Aramark

Good morning and welcome to Aramark's first quarter 22 earnings results conference call. My name is Kevin and I'll be your operator for today's call. At this time, I'd like to inform you that this conference is being recorded for rebroadcast and that all participant lines 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 Phyllis Cassell, Vice President, Investor Relations, Corporate Affairs. Ms. Cassell, please proceed.

Thank you and welcome to Aramark's first quarter fiscal 2022 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 Zillmer, 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 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. So with that, I will now turn the call over to John.

Thanks, Felice, and it's good to be with all of you again. In December, we had the opportunity to come together in person at our Analyst Day to provide an overview of the state of our business, highlight our value-creating strategies, and introduce our long-term performance goals through 2025. as well as the actions we're taking to achieve them. As we review our first quarter results this morning, we're exceptionally pleased to see the significant progress that we've made in both our performance and ability to achieve our financial targets. Fiscal 2022 has already begun with great enthusiasm across the organization that's building on the momentum created last year, which included record net new business. Most notably, we're off to an impressive start in net new business driven by strong retention rates and newly awarded contracts. Just last week, we announced the largest client win in Aramark's history with Merlin Entertainments, a global leader in location-based family entertainment and one of the world's largest attraction operators. We will be providing services for Merlin that span seven locations in the UK and U.S., This is a differentiated self-op conversion that represents a unique growth opportunity for Aramark outside our historical portfolio to serve a new dynamic type of client. And we believe our experience, expertise, and scale positions the partnership for strong success. We've already begun to work closely with our team and will begin operations next month in the UK. Additional new business wins were broad-based, with particular strength in facilities, as well as launching Walmart in Chile within our international segment. Our sales progress is off to a strong start to the year, and our pipeline continues to expand. In the quarter, we also embarked on two strategic partnerships with innovative businesses that align with our mission and service offerings. The first is with Patient Engagement Advisors, or PEA, which adds a technology and service platform to our healthcare portfolio that assists our clients by providing continual care, both pre- and post-discharge for patients, extending our services beyond the four walls of the hospital. This added capability enables us to better serve an evolving healthcare industry by working in close partnership with our clients to customize care, remove non-core tasks, connect with the community, and improve the healthcare system's financial viability and network integrity. The second, Star Restaurant Organization, based in our hometown of Philadelphia, is one of the largest multi-concept restaurant groups in the United States. Our exclusive agreement is designed to provide unique hospitality experiences for clients while enabling new growth opportunities by implementing Star's creative concepts and brands across our business. Turning now to Aramark's performance in the first quarter, organic revenue increased 41% year over year and reflected sequential quarterly improvement that reached 92% of pre-COVID fiscal 19 levels. The quarter reflected ongoing recovery in all segments, with our teams across the globe continuing to manage through various stages of COVID, especially the Omicron variant and our ability to adapt to dynamic situations. Organic revenue in U.S. food and facilities increased 61% year over year. Key drivers across each sector included education kicking off the academic year with nearly all clients holding in-person learning, while managing through some COVID-related delays in specific geographies. In higher ed, students largely resided on campus with meal plans intact. Building on our relationship with Purdue University, we opened the Purdue Memorial Student Union that serves thousands of visitors daily. We played an integral role in redesigning the facility that included creating a culinary concept in collaboration with alumnus and former NFL quarterback Drew Brees, already becoming a marquee destination on campus. In K through 12, we continue to benefit from the universal government sponsored programs. Education is currently gearing up for the upcoming new business selling season that typically begins in the spring and we remain confident in the next academic cycle. Sports leisure and corrections demonstrated improved performance. Sports and entertainment experienced double-digit per capita spending growth enabled by technology and concept innovation. Client participation in the MLB playoffs early in the quarter as well as strong levels of fan attendance throughout the NFL regular season contributed to year-over-year growth. We also offer our congratulations to our client, the Cincinnati Bengals, on their AFC championship victory and wish them luck in the Super Bowl on Sunday. Leisure maintains steady performance in the quarter with a focus on a strong upcoming season. We're excited to showcase reopenings, new renovations, and outdoor programs that enable vacationers to explore unique natural landscapes, particularly within our national parks portfolio. Corrections, where we continue to expand our efforts to reduce recidivism, once again performed above pre-COVID levels. BNI continued to experience greater in-person activity while still measured. Clients have implemented increased office safety protocols and we expect additional sales opportunities from higher participation rates, meal subsidies, and customized offerings. Facilities and other grew double digits compared to pre-COVID levels due to in-demand services and project-oriented add-ons. In addition, strong levels of new account wins contributed to this performance. and healthcare demonstrated year-over-year growth as patient visits and retail activity gradually normalized. This team remains laser-focused on first-class patient and caregiver experiences. FSS international organic revenue grew 28% year-over-year and reflected notable improvement compared to the previous quarter as Europe and Canada experienced improved activity levels in the sports and entertainment and education businesses. China, Chile, and Spain continue to outperform pre-COVID levels on a constant currency basis, with double-digit growth in revenues compared to first quarter fiscal 19. As we enter the 22 calendar year, government programs are expected to be reduced or eliminated in various countries, shifting their focus to reopenings. Organic revenue in uniforms increased 7% year-over-year, reaching 99% to pre-COVID levels in the quarter, with December reflecting the first month higher than pre-COVID levels. Kim Scott, who you heard from in December, has led this segment for just 120 days, and the team is already making an impact with a focus on base recovery, value delivery from recent investments, and building out a strategic growth plan to deliver a meaningful step change in organic growth. In supply chain, we are managing through the disrupted environment through pricing initiatives, supplier partnerships to ensure product availability, as well as off-program utilization. The proactive actions we've taken combined with Aramark scale, deep supplier bench strength, and menu flexibility have helped mitigate issues for our clients and customers. We continue to monitor our supply chain globally to ensure we remain ahead of the curve. We are proactively addressing inflation and wage pressures through fixed contract pricing, menu reengineering, and product alternatives. We've also just launched a capability that allows field employees to receive their pay immediately at the end of a shift, a compelling incentive that has been effective during this period. Two weeks ago, we released our comprehensive Be Well, Do Well impact report that highlights Aramark's key areas of focus for ESG and our path for delivering on our sustainability commitments. We've also built a strong internal model to embed sustainability across our business. As a company, we took steps to strengthen our governance, resource teams for success, and significantly increase our transparency by providing more information and data than ever before. aligned with the Sustainability Accounting Standards Board, the Global Reporting Initiative, and the Task Force on Climate-Related Financial Disclosures. Diversity, equity, and inclusion remain central to our core values at all levels of the organization, and we are proactively pursuing a DEI strategy that will expand opportunities for everyone. We've built a strong foundation, and I'm excited to continue the progress and impact of our work in 2022 and beyond. Last week, Fortune Magazine released its list of the world's most admired companies, and Aramark ranked in the top 100 globally. More notably, we were first in the diversified outsourcing category, up significantly from sixth place last year. In a year that has been both historically challenging and inspiring, this news was especially gratifying. I remain convinced that the team's unwavering commitment to our vision of being the most admired employer and trusted hospitality partner is more than just a catchphrase. It's our way of doing business. Before turning it over to Tom, I would like to highlight the recent election of two new members to Aramark's Board of Directors at our annual meeting last week, Patricia Lopez and Ken Kaverian. Patricia's balance of creative, strategic, and operational skills will add a new perspective to our strategic direction. and Ken's deep expertise of the digital landscape will be a valuable asset to further drive innovation. We're looking forward to both joining our board and providing a meaningful impact. I would also like to thank Irene Estevez, who announced her retirement from our board, for her valued contributions since 2015, and most recently as the chair of our finance committee. I'll now turn the call over to Tom for a detailed financial review of the business.

Thanks, John, and good morning, everyone. At our analyst day, we also shared with confidence that the foundation is set to achieve our outlook for fiscal 2022 and our long-term goals for fiscal 2025. Throughout the first quarter, we executed on our strategies that not only strengthen the current state of the business, but position the company for future success driven by profitable growth. As John mentioned, organic revenue in the quarter reached 92% of pre-COVID fiscal 19 levels, compared to 65% at this time last year, with meaningful improvement across all segments. While this year-over-year performance reflected a continued steady recovery in pre-COVID-based revenues, it was also driven by the impact of pricing pass-through and the initial contributions from last year's record net new business as we began operations at those new client sites. Consistent with what we discussed regarding our COVID index last quarter, The vast majority of our operations have components of the business that have already approached or exceeded pre-COVID organic revenue levels. However, a few select areas within the portfolio continue to be slower to recover, specifically white-collar business and industry, retail and catering and higher education and healthcare, conference and convention centers, concerts, and select events within the sports, leisure, and corrections sector. and some hospitality clients and Canadian operations in our uniform segment. We anticipate these remaining volumes still impacted by COVID will continue to recover throughout the course of this year and beyond. As previously discussed, in many cases, the company has brought back operating and above unit support costs in advance of full revenue recovery. We anticipate that as COVID impacted volumes recover, this transitional impact on profitability will unwind with an expected incremental margin of 15 to 20% on the returning volumes. As revenues improved during the quarter, we continued to control what we could control by effectively leveraging our variable cost-based operating model and proactively addressing inflation and wage pressures through supply chain initiatives, ongoing efforts to drive operating efficiencies, and lastly, through account pricing. As a result, Adjusted operating income improved by $176 million year over year, resulting in a constant currency AOI margin of 4.3%. AOI margin was somewhat affected by the startup of new accounts and off-program supply chain actions. As the year progresses, we expect that the global supply chain environment will ease. Our collective actions resulted in an adjusted EPS of $0.22 compared to an adjusted loss per share of $0.31 last year. On a GAAP basis, Aramark reported consolidated revenue of $3.9 billion, operating income of $140 million, and diluted earnings per share of $0.17. These results included a $92 million revenue contribution from the next-level hospitality acquisition that continues to be excluded from our organic revenue metric until we lap the acquisition Q3 of this year. Now turning to cash flow. In the quarter, net cash used in operating activities was $503 million, and free cash flow was a use of $569 million. At quarter end, we had over $1.4 billion in cash availability and no debt maturities due until 2025, with the exception of the AR facility, which supports our seasonal working capital needs. As expected, the first quarter saw the return of our normal seasonal cash outflow, driven by a use of working capital in the higher education business. In addition, working capital was also impacted by increased accounts receivable due to the improving pre-COVID-based revenue and record-level new account openings. Compared to prior year, cash flow results in the quarter also included higher incentive compensation payments associated with exceeding our fiscal 21 targets and a scheduled deferred FICA payment of $64 million that we had previewed in our outlook during last year's Q4 earnings call. Consistent with previous quarters, we participated in the appropriate country-specific government assistance programs where we received approximately $25 million in labor credits that offset costs incurred globally. As we move into the new calendar year, these government programs are expected to be reduced or eliminated in various countries. Looking ahead, Our capital allocation priorities will continue to balance potential debt repayment opportunities with the disciplined use of capital investment to facilitate new business wins and drive results in existing client locations. We will also remain opportunistic in pursuing select accretive M&A that advances our profitable growth agenda. Lastly, we remain committed to our quarterly dividend as noted by the Board's approval last week of our upcoming quarterly dividend of 11 cents per share. So let me conclude with our outlook for fiscal 22. The first quarter reflected a solid start to the year, and we were extremely encouraged by the upward trends of the business that included organic revenue improvement, cost discipline, effective cash management, and notable new client wins. Based on our current view of the business, we maintain our previously stated full-year fiscal 22 outlook of organic revenue growth between 23% and 27%, AOI margin of between 5% and 5.5%, free cash flow between $300 million and $400 million, and annualized net new business in a range of $550 to $650 million, which would represent, at the midpoint, 5% of prior year revenues and 3.7% of fiscal 19 revenues. At all levels of the organization, We wake up every day with an everyone sells mindset and a commitment to reach $20 billion plus in revenue, deliver 7% plus margins, and a leverage ratio below 3.5 times, all by 2025. The foundation is set, and we couldn't be more excited. John?

Thank you, Tom. With fiscal 22 just underway, I'm extremely pleased with our performance as we begin the new year and confident in our ability to execute on the numerous opportunities ahead. As a company, we've implemented a number of meaningful initiatives across the businesses and have continued to build upon last year's momentum, which included record net new business. Our belief in Aramark's success has never been stronger, and I'm immensely grateful for the exceptional teams around the globe who make it happen each and every day. Thank you, everyone. An operator will now open the call for questions.

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

thank you very much of the very good quarter here you know again another quarter of good good on new business here can we just get a little bit more color on some of the new business I think I don't know if Merlin was the biggest that you had maybe you could kind of explain how you got that what the process was and then also if I was to put kind of pencil to paper here I think Yosemite was maybe $140 million of revenues. Is this sort of like the level we're talking about for that win? And how should we basically be modeling it? Thanks.

Terrific. Thank you very much, Ian, for the question. First of all, this was a process that was undertaken over the course of the last year. Merlin had been evaluating self-op conversion. They've previously operated all this business themselves. They went through a very disciplined process, including a number of different competitors, and we were gratified to be selected as their provider of choice. It is the single largest account we've ever sold, but we've agreed with them not to disclose the size and scale, but what we can say is that the largest account we had ever previously sold was Yosemite National Park, and the revenues disclosed at that time were $140 million. So from a disclosure perspective, that's as far as we're going to go with respect to the size of the account, but it is significant. It's a very exciting win. It does represent a new vertical opportunity for us. The amusement park business around the world is primarily self-operated, and we see that as a potential opportunity for continued growth in the future. So it's an exciting win. The team, both domestically and internationally, work together very closely to make this happen, and we're excited to get started.

Okay, thank you. And if I could just ask a few more on the new business side. Maybe one question for Tom would be, what is the AOI drag from the new business? Maybe you could quantify it. And then maybe for John, when we think about the environment we're in with inflation, labor shortages, has there been increased discussion as far as self-op conversions? Have we seen that yet? Do we expect that to accelerate? And how should we kind of be mapping that out going forward? Thanks.

So, thanks. I'll talk about the self-op conversion process first. We are seeing an accelerating trend of organizations in multiple segments of our business, you know, continue to evaluate self-op conversion opportunities. And that's happening in higher education and healthcare areas. in K through 12, and in some very non-traditional markets, as we just discussed, and also in the facility sector. So we see it as a fairly broad-based phenomenon. As you know, last year, about 50% of our business wins were self-op conversion wins. That's up from kind of a normalized level of around 30% on an annualized basis. So we see that trend continuing with an expansion of potential opportunities in and one that we're very well positioned to take advantage of.

And on your first question, the AOI drag on new business, it really depends on the type of contract and the complexity and size of the account that we win. The bigger and more complex P&L-oriented contract will have a larger drag, and a sort of small cost-plus contract will virtually have no drag. So it really just depends on the mix of business that we're winning. You know, generally, as we talked about in the analyst day in Q4, you know, the maturity is over a couple, two, three years for a lot of these contracts. And then it just, again, depends on the mix.

Thank you. Our next question comes from Tony Kaplan with Morgan Stanley.

Hey, guys. This is Jeff on for Tony. Can you help us out with recent trends in the business and any impact you've seen from Omicron? Mainly, did you see any notable fall off in December and then into January from the level of sales you were doing earlier in the quarter? And if there was a decline, has that since recovered? Just how should we think about that?

A slight impact at the end of the quarter, really negligible. Same thing as we moved into January. I think the the month was about as we expected, maybe just a touch off, but nothing of note, you know, given our, as reflected in our guidance for the year being unchanged. And, you know, as we move into these weeks, it's sort of a week-by-week basis, but we don't see anything that has significantly changed, you know, our outlook or really what we expected through December and January to any great degree enough to call out.

Okay, got it. And then in your remarks, you mentioned using pricing pass-through as a driver in the quarter. So I was hoping for some more color around that. Are there particular geographies or verticals where you're trying to push more price than others? And just to clarify, are these price increases largely in line with your cost increases, or are you pricing intentionally beyond those increases? How should we think about that?

Yeah, I think you should think about pricing pass-through as inflation or cost recovery mechanisms. Our primary driver for growth is new account wins, new customers, increasing participation. So we're not trying to build margin by pricing pass-through. We're trying to recover our costs. So there is a little bit of a lag in some of the businesses as we have pricing that's, you know, particularly in contracts on the correction side where the pricing is fixed and you get an inflation adjustment on an annualized basis. So there might be a slight lag there. Obviously, in higher education, the pricing on board plans is set the previous year. So there are lags on pricing pass through in higher education. But that's basically all built into our plan and our expectations for the balance of the year. We don't see it as having a you know, through the balance of the year and expect to recover the impact of inflationary pressure.

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

Hi, Tom. Could you give us some color by the three segments when thinking about the 22 organic guide of 23 to 27 percent?

Andrew, in terms of the contribution from each or how they're trending against what we expected?

Yeah, how will the three segments contribute to 23% to 27% organic revenue growth for the year?

Well, I think we expect international to continue on in a strong form. They've had the most consistent year-on-year net growth of the three segments. So they'll be contributing strongly. The U.S. is picking up the pace quite nicely last year, and so they'll continue to contribute into the year. And then the AUS business has had, you know, a good restart with their sales process over the last 18 months. you know, probably will contribute a little slower than the other two. But again, they're picking up some good momentum and good pace. So we expect all three to contribute, probably slightly led by international.

And those price increases that you mentioned, you know, I assume those weren't contemplated when you first gave this guidance of 23 to 27 percent organic. So would it be more recent price increases that sort of, you know, kind of help the overall organic revenue growth trajectory for the year?

We did anticipate it because, you know, inflation really was, you know, in our budget cycle through August, you know, we had pretty good visibility into what we thought inflation would be. It's tracking slightly ahead. So that, you know, ultimately, if we execute right, we could provide a bit of a tailwind on the top line. but not significantly over what we anticipated as we started the year, unless it's prolonged throughout the balance of the year.

I understand. Thank you very much. I appreciate it. Our next question comes from Richard Clark with Bernstein.

Hi. Good morning. Thanks for taking my question. So just first one, of the 92% recovery you talk about, whether you could break that down between where you are on like-for-like volumes, how much bigger your footprint is than the comparative period, and maybe where your pricing is relative to the comparative period, please.

Michael Heaney Yeah, if you break back on the base and try to, you know, get to the COVID base, if you will, you know, I think we're in the mid-80s there. And then if you build up, you know, probably a solid year of net growth in there, as opposed to two since we were, you know, restarting that growth engine, you know, a year, maybe a year plus of pricing. So you build up that 85 to 92, and then you've got the next level on top of that. So I think that's, you know, generally where we are on the base compared to what's reported.

Okay, that makes sense. And then just a question on cash flow. I notice you've drawn down all of the revolver in the quarter. You normally do draw down something in the first quarter, but this normally looks a bit more sort of sized to get to about $250 million of cash, and here you've gone way beyond that. So just maybe any commentary on why draw down all of it, and especially given your capex seemed very low in the quarter. I can't find a quarter at all in your history where you only spent $82 million. So is there some capex to come maybe? Is that why you've drawn it down so much of it?

Well, it was a working capital need as really the business continues to restart, in essence, sort of repopulating the balance sheet. AR, as you can see, was up as it normally is, but even so, it's more than historical because of the continued recovery of the COVID base. And then on AP, I think just to add a little more color, you know, that was accounts payable was was kept very tight in the quarter as we dealt with some off-supplier programs and distributors, just keeping that tight to ensure the continuity of the supply chain and the deliveries. So we had those two effects in there. And like we said, we paid the deferred FICA payment of 64 million and then, you know, against a prior normal base 19, also had higher incentive payments in the quarter.

And any color you could just add on the low CapEx number in the quarter?

It's purely timing. We don't see it being anything that's different than we're expecting for the full year. Still probably in and around the three and a half percent of revenues mark, you know, on a normalized revenue basis for the year. So I think that's just, you know, let's look back on the full year and I think we'll be there. The opportunities are in front of us and we're happy to spend CapEx for for long-term contracts.

Okay, makes sense. Thanks very much. Our next question comes from Shlomo Rosenbaum in Stiefel.

Hi, good morning. Thank you for taking my questions. Hey, John, just to start, can you talk a little bit about the success? You're talking about new contract wins, and you had this Berlin Entertainment's win, which sounds really like a fantastic win. Are the wins... From the outsourcing trend accelerating, do you think it's company-specific efforts from all the sales resources you put in, or do you think it's some kind of combination of both? How should we think about that?

Yeah, I think – well, we are seeing accelerating opportunities, I think, and we are – have been very successful in converting those opportunities, in particular Merlin and several others that we'll have the opportunity to talk about here over the course of the year as we close and contract those. So I think you are seeing an accelerating trend of additional outsourcing coming from both traditional businesses as well as some nontraditional segments. And I think our sales organization has just done a fantastic job of capitalizing on those opportunities and converting them. So I think we're enjoying significant success, and we're just taking advantage of all the opportunities that we have been presented with. The Merlin win is obviously a very different segment. It's something that, you know, as a first-time outsourcer and a first time in the industry, we're very gratified with our ability to go ahead and compete, to go ahead and get that win. So it's very exciting for the organization, and it does represent significant further growth opportunity in the future. So I think it's a combination of both, Shlomo, and I apologize for the long-winded answer, but I think it's really a combination of both accelerating outsourcing and just improved performance of the organization.

Okay, great. And then, Tom, Can you talk a little bit with a contract within the size of Merlin? Is there a noticeable impact to margins as you ramp that business? Usually when there's a startup of a new customer, there is a depressing impact near-term on margins. Should we expect that to be similar, how this is going to work over here, and if so, how long? And then it seems like there's growth opportunities within Merlin as Is there some way to dimensionalize that? Like, you know, what percentage of their business this contract represents? And, you know, so how much is going outsourced and how much is remaining that's still insourced and how we can think about that?

Yeah, there definitely is further opportunity. So we're excited about that. But I really can't go any further at the moment than that answer for you. It could, and as I said before, provide or create a drag on margin. We're fortunately, and I think very smartly both for Merlin and ourselves, opening it in a phased approach starting in March. And so I think that helps mitigate some of the headwind that will come from the early days of the contract. So I think we've been thoughtful about how we're approaching it so the impact, to use your word, isn't noticeable. But certainly it will put some pressure on us to open it right and effectively and get this off on a good foot.

Yeah, and I would just add that our guidance anticipates these winds and the anticipated drag from opening. And keep in mind, this is a phenomenon that as we lap year over year, as we begin to generate this engine, as this engine produces sales results and net new business growth year over year, we'll lap those new account startups next year and then add another batch. So you'll have this phenomenon in terms of the margin drag ultimately works its way through the system as you continue to build the new business base and these accounts mature over time. It's an anticipated impact. It's one we're well prepared for, and our guidance reflects it.

Great. Thanks.

Our next question comes from Stephen Gramlin with Goldman Sachs.

Hi. I know you don't like to talk about the specifics on any individual deal, but just going back to Merlin, just can you give a little bit more color on what services are part of that deal? Is that just food and beverage or also retail? Is there room to potentially expand the number of properties that are being serviced? And then as a related follow-up, have you had any conversations with other amusement park operators and what maybe makes this segment more or less likely to outsource now versus history?

Yeah, well, those are great questions, and I would say we are bound by the confidentiality agreement we have with Merlin with respect to their business. We do see significant opportunity to grow with Merlin, both geographically through the opportunity to potentially pursue additional park operations in other parts of the world, They will continue to operate some of their retail business. That will present a forward opportunity potentially in the future. And, you know, the scope of services that we've talked about is with those seven facilities in the United States and in the U.K. And it's a comprehensive list of services in those facilities, primarily food, and that's about as far as we can go with respect to the disclosure. I think over time, as Merlin becomes more comfortable with us and we with them, we'll be able to talk about this more openly. Because it's a first-time outsourcing opportunity for them, they're very sensitive to making sure that their employees are well-treated and that and that they're fully informed. So we want to be respectful of their needs, both internally with their employees and with the marketplace.

Got it. Thanks so much.

Thank you. Our next question comes from with RBC Capital.

Hi, this is John filling in for Ashish. Could you just remind us about the margin ramp in the back half of the year and how we should think about modeling as COVID impacted volumes return? Thank you.

Yeah, we definitely see an acceleration into the back half, probably, you know, an exit, you know, in the neighborhood of six and a half percent as we go into fiscal 23. You know, again, we talked about before with, you know, some slight headwinds. probably impacting Q2 a little bit, maybe into Q3, depending on how long inflation remains at the levels it has been. As I said before, we baked in a good bit of inflation into this plan and this outlook. But if it stays up to this level for the balance of the year, that could provide a bit of a headwind. And then, of course, you know, better net growth if we really continued the pace we've got with the net growth. That could be a little bit of a drag. But all those things considered, and as John was mentioning, you know, we factor a lot of that into what the outlook and guidance we put together. But with an exit sort of mid-sixes from the 4.3 in the first quarter, sort of that trend.

Great. Thank you. And then lastly, just on the performance in uniform, could you just maybe break it down in terms of the new client wins and just what the level of the pricing path through was? Any color additionally on the volumes would be greatly appreciated.

Yeah, their COVID base, their portion of, I said, mid-80s for the overall company is where we are on the base recovery. They're obviously much higher. They're not at 100, but not far off. And then, you know, their pricing and net wins, bringing them back actually in December was the first month since COVID hit. They've been above pre-COVID levels. So those net wins and pricing took them above that off of a base that was still just slightly below their fiscal 19 numbers.

Thank you. Our next question comes from Neil Tyler with Fred Byrne.

Yeah, good morning. A couple left, please. Firstly, back to the Merlin contract, just very quickly. When you spoke at the Capital Market Day in December, how good was your visibility on achieving that contract? And I suppose the question really is to what extent that is already in the net new figure for this year. Second question, on BNI, you mentioned the client strategies aimed at persuading employees back to work. Can you give us your insights into the extent to which any of those strategies might drag on margins or enhance margins, please?

Sure. Well, in the BNI sector, we continue to see companies focused on getting their employees back to work. We're seeing an expansion of of subsidized offerings and customized offerings in the B&I environment that continue to support the return-to-work strategies of the various employers. So many have adopted significant changes to their former approaches on food service, some subsidizing 100%, some providing free meals. But almost all of our B&I contracts are currently operating on a management fee basis. I think that's probably true of most of the industry, to be honest. And so we continue to see employers providing every opportunity and every incentive to bring employees back into the office. And so, you know, we're able to provide some very differentiated offerings. You know, we're implementing things like touchless pay and other opportunities, you know, delivery to workstations, a lot of different service providers. changes in order to accommodate the needs of our various clients in BNI. So I think the business, while it's slower than the others to recover because of the ramp and timing issue, I think ultimately the business has very strong prospects going forward. So we're very pleased with the progress that BNI is making on their return to work. You know, with respect to the Merlin contract visibility, yes, when we were together, we did have a very clear understanding that this would be a significant opportunity. We did not have a signed contract at that stage, and we were still in the process of Merlin working through their own internal discussions and their own internal notifications for their employees. So that's why we didn't disclose it back in our investor day. So It's a very exciting win. As we've talked about, our net new business goals for this year are a significant step up over our net new business disclosed numbers from last year. We have very high expectations for this year, and we're off to a very strong start for net new business wins, both from a retention perspective as well as those new client wins. So we're very, very pleased with where we are after the first quarter. both domestically and internationally.

Thank you. Our next question comes from Andy Whitman with Baird.

Great. Hi. Good morning. Thanks for taking my questions. John, pitchers and catchers are supposed to be reporting in a couple of weeks. We have a lockout situation there, and obviously the owners and the union will be figuring that out as time goes on. But I was just kind of curious more about the right way to think about or how you're thinking about the attendance in ballparks for the important baseball season coming up. Most of the pro sports leagues have been down kind of single-digit percentages in attendance here recently versus their pre-COVID levels. Is that the right way, do you think, to think about baseball as we get into the summer outdoor season? Or do you think that that business can be at or above pre-COVID levels in terms of attendance?

Yeah, I have a strong belief that Major League Baseball, if it solves the lockout issue, will come back, you know, very strongly for the summer season. And we anticipate and project attendance levels to be at pre-COVID levels in MLB, with potentially the exception of the Canadian environment. So it's just hard to say when that will resolve itself. But You know, we do believe that outdoor events in particular, like we saw that with the NFL this year, very strong attendance in the NFL teams. So there's a lot of pent-up demand for baseball. We think it will perform well this year. We have very high expectations from both a per capita spending perspective as we implement those new service offerings that we've been able to achieve in football and other venues. So we hope for a strong season, and we hope that the Major League Baseball and the Players Association work through their issues and resolve it as quickly as possible. As you know, the Labor Secretary yesterday offered to go ahead and engage in a process to help the two sides. Hopefully that stimulates some further dialogue, and we're looking forward to a very strong baseball season.

Okay, that's helpful. Thank you for those thoughts. And then, Tom, just for you, you mentioned, I think, in the prepared remarks a couple of times, the labor subsidies that you've been receiving internationally. I guess they were about $25 million. Presumably, those are baked into your margin outlook. But I was just wondering, could you talk about any offsets to those? I mean, early on, a lot of those were just to keep people employed, even if the volumes for whatever they were doing weren't there. Have those volumes recovered yet? enough that they now stand on their own, or do you think adjustments need to be made to kind of offset some of the headwind from those prior subsidies?

No, it's still the same effect as before, just a lot smaller. So it's still recovering costs for folks to keep them, you know, employed and around the world as those volumes recover. So it's waning. The number is getting smaller and smaller, and as I said, we expect those to be virtually nil as we finish the year here. So it's the same concept as before.

Okay, great. Thanks a lot.

Our next question comes from Hamza Mazari with Jefferies.

Hey, good morning. This is actually Ryan Gunning filling in for Hamza. My first question is just around competitive changes. Have you seen any changes in the competitive landscape from COVID in terms of market share shifts among the big three or even regional competitors? And then as part of that, have you seen any change in the role of distributors like Cisco evolving further?

Yeah, I would say the competitive environment continues to be – you know, very balanced. I think all of us are working very aggressively to retain our existing clients and working hard to sell new opportunities. You know, I think that I wouldn't I don't think there is a share shift going on. You know, I don't see significant share transitioning from one player to another, but we are pursuing those new opportunities as contracts come to market very aggressively. But nothing that I would say is different from the historical approach. to doing business. The fact that we're able to capture some of these large self-op conversions is significant, but they're also being aggressively pursued by our competitors as well. So from a distribution perspective, I think the large players in the industry are working very hard to meet the demands of the environment, working very hard. They have labor issues. They have supply chain issues. They're all working very hard to go ahead and solve those, but I don't see any structural changes in the industry. They continue to serve us well. As you know, we're partnered with Cisco as our primary supplier in the U.S., Canada, the U.K., and Ireland, and they've worked very hard to be able to serve the needs that we have. to help manage through the supply chain efforts. We also have very strong relationships with alternative suppliers. U.S. Food is our primary supplier for Avendra. They work very hard and very diligently. So I think all in all, they're struggling with labor issues, with product issues, but they're working very hard to go ahead and solve for us. So nothing that I would really call out as being structural change for that industry.

Great. That's super helpful. And then my follow-up, just in regards to headcount additions, can you talk about how you're thinking about headcount additions going forward in 2022 versus last year and how much labor availability has been an issue for you guys?

Yeah, we, you know, certainly, you know, we live in the same environment as you. every hospitality company, so yes, there has been a labor shortage. We've worked very diligently to close those gaps. We've got a very strong talent acquisition organization, and I think that has positioned us extraordinarily well. I think in large part the labor shortages in our operations have been resolved. And we're operating at pretty normalized levels. We've instituted a number of things to go ahead and make us a more attractive employer. And we've implemented a number of things like same-day pay, which has impacted our ability to retain and recruit people in various industries and higher education and others. So our employees who come and work a shift can get paid at the end of that shift, and that's been a very attractive alternative. Over 26% of our eligible employees have signed up for that program, and so that's been very successful in helping to stimulate additional staffing. So I would say we're in pretty good shape, but we'll continue to be out there acquiring talent as aggressively as possible.

Thank you. There are no further questions at this time. I'll turn the call back to Mr. Zilmer for any closing remarks.

Thank you very much, everybody, for joining this morning. We're extraordinarily excited about 2022, off to a very strong start from a new business perspective. We're very pleased. And if I would summarize the quarter in this way, it is as we expected. We have a very high level of confidence going into the balance of the year around our ability to execute against our strategies, and we're looking forward to getting together at the end of the next quarter. So thank you very much.

Thank you for participating. This concludes today's conference. You may now disconnect and have a wonderful day.