that uh but we also need to provide value for our clients so uh it's a case-by-case much uh base as much as it was you know in the early days of covid where we're negotiating contracts you know the teams are out there you know diligently working um In some cases, there's a bit of a delay in pricing, such as higher ed. They're fixed for the semester, obviously, and then they negotiate for the new semester. Others, it's instantaneous or it's contract-driven that the changes can happen instantaneously. But always, we're looking to provide what can we do first before just passing a bill on to the clients.

yeah i would just add that you know we while we still have the contractual rent to do that we think it's imperative that we use all the levers we have under our control because ultimately that's what helps the client derive value from us as an operator that they see higher value if we're able to really deliver to them beyond their expectations but there comes a time when you have to use the lever. And we've got systems in place and infrastructure in place that really assist our frontline managers with understanding what the cost implications are going to be for them. And they're a very specific location because it's different by geography, it's different by business unit based on the products that they use and the mix of menu offerings. So we've got systems in place and process in place that really helps them make their individual decisions and negotiations And we're very confident in our team's ability to go ahead and recover that, those inflationary cost pressures. Okay, perfect. Thank you.

Stephen Grambling from Goldman Sachs is online with a question.

Hi, thanks. I may have missed this in the beginning, but what are some of the expectations at the segment level as we think about organic growth and margin assumptions? And then could you also – for 2022 and can you also bridge us kind of from that sales and margins to free cash flow guidance as we think through some of the other line items such as capex contract investments cash taxes and working capital tom you get this one yeah five segments even you know i haven't really gone into that level of detail so um you know we'll i'll take a pass on that one

you know, provide the overall guidance. You know, we're getting, as John said, broad brush, you know, positive results across the piece, you know, year to year. It could vary a bit, but, you know, we feel very good about the progress that each of the segments are making in their growth journey and expect, you know, good results from all three over time. In terms of bridging the cash flow, it's a very strong quarter. It's a very strong year for cash flow. It certainly was helped by the federal tax refunds. Very strong work in capital management and, of course, the underlying operating results. Probably a bit higher if you look at it as a conversion or a percentage of AOI higher certainly than than we've done before because of a couple of those CARES Act items. But we do expect as we get into next year through the guidance to be back around that sort of 45, 50% AOI conversion, which we historically have been to. I personally, and we'll talk about it again in a few weeks, I personally like to see that continue to push a little higher. CapEx, I think pulling this back to the new business wins this year, I think the market remains very rational. As John mentioned, we're not lowering our return expectations or investing a lot more to win these contracts. So I think proportionally, I don't feel a lot of pressure on CapEx and therefore free cash flow. So I think trying to get into that near 50% AOI conversion rate for free cash flow is a realistic target for us.

And perhaps one follow-up as a point of clarification. On the 10% to 15% headwind you cited for new contracts, is that the full headwind from both going from, call it, 0% to 3% net wins and the impact of the ramp from new contracts, or is it really just the headwind from, you know, kind of going from zero to the 3% plus. Thanks.

Yeah, it's really the headwind going from a standstill. So the zero to three portion, because that's what I'm saying. And once we start to lap it in a few years and we've got a consistent growth model going, that headwind dissipates. Awesome. Thanks so much. Yeah.

Andrew Whitman from Baird is online with a question.

Yeah, good morning, and thanks for taking my question, guys. And first, just thank you on the disclosure for the net new retention, the gross new wins. This is obviously really important indicators that I think many of us have wanted to see disclosed for a long time. So thank you for the transparency. It does a lot. Just based on that, I thought we'd use the opportunity to ask a question as well. And regarding the gross new wins, you know, record, heard that. We heard record retention, and that's all very positive. The context that I'm looking for is the 1.24. How does that compare? You said record. How much record?

Andrew, did we lose you?

Hello? I apologize. Hello? No worries. I'm sorry. Thank you. My phone's been off all morning. The context that I was looking for was the The context that I was looking for was that the five-year average of new wins has the one year of COVID impact that brings that one down. So how much better was 21 on gross new wins than historical levels?

Yeah, I think that was a fair number. I mean, COVID-20 was impacted the five-year average, but believe it or not, there were there were years in the past five and certainly past eight that were lower than last year in 2020. So I don't know that I'd attribute a lot of that five-year average just to COVID helping out the cause in terms of the jump from the five-year average to 2021.

Okay, that's helpful. And then I was just wondering, in terms of the impact of where you're winning your business, education and facilities seem like kind of the areas where you've won the most. Can you just talk about how those margin profiles in those businesses compare to your overall fleet average? As the business recovers more, is this helpful to your average margins, or does it go the other way?

Yeah, I would say – In general, helpful. We don't like to talk about margins in the individual components of the business because of the competitive nature of the marketplace. So I don't want to be disclosing my individual line of business margins. But I would say in general, helpful. Both businesses operate above the company average.

Okay.

Thank you very much.

Richard Clark from Bernstein is online with a question.

Hi, thanks for taking my questions. Just the first one. It's been a mantra in the industry of margins recovering ahead of volumes. And if I try and kind of unpick your guidance for next year, are you expecting that we'll still be seeing a material COVID impact as we exit 2022? Or are you, because of this acceleration in new business wins, would you step away from that view that your margins will recover ahead of volumes?

Well, Richard, because it's a slightly complicated one, and we talked about this a year ago, if you assumed that the new $16 billion, which was our pre-COVID level, was exactly the same as the new $16 billion, I think we would recover. So we would sort of continue to stand by that statement. Unfortunately or fortunately, and actually we think it's very fortunate, the what the composition of the new $16 billion, which includes some pricing, which includes, you know, material now, that new business, provides, you know, is a headwind on the margin. And to the previous question, as we sort of go from no growth to growth. So you've got to sort of pull it apart. That's what we, again, we tried to show on the slide to say, if we theoretically just brought back the same revenues they recovered we would recover to a you know a higher than 19 margin but now you have all this new in the short run margin dilutive revenue that's going to bring us back up to 16 in a different way then getting to that back to that margin is going to be much more of a chore by 16 but ultimately That is all good news for the long run because I'd rather have great net growth than just have pure recovery from a margin standpoint. Okay.

Again, I would just add as the volume recovery takes place, as those accounts that are still below the COVID-19 levels, pre-COVID levels, as they recover, they'll recover at generally a higher rate of margin based on the leverage in the business and based on the actions that the company has taken. So if you build the recovery volume on top of what we've been able to achieve from a net growth perspective, we should be operating at a higher margin as we exit.

Okay, that was clear. And then maybe just a follow-up. I think this was a question that someone tried to answer earlier, then they got cut off. But the 1.24 billion of gross wins that you've highlighted for 2021, is that number itself impacted by COVID? Or have you kind of reversed that out? Is that number actually 1.5 billion on fully normalized revenue? Is that actually better than what you're presenting in the slides?

No, we tried to normalize it. So the 124 is a normalized number against, again, against a normalized pre-COVID comparison. So when we talk about it being, if you do the math, and that's all, it's just a number on a number. The 124 on the pre-COVID revenue is that 3.1% on that base. So we tried to make it a comparative number pre-COVID to post-COVID.

Okay, so there's actually a smaller number today, but that's what it will be once we're back to fully recovered volumes.

No, that's, well, is that correct, Tom, or is that the performa expectations?

Both numerator and denominator exclude COVID. Okay. They're both normalized numbers. Okay, thank you very much.

Shlomo Rosenbaum from Steve Always Online with a question.

Hi, it's Adam. I'm for Shlomo. Could you talk about how the company is tracking in terms of the routing technology rollout for the uniforms division?

Sure. Shlomo, I'm sorry. I had trouble quite understanding the question. Could you ask it again, please?

Yeah. How is the company tracking in terms of the routing technology rollout for the uniforms division? Terrific. Thank you.

That was much easier to hear. Yeah, it's going very well. The ABS implementation, as we've talked about, Over the last several quarters is running. We're right right around 80% of revenues covered and expect to be completed with the implementation and the rollout by call it the second quarter of our of our calendar. I'm sorry of our fiscal year. So call it January, February, March will be completed with the rollout and working through the optimization strategies so The team's been able to do a terrific job of getting that implementation done during the COVID environment, and we're very pleased by the progress and fully expect it to be wrapped up as planned.

And your last question is from Hamza Mazzari with Jeffrey.

Good morning. Thank you. Most of my questions are answered. I just had one question. Could you just remind us on how big your GPO business is today and the scale you have relative to competitors and whether that's a focus going forward as well? Thank you.

Yeah, it is a focus going forward. We continue to continue to work very aggressively to grow both that business through new customer acquisition as well as new client representations, if you will, as well as looking for bolt-on potential acquisitions in that space as we've done a number of small bolt-ons over the course of the last few years. So in terms of total purchase spend, I don't know, have we disclosed that number before, Tom? I'm not certain.

We have not.

Yeah. Yeah. I would say the combined scale of the two purchasing organizations between Avendra and the supply chain organization from Aramark, we've got very adequate scale to compete with the large other GPOs out there, and we're really focused on growing that purchase spend and leveraging it. We've had actually very strong results over the course of the last quarter as a result of the improving hospitality trends taking place, improved travel trends taking place. So we're very encouraged by that business and continue to be focused on it. Very good.

Thank you.

Thanks, Hamza.

With that, I will now turn the call back over to Mr. Zimmer for closing remarks.

Terrific. Again, thank everybody for joining us this morning. We're Excited about the future of the organization, about the achievements the company has been able to make in the last 12 months during a very difficult environment, and we are excited for the future of Aramark. I'd like to say thank you to all the associates and employees of Aramark around the world who've done such great work for our clients and our customers, and looking forward to seeing them all in the field as we all recover and get back to normal life. Thank you very much.

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