Aramark

Good morning and welcome to Aramark's second quarter 2022 earnings results conference call. My name is Josh 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 or 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 second quarter fiscal 22 earnings conference call and webcast. We also look forward to reviewing the plan to separate the uniformed services business into an independent, publicly traded company announced this morning. You will be hearing from our CEO, John Zillmer, as well as our CFO, Tom Undroff. As a reminder, our notice regarding forward-looking statements is included in our press releases this morning, which can be found on our website. During this call, we may 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 U.S. GAAP can be found in this morning's press release as well as our website. So with all that, I will now turn the call over to John.

Thanks, Felice. It's good to be with all of you during this transformative time in Aramark's history. While we continue to build on the operational changes we've made over the past two and a half years to drive a client-focused growth mindset throughout the business, we are also excited about our plan announced this morning to separate Aramark Uniform Services, or AUS, into an independent publicly traded company. AUS is a terrific business that is well poised for continued success and one that I believe will thrive as a separate company under Kim Scott's leadership. Clearly, there's a lot to cover today, and to ensure we wrap up in our usual timeframe, I will briefly highlight the key takeaways from our second quarter results and provide an update on the current state of the business. Tom will then share his financial perspective on the quarter, as well as performance expectations for the remainder of the year. We'll use the final portion of the call to review the planned spinoff and open the line for your questions. Our performance in the second quarter demonstrated the strong foundation we have built and the resilience of the business as organic revenue increased 35% year over year and surpassed 95% of the corresponding pre-COVID fiscal 19 levels. The progress on the top line came from all three segments and continued to be driven by the COVID index base recovery, pricing pass-through to help offset the impact of inflation, and contributions from last year's strong net new business, as well as the startup of this year's net new business, which is on pace for another record year. Our teams remain focused on working closely with clients to effectively manage through this higher inflationary period and tighter labor market. While we're seeing an improvement in hiring availability and supply chain resources, the war in Ukraine is creating added supply chain complexities globally, which we're working to navigate, even though we have no operations in the region. We continue to actively utilize our scale, our deep bench of suppliers, and menu engineering flexibility to help moderate the inflationary impact in the business. We have been opportunistic over the past year in selectively pursuing accretive, tuck-in acquisitions and partnerships that we believe align with our mission and expand our capabilities. Most recently, we signed an agreement to acquire a union supply group, a commissary goods and services supplier with a strong infrastructure of distribution centers and warehouses that will serve as a resource for our U.S. food business, primarily in corrections. Union supply generated approximately $250 million in revenues last year. The acquisition is expected to close in the third quarter, subject to customary closing conditions and regulatory approvals. As we enter the second half of this fiscal year, we will continue to execute on our strategic priorities. As an organization, we are rooted in service and our vision is to be the most admired employer and trusted hospitality partner. Trust is earned by delivering on our commitments and exceeding the expectations of our stakeholders each and every single day. Our deep commitment to these principles enabled Aramark to achieve a perfect score yet again in this year's Human Rights Campaign Foundation's Corporate Equality Index, in recognition of our work towards the LGBTQ plus workplace equality. Last week, we were also named a Top 50 Company for Diversity by Diversity, Inc., and cited as the top company for employee resource groups. In addition, we were once again selected as a top 50 employer by Careers and the Disabled for providing a positive work environment for those with disabilities. We appreciate the extensive accomplishments of our teams and their continued focus on enabling the equity and well-being of our own people, the customers we serve, and the communities in which we work. I will now turn it over to Tom before reviewing the announcement regarding AUS.

Thanks, and good morning, everyone. Despite the current challenging macro environment, we remained resolved during the second quarter to execute on our strategy to build a customer-focused, growth-oriented company capable of achieving the financial targets we outlined at Analyst Day. The foundation we've built so far helped deliver strong revenue performance in Q2. As John mentioned, organic revenues surpassed 95% of pre-COVID fiscal 19 levels compared to 71% at this time last year. with meaningful improvement across all segments. While these results reflected a continued steady recovery in pre-COVID-based revenues, it was also driven by the impact of pricing pass-through and net new business, particularly from the contribution of accounts that are now up and running from our record net new business performance last year, as well as a portion of new clients that started up operations during the first half of this year. Consistent with what we discussed regarding our revenue recovery and COVID index last quarter, Many 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 health care, conference and convention centers, concerts and select events within sports leisure and corrections, and some hospitality clients in our uniformed segments. We estimate that pre-COVID base revenues were approximately 88% to 89% recovered in Q2, with the missing volume coming from the COVID index categories I just mentioned. This compares to an estimated 84% to 85% last quarter. While encouraged by the steady progress we have seen in the recovery of the base volume, we still expect a residual impact from COVID as we exit the year of approximately $1.5 to $1.7 billion. slightly better than the $1.6 to $1.9 billion we communicated at Analyst Day. As these areas continue to recover through the balance of this year and into fiscal 23, we anticipate an incremental margin of 15 to 20 percent on the returning volumes. In the second quarter, adjusted operating income improved $138 million year-over-year, driven by strong unit-based cost management and our ability to leverage above-unit operational cost and SG&A support across higher sales volumes. This AOI performance resulted in a constant currency AOI margin of 4.5% compared to 5.9% in the second quarter of fiscal 19, meaning we have now recovered 76% of the same quarter pre-COVID margins, up from 62% in the first quarter and 60% recovered in Q4 of last year. While we're pleased with the progress made so far on the margin recovery, progress we expect will continue, it is important to note a couple of things on margin in this period of high inflation. First, in certain businesses, there can be a lag to pricing pass-through in a period of rising costs. An example is higher education, where most board plans are repriced twice a year before each semester. Conversely, in sports and entertainment, we can, in many cases, change prices event by event. Where there are timing delays, we are actively working with those clients to address the impact of rising inflation levels. Secondly, with cost plus contracts, higher costs are passed through to the client as incurred, which increases revenue, but our fee is most often fixed. This obviously pressures the margin percentage, but the AOI dollars remain unchanged. As you know, we currently have a greater proportion of cost plus contracts than the historical norm coming out of the COVID environment. although clients are steadily transitioning back to P&L as volumes return. The unexpected developments in the first half of the fiscal year, an increasing rate of inflation rather than abating, and the exacerbation of the supply chain due to war in Europe rather than normalizing, do not change our business's structural margin profile, nor our views concerning achievement of our fiscal year 25 financial targets. Our ability to recover and go beyond the fiscal 19 margin will be primarily driven by the incremental margin on the returning COVID index volumes, continued pricing to keep pace with inflation, and the normalization of off-program supply chain activity, as well as our proven ability to leverage our variable cost-based operating model and further drive operating efficiencies. And as a reminder, when compared to fiscal 19, AOI margin has been affected by our substantial strategic investments in growth-oriented resources and technology infrastructure, including cybersecurity. Our performance in the quarter resulted in an adjusted EPS of 22 cents compared to an adjusted loss per share of 24 cents last year. On a GAAP basis, Aramark reported consolidated revenue of $3.9 billion, operating income of $142 million, and diluted earnings per share of $0.14. These results included $95 million revenue contribution from Next Level Hospitality that continues to be excluded from organic revenue until we lap the acquisition in June. Upon its close, the contribution of Union Supply Group will also be excluded from our organic revenue and AOI metrics. We expect to close this transaction in the next few weeks following customary regulatory approvals. As John mentioned, Union Supply reported revenue of approximately $250 million last year, and we expect it to be accretive to earnings no later than the end of fiscal 23. Now turning to cash flow. In the quarter, net cash provided by operating activities was $375 million, and free cash flow was $278 million, driven by improved operating and income performance, as well as effective management of working capital. At quarter end, We had over 1.5 billion of cash availability and no significant debt maturities due until 2025. In this period of rising interest rates, we will be strategic and opportunistic with regard to debt repayment and refinancing. While we will continue to support our businesses to invest in profitable new business opportunities when needed, we will remain committed to leverage ratios below 3.5 times by fiscal 25. So let me wrap up by reviewing the latest outlook for fiscal 22. Following a strong first half of the year, we are pleased with the trajectory of the business, particularly with respect to our business, our progress in net new business, while simultaneously navigating the current inflationary environment. As a result, we anticipate the following for the fiscal year. Organic revenue growth expectations to be at or near 27% compared to previous expectation of 23 to 27%. Due to stronger contributions from net new business, increased pricing pass-through to recover incremental costs from inflation, and slightly improved base recovery. Annualized net new business in a range of 650 to 750 million compared to previous expectations of 550 to 650 million. which would reflect at the midpoint 5.8% of prior year revenues and 4.3% of fiscal 19 revenues and represent another record-breaking performance year for the company. The raise in outlook is due to better than expected new account wins while maintaining last year's improved retention rates. In addition, we have a robust sales pipeline and improving close rates. AOI margin to be at or very near 5% for the full fiscal year compared to previous expectation of 5% to 5.5% as a result of startup costs associated with better-than-expected new business wins, continued reliance on off-program procurement, as well as slower-than-expected conversion back from cost-plus to P&L contracts and the timing effect from pricing pass-through. We expect Q3 AOI margin to be in the mid-4% range and Q4 to be mid-6%. and free cash flow between $300 and $350 million compared to previous expectation of $300 to $400 million due to working capital needs associated with higher than expected revenue and the timing of cost plus contract conversions back to P&L. We continue to build the foundation to achieve our financial targets for 2025 built on a sustainable and profitable growth framework. The transformational actions we have taken over the last two years are making a meaningful impact and delivering results. As such, the planned spin of AUS reflects our confidence in that firm foundation and presents a timely opportunity to accelerate future growth and, we believe, will position both independent companies for great success. I'll now pass it back over to John to review some of the details of the planned spinoff transaction. John?

Thanks, Tom. I'll now share my comments on the planned spinoff of AUS. which we believe will create two strong, independent, publicly traded companies, each greatly positioned for profitable growth. The transaction is structured as a spinoff that is intended to be tax-free to Aramark and its stockholders for U.S. federal income tax purposes and expected to close by the end of fiscal 23, subject to certain customary conditions. One of my top priorities when I rejoined Aramark was to recapture a winning hospitality mindset and to reinvigorate the latent power of our people. Due to the hard work and unwavering support of the entire team, Aramark is a company transformed, now stronger, focused, and more energized than ever before. As a result, we're now able to execute on strategies that we expect will unlock significant value for our businesses. This includes the planned spinoff of AUS. So why now? Together with the Board of Directors and management team, we regularly assess the business portfolio to enhance performance and drive value for all stakeholders. To that end, we believe the growth trajectory we have worked to achieve enables us now to create two successful independent publicly traded companies with distinct growth and profitability strategies, business characteristics, and investment profiles. Importantly, we anticipate this transaction will offer numerous value-creating, compelling benefits for both companies, including enabling the executive leadership and boards of each standalone company to focus solely on its respective business. Each business's narrowed focus and the ability to compensate employees with equity incentives linked solely to its own performance enhances the ability to attract and retain strong employees. The availability of equity linked solely to its distinct business will facilitate each company's acquisition strategies. The flexibility for optimizing capital structures and capital deployment priorities and the ability for the investment community to value each business independently, which the company expects will result in optimized total stockholder returns. Kim Scott, our President and CEO of AUS, who you all heard from at Analyst Day, is now firmly established in a role and has a strategic framework in place to successfully lead that business. We have assembled senior executives with extensive public company expertise, including Tim Donovan, this newly appointed general counsel of AUS, who I worked closely with at Allied Waste and then Republic, as well as Jeff Freidel, the senior vice president, human resources of AUS, who has over 30 years of experience in labor relations, organizational impact, and diversity and inclusion. Rick Dillon also just joined as the CFO of AUS, adding over 20 years of financial leadership, including experience as a public company CFO, and is quickly getting up to speed. Tom and I, along with the rest of the executive leadership team, will remain on the Aramark side. Aramark will continue to operate as a proven global leader in food and facility services with world-class scale and capabilities. Food and Facilities reported pre-COVID full-year fiscal 19 revenues of $13.6 billion, operating in an extremely attractive and growing addressable market, which is estimated to be approximately $500 billion in revenues with favorable outsourcing trends. Last fiscal year, Food and Facilities achieved record net new business performance, nearly five times higher than the historical five-year average, reflecting new business wins over $1 billion, and retention rates of approximately 96%. This momentum has continued into fiscal 22, and we believe this is only the beginning. As you know, AUS provides its customers with full-service rental programs, resulting in a compelling contract-based recurring revenue model with pre-COVID full-year fiscal 19 revenues of $2.6 billion. The estimated $40 billion revenue market presents substantial opportunity for growth. In the second quarter of 22, AUS's quarterly performance surpassed pre-COVID fiscal 19-year-ago levels, and we see tremendous upside ahead. We remain committed to the financial targets provided in analyst day, which reflect opportunities for both companies to capitalize on accelerated organic growth and margin progression. While the separation will enable Aramark and AUS to implement capital allocation strategies that reflect their distinct growth opportunities, and cash flow profiles, we expect both companies to have leverage ratios below 3.5 times by fiscal 25, consistent with our messaging at Analyst Day. And it is our intention that the two companies will maintain an aggregate dividend aligned with our historical practice following the completion of the spinoff. Today marks a milestone in Aramark's storied history and sets the stage for us to reach new heights of performance success. I have never been more excited about the company's prospects ahead within both food and facilities and AUS and with the teams we have in place to get us there. Operator, we'd now like to open the line 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 touchstone telephone. If you wish to be removed from the queue, please press the pound sign or the ask 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. Our first question comes from Kevin McVey with Credit Suisse. You may proceed.

Great. Thanks so much, and let me add my congratulations. I mean, it's obviously a very, very tough environment, and you folks are really executing exceptionally well despite that backdrop. I want to start with the uniform business. I mean, it's been talked about for a while, John, and, you know, for years, I think as long as I've covered it, you know, how are you able to get it done at this point? I guess what was, you know, kind of the catalyst for that? Maybe we could start there.

Sure. Absolutely. You know, we have been obviously evaluating this for some period of time, and I've always believed that the company had work to do with respect to fixing the business, to getting the systems right, the infrastructure right, and the management team right. And the investments we've made over the last couple of years in both sales infrastructure, growth infrastructure, the route accounting systems, are largely behind us. And we are now well positioned to accelerate the growth and improve the margins in the business And then secondly, we've built a management team that I have a great deal of confidence in. I'm very pleased with the actions that the organization is already taking to improve the quality of the business and to improve the results. Kim is well positioned to lead this business into the future. And the team that we've assembled around her, I think, is extraordinarily talented and very strong. So we felt we're well positioned. This was the right time. And I think, frankly, that the market will value both companies more appropriately going forward as two separate entities focused on our respective businesses with the capital structures designed to optimize for those businesses. And as we stated in the dialogue, the benefits, I think, are very clear. And the board reached the conclusion that now was the right time to proceed.

That makes a lot of sense. And then just one quick follow-up on that. I know you discussed a potential dividend back to Aramark. I don't know if this is for maybe Tom, but Tom, is there any way to frame what that could potentially be? And then will you hold any of the existing equity of the new co or will it be kind of completely standalone?

Well, Kevin, all that's really to be determined as we go forward in the process. There are a lot of things to do from here. But the debt structure certainly is one of those, as well as the equity structure that we'll consider as we work through the details of the transaction. I mean, I'll just reiterate what John said in our overall commitment to deleverage the company and really having both companies targeting to be below 3.5%, you know, consistent with what we said before. I mean, 3.5 times, sorry.

Congrats again. Thank you.

Thank you. Our next question comes from Stephen Grammle in Goldman Sachs. You may proceed.

Hi, thanks. I'd like to stick with the uniform separation. As we think about it, are there any dis-synergies to think through as you separate the two businesses kind of qualitatively? And then I realize you do have work to do on the exact pro formas, but is there any reason to think about the segment-reported AOIs as being different than what we would see move over?

Do you want to take the segment reporting?

Yeah, I think it's directionally very accurate. I mean, as we've talked about for a long time, these businesses have been run pretty distinctly. So I think that will give you a good feel for where to go. You know, there are certainly some costs that we're working through that Kim and the team are starting to assemble, some public company costs that will be added. We still think there's some other opportunities in other areas to be a little more efficient. So we'll figure out what and eventually get to the point where Kim and the team and us will – give a clear indication of where we think the next few years go. But by and large, they're very distinct.

Yeah, we've operated the businesses pretty independently over the last several years, so I don't believe there's any significant disenergies in terms of building the public company infrastructure in place, the board, the IR activities, those kinds of things will be added costs for uniformed services today. But we believe there will be corresponding cost savings from other parts of the organization as well. So all in all, we think this is a fairly easy split. I'll use that word very carefully because there's always a lot of hard work that goes with these. But because the companies have operated separately for quite some time and have been structured that way, we think this will go relatively quickly.

Makes sense. And then on the benefits, you mentioned more focused capital deployment, including, I believe, for inorganic growth. What does that landscape look like in each segment? So what's remaining and what's being separated as it relates to M&A and the current environment? And do you generally think of those opportunities as being more tuck-in or tangential growth opportunities? Thanks.

Yeah, I mean, eventually Kim and the team talk about the AUS opportunities, but by and large I think they'll at least continue on with the opportunities to fill a density in many parts of the country with tuck-in deals. It's highly synergistic and accretive for them to do those, and they've had good past experience with it. So I'm sure that will be a continued strategy on the M&A side for AUS. On the food side, same. I mean, you've seen our activity here over the last 12, 18 months. We've been very happy with some of the deals, Wilson Vale being recent, and then the announcement with Union Supply. So we'll continue to look at very targeted opportunities to build our our service offer and strengthen our management teams across all our sectors. I don't see anything, John, you can add to this, but I don't see anything transformational on the food side, but more of what we've been doing.

Yeah, I think that's exactly right. Our first priority is continue to be growth organically through new account sales and support, debt pay down, and the occasional tuck-in acquisition when it makes sense in terms of expanding capabilities for our customers and looking at new niches for the organization that might make sense from our base business perspective. So we are committed to the targets that we established for Analyst Day. We see everything that's occurring in the business as very supportive of that strategy, and we like the trajectory, and we'll continue to be focused on the metrics that we've outlined for our stakeholders.

Thank you. Our next question comes from Ian Zuffino with Oppenheimer. You may proceed with your question.

Hi, great. Just wanted to kind of touch on debt to core business. You know, on the net new business side, you know, very, very strong. Are there areas that are like, let's just say, massively outperforming expectations that's really pushing this up, or anything that's particularly strong you'd like to call out, and then I'll follow up. Thanks.

Sure. It's actually a very broad-based performance, both domestically and internationally, across all the business units. We're very pleased. The growth culture that's been reestablished has really energized the entire organization. So Very strong performance across all the sectors, and so we're pleased by that. We continue to see pipelines building, closure rates improving, the net new business profile much stronger than our previous history, and we're very encouraged by that. So I wouldn't say there is weakness in any of the businesses that we operate today. I think they're all looking very solid. And we're encouraged. We have had significant self-op conversions. Obviously, we've talked about Merlin in the past. That is a segment that is new to the organization, the amusement park segment. We've opened and are operating our first four facilities in the U.K., and we're very pleased with how that development is going. But otherwise, I'd say the business is experiencing very broad-based performance improvements. across both domestic and international operations.

Okay. And then just as a follow-up, you know, can you just talk about the margin cadence? You know, how are you getting to exiting the year in the mid-6%? And then also just on the subject of rationale, walk me through the three-and-a-half times leverage ratio you guys are talking about You know, and so how are you getting there? How is that the optimal level? And then, you know, why would it be the same for, let's just say, two different types of businesses? Thanks.

So I guess I'll start with the 6%. As a reminder, I think it's important for folks to go back to 19 and look at the seasonality of our margins. in a, you know, air quotes, normal year. And you can see that both Q1 and Q4 are the higher margin periods, Q4 being the highest. So there is a bit of seasonality that's taking that mid sixes up from where we've been as we've traditionally done. But as I mentioned before, as a percent of 19's margin, We continue to progress, and that rise to the mid-sixes will be further progression back towards 19 levels compared to the last three or four quarters. So, you know, it's just not rising because of seasonality. It's rising, you know, as we make our way back to those 19 levels. In terms of the three-and-a-half times, you know, it's, as we said at Analyst Day, you know, no particular magic there. to it. We feel that that's a threshold that we need to get to. From there, we'll see. It could go, as was pointed out on analyst day, lower based on acquisition opportunities and certainly new business organic growth opportunities. Or we could have some good opportunities in front of us between now and 25 that could keep it around that three and a half times. But I think it's a target for us to strive for, and then once we get there, we'll see where we are.

And I would just add that we are obviously very comfortable operating at higher leverage levels. We recognize that the investment community would like to see us with lower leverage, so we're being respectful of that desire and that inclination. But the organization is extraordinarily well-equipped to operate in this higher debt environment. As interest rates rise, we recognize the desire to go ahead and pay down interest to reduce our interest expenses. I'm not sure what the optimal uh debt level is and i think over time the investment community will help educate us to give us the the optimal capital structure uh but we we know that we can achieve three and a half uh we're focused on uh and committed to delivering uh on that level uh and we'll see where that uh where that leads us going forward thank you our next question comes from mandy whitney with bears you may proceed

Yeah, great. Thanks for taking my question. I guess given the synergies that are available in a strategic combination of the uniform rental business, can you talk a little bit about how you came to the conclusion that the spin was the best outcome for shareholders at this point in time? I guess, you know, one of the things that might have been a consideration was the business's tax basis. I know this has been something that's been discussed in the past. And can you just maybe talk, Tom, a little bit about what happens to AUS's tax basis in a tax-free spin? Does that get stepped up or anything that might have future benefits to the company?

Well, again, as we go through the transaction, we'll provide more details on it and more clarity on leverage, on tax basis, a lot to do in terms of the carve-out financials. and, again, getting Kim and the team equipped and up and running. So I don't mean to evade, but certainly more to come on the details around the tax basis, you know, and the debt structure and everything else around the spin.

Yeah, you know, the primary reason for doing the tax-free spin is historically this business has had a relatively low tax basis. and an outright transaction or sale of the entity would have been significantly value destructive for our shareholders. So that was not an option that we considered. This is, I think, the best option for the shareholders ultimately to receive these shares on a tax-free basis and then to make an independent decision about whether or not they want to continue to be invested in both the food business and the informed business or make a trade-off for one or the other. We think optimally this gives the investment community a much greater degree of flexibility and a much higher degree of clarity around their investment decisions. We feel very strongly about the performance of the business. These are both great businesses. And so absent the desire to optimize shareholder returns, there's really no reason to go ahead and sell this business because we believe the performance will continue to improve or to spin this business. But we think this does create value for shareholders in the long run. And that's why we've gone ahead and chosen this path.

Okay. That's helpful perspective. Thank you for that. And then just on the union supply group acquisition, I guess it's a little bit different than, you know, just a normal tuck in of a business that you're already doing. So I'm trying to, understand how this fits in. It sounds like it's a warehouse distribution play. So is this a margin play? You're giving us a $250 million revenue. Are they a supplier to you or part of your supply chain today that you'll have intra-company revenues on this? I'm sorry, I'm just trying to understand how this fits in strategically. So just looking for a little bit more color on that.

Yeah, this is really a commissary services company that provides services to the corrections community They are a competitor today, and we provide commissary services as well. We use a model that's an on-site model for the institutions that we serve and the customers that we serve. They use a distributed model that is a different segment of the marketplace. So this is really expanding our reach to a new set of customers for a service that we already provide and giving us scale in that marketplace that would have been difficult to achieve by either selling new accounts or growing the business organically. So this is an expansion of capability into a business we already run.

And it gives us a platform with the distributed model and, in essence, a pick and pack capability that could serve other parts of our business.

Yeah, there is opportunity on the retail side and other businesses for them to deliver to those components as well. So it is an extension of the capabilities that the company has.

Thank you. Our next question comes from Heather Bosky with Bank of America. You may proceed.

Hi. Thank you for taking my question. I wanted to ask about inflation. I was hoping you could help us understand the guidance a little bit more in terms of the level of inflation that you're assuming for the rest of the year and then thoughts on if The environment, I think, has been worse than people had originally anticipated when the year started. The levers you have if inflation is higher than it even is right now, sort of kind of where you can go from here. And I guess help us understand also as well as the pricing on the education side, when we can start seeing that flow through given the delays in timing.

Sure. We'll both tackle this question. I'll start off with the education component. As you know, board plan pricing is set by universities the semester or the year before. So it's difficult to raise prices on a college freshman when they're already on campus and have already paid for the board plan that they're consuming. So those prices lag by a period of at least a semester and sometimes a little bit longer. So as we negotiate those new board plan rates for the fall semester, that's when we'll see the benefit of that cost recovery. We can price on campus. We can price both the retail business and the catering business on a more active basis, and we take advantage of those opportunities. So there are two different elements on the pricing side for higher education. You know, obviously, we believe that the inflation environment, you know, we're making the assumption that it will continue through the balance of this year. A lot of focus on cost recovery as a result of pricing and a lot of cost reduction as a result of menu engineering and menu flexibility. So we've got multiple levers that we can employ to go ahead and mitigate those higher costs that are affecting our frontline operations. There is also, beyond inflation, there's also the supply chain availability issue, which has been rather dramatic in certain parts of the business and certain commodities and proteins. So we continue to work through those challenges as well. I think the fact that we have been able to demonstrate hitting our earnings target for the quarter was a very strong performance, recognizing that the teams have overcome significant inflation in both food and wages. during that time period. We believe that we'll continue to be able to recover. We have the contractual flexibility, the operational flexibility to continue to recover those cost increases going forward.

I guess in terms of our outlook or at the beginning of the year, we were really looking at the time at sort of 4% to 5% at the beginning of the year and then it easing in the second half of the year. Conversely, it's now moved into the sort of 7% to 8% range for the second half of the year. So that gives you that order of magnitude on sort of what we expected at the beginning of the year and then where we've gone to here for the second half. The one other thing I'd mention to add to John's comments is we do have higher ed that has got timing issues. Beyond that, we've got sports and some others that are much more real-time and then everything in between. We continue to manage the inflation increases account by account, business line by business line. The U.S. is quickly getting up to speed with it. The international business is much more part of their DNA and their their landscape traditionally to have inflation be a part of the mix. And so I think they've been able to respond more readily and more consistently to inflation.

Thank you. And I'm just curious on the sales side, are you seeing I guess should we think of inflation as a tail end for companies or to do self-op converts? Are you seeing more demand in this inflationary environment?

I think that's true. You know, we've had a number of things in the last couple of years probably not wished upon anybody that have helped self-ops convince themselves that maybe they shouldn't be doing it themselves. You know, the pandemic obviously was a big driver And I think inflation and the supply chain disruption has been another reason for people to rethink whether that's something that they're in a position to do or should they outsource. So, you know, I do think that that's a helpful tailwind as well.

Thank you. Our next question comes from Andrew Steineman with JP Morgan. You may proceed.

Hi, Tom. I just wanted to confirm that you said mid-fours operating margin for the third quarter, and with that being overall, I was wondering if you'd be willing to make a couple of segment-level margin comments for the current quarter, the June quarter. And then I also know, and I heard you when you said, hey, don't forget fourth quarter has seasonal lift, and 200 basis points of seasonal lift is obviously very typical of seasonality for third into fourth quarter for Aramark. But I was also kind of struck by your comment that the higher than previously expected gross wins will weigh on margins. And I assume that's disproportionately a fourth quarter, a fiscal fourth quarter dynamic.

Well, it is. I'll start with your second question. And that is sort of offset by the underlying strength of the margins. So, said another way, without the new business wins, which we wouldn't want, we believe we could be a little bit stronger even in the fourth quarter as we exit into 23. So, it is that combination of seasonality and that lift, but also the recovering base volumes with the higher incremental margin, as well as us continuing to drive efficiencies in the business. I always respect your asking about more detail on the margins by sector, but we'll just leave it at the four and a half for the overall company at the moment. Okay.

No problem. Thank you very much.

Thank you. Our next question comes from Tony Kaplan and Morgan Stanley. You may proceed.

Thanks so much. I wanted to ask about international really good quarters. this quarter. Just what are you seeing in terms of differences compared to the U.S.? And also, you mentioned Europe and Canada experiencing improved business activity, but I wanted to ask about sort of the outlook for Europe.

Yeah, I think there's two things internationally. I mean, they are doing very well, and credit to Carl and the leadership throughout the business really just sort of rising to the challenges in front of them. They, as I mentioned before, deal with inflation more as a part of their everyday year in and year out, and so I think their ability to react to it positively You know, it's probably quicker than the rest of the business in terms of its recognition, you know, particularly in the Latin America businesses where they see that quite consistently. The other benefit for them is, and we talked about this as an overall, you know, driver of the model, is they've had consistent new business wins for a number of years. And so their maturity of their business they won two, three years ago is paying dividends. And so in a way, it's sort of covering up their startup cost of new business, Merlin being a slight exception for them given its size. But when you have a model where you're winning business consistently, those older contracts are maturing, and then you're also used to inflationary environment, that sort of has mixed together to allow them to really sort of do well through this environment.

Great. I wanted to also ask as my follow-up on competition, you mentioned that the self-op conversion has been helped by inflation. Wondering if sort of the inflationary environment has impacted the competitive environment in terms of does it become harder for maybe smaller companies to compete? You know, just any sort of changes in the competitive environment due to the inflation dynamic?

Yeah, my guess here, and it's still a little bit early to tell because we've talked about, you know, hello to contracts for a lot of self-ops and other conversions can be years. So while we think it's a tailwind and we've seen tailwinds out of the pandemic, you know, not quite sure whether inflation is will deliver that, but the suggestion would be it would. And I think it will favor the bigger companies. I mean, right now with the supply chain complexities, the bigger voices are winning and I think have more leverage to deliver. And so smaller folks, smaller suppliers, and businesses are struggling a bit more with limited supply and rationalization. So I think it will help, but probably a little early to tell yet.

Thanks a lot.

Thank you. Our next question comes from Shlomo Rosenbaum with People. You may proceed with your question.

Hi, good morning. Thank you for taking my questions. I just wanted to start out a little bit with the nature of the new wins, you know, the raised $100 million guidance. Is this kind of broad-based or the concentrated one sector? And how much of the pressure on the large sector is coming from these startup costs from the new wins, or is this really tangential? And think about it as overwhelmingly from the inflationary pressures, and this is just kind of a tangential pressure.

It's probably a little bit more than tangential, just as we're coming off a standstill start, like we talked about at Analyst Day. I mean, we really didn't have any net growth for a number of years, really experienced our first startup of 2020. substantial material new business last year and really in the second half of last year and then this year so probably a little bit more than tangential but that will wane as we as we move into 23 and then certainly into 24 provided we consistently continue to to deliver the net growth and that's that's that's our goal the inflation is is is a big driver at the moment in terms of our guidance in the range between the 5% and the 5.5% that we started out with, and the timing lag that we talked about with that. Of the two, I'd say the inflation is tipping the scale a little bit more than the startup cost at the moment.

That's right, but both components are significant. I think the Startup costs, as Tom indicated, as we set this engine going, we expect that we'll have significant startup costs year over year and that we'll eventually kind of lap that phenomenon. And in an average sales year, we'll have somewhat average opening costs. But it is new to the P&L this year as a result of both the magnitude of the wins last year and, frankly, the magnitude of the wins we've already achieved this year. Very good phenomenon to have. We like this as the alternative, and we know we have the flexibility and the capability to work through getting past these costs and bringing this business on into very profitable accounts for the organization. So we're pleased in terms of where we are to date, and we're also pleased with the company's ability to go ahead and recover uh, those inflationary cost increases, um, you know, by way of the various mechanisms that we've described before.

Okay. Thank you. Uh, and then also, um, just how much is Aramark on the food services side, a customer of Aramark on the uniform side, is that something that we should consider in terms of a spin that there'll be some kind of long-term contract set up or how material is that?

Yeah, that's a, that's a great question. And yeah, and yes, Aramark, uh, Aramark is a large customer of Aramark Uniform Services, and we expect to continue to be, and that we will have a long-standing commercial relationship that will survive the spin and many, many years to come. We would have the expectation that we will probably always be a customer of AUS, and as a business, they'll have to perform. to serve the needs of their Aramark customers just like they do every day for every other customer that they operate. But I think that whole question raises a good point. It's very important that everybody understand that we're undertaking this spin because we believe that the two companies will perform better separately, that that the ability of the management teams to focus on their respective businesses will be enhanced, the ability of the board to focus on that individual business will be enhanced, and that ultimately it leads to stronger performance by both organizations. And that's really the primary reason for the ultimate spin. We think there's value accretion as a result of of the transaction. We think there's also significant value created as a result of creating equity that's focused distinctly on its business. But ultimately, it's about the performance of the company, the management teams, and their ability to manage the business more effectively in a very focused way. And that's the ultimate reason for the spin.

Thank you. Our next question comes from with PMB Paribas. You may proceed.

Hi, morning. Just wanted to go through some of the new business numbers, if that's OK. So your upgraded guidance of 650 to 750, that's net. And then I think you also said retention is broadly maintained at last year's level, which I think was 95.5. So is my math correct that to get to the new guidance, you're going to sign around 1.4 billion of gross new signings for the full year. Just curious how much of that is signed, how much of that is in the H2 expectations, because that's a very big number. And then related to that, how do we understand the impact of the contract startup costs? Is there a rule of thumb if there's indeed 1.4 billion of gross signings? How many dollars do you have to spend in year one? to reach $100 of those contracts before they're ramped up, just trying to separate those startup costs from just inflation impact.

Well, your math is right. That's the trajectory we're on. We've got a good deal signed at this point. Again, I want to stay away from disclosing quarter by quarter what we're booking because it does tend to vary year by year. And doesn't necessarily always come in the same quarter so we have signed a good bit and then based on our our pending bids and our remaining pipeline feel very confident about that gross number and again that would be another record year for us so we're well on our way in terms of startup costs I wish I could give you a rule of thumb. There's not really. The only thing that's tried and true is the bigger the account, the more the startup costs. So that's why we like the smaller accounts. That is the bread and butter. And understand that underneath the Merlins and the Purdue's and the Miami Ohio's and whatnot, there are corning. There are a lot of one, two, three million dollar accounts, which are really the bread and butter and the ones we like to get. They have less in terms of startup cost, the complexity's less. The understanding of those operations comes a little quicker. So that's probably the rule of thumb is if you're seeing a lot of big, big accounts, there's gonna be heavier startup costs. If there aren't the bigger accounts, then there'll be less.

Yeah, that's a great answer, Tom. I wish there were a rule of thumb. It would be easier to predict. But every account is different. Every circumstance is different. They are somewhat differentiated by size. The bigger and more complex they are, the higher the opening costs. But we have sold a very broad base of business. We've had a couple of very large accounts this year, like Merlin. And as Tom indicated, we've got hundreds of accounts that are the smaller bread and butter accounts that are really kind of the lifeblood of the business. So we don't focus on just the big ones. We focus on a big range of accounts. And it's also somewhat differentiated by the line of business. And, you know, the opening costs can be somewhat determined by the contract type as well, whether it's a management fee or a P&L. So A lot of variability there, but it's something that, as we said, as you have an engine that produces significant net new business year over year, ultimately those opening costs are just part of the normal operating cycle. And the fact that we've gone from zero to 60 and now we're going from zero to 100 this year, it makes that phenomenon more impactful in the year.

Thank you. That's useful. Thanks.

Thank you. Our next question comes from Faisal with Doja Bank. You may proceed with your question.

Yes. Hi. Thank you. Good morning. So I was curious on pricing. You mentioned that inflation was 7% to 8%. So I'm wondering where you are on pricing at this point in time and sort of where do you expect 4Q pricing to be? Do you expect pricing and inflation to be aligned? Or is there more incremental pricing that we should expect as we get into fiscal 23?

Well, again, I wish there was a straightforward answer. It depends a lot on the client contracts. It depends a lot on the timing lag. and just our ability to sit with our customers and understand what operational adjustments they might want to make to help offset the costs, whether the contracts are cost plus for P&L, obviously. So there's a lot of factors that are going into the pricing. So it's really hard to give just a straight answer on a broad brush across what pricing is versus cost. We continue to get pricing. And we're trying to, again, always demonstrate value to our clients that we're able to mitigate those increases better than if they were on their own or with someone else. So, again, it's a combination of things. The pricing ultimately, hopefully, is never what you would read in the headline because we've done a good job of mitigating costs. And, again, therefore, the client sees the value equation.

Yeah, and ultimately what we expect is that pricing and inflation are relatively neutral and that we're able to offset inflationary pressures through a number of mechanisms, pricing being one of them, and one that's obviously in today's environment more important than normal. But we're always looking to match those those two things. We never want to overprice because we want to make sure our consumers are protected and our consumers continue to want to frequent our operations. And so we're always carefully managing price to value, and we're also carefully managing menu in order to mitigate the impact on the consumer. But make no mistake, we are pricing to go ahead and recover those added costs, and we expect over the long run for those inflationary pressures to be neutralized by price as well.

Okay, okay, great. And then just on the, at Investor Day, you had talked about an ongoing sort of long-term growth rate of 5% to 7%. I'm curious if you were able to talk about a growth framework for Uniform versus the remaining business, And as part of that, if you're at all willing to comment on how you thought about the relative valuation of the two businesses as you were evaluating various strategic options at your disposal.

We'll get into, as we begin to formalize the SPIN structure, the SPIN details, we'll be able to present a framework that highlights what the three-year plan is for the business. I want to be very careful. Today, we are focused on creating the environment for the spin, on putting the team against the project and really detailing the story, if you will, and the plan, if you will. And that will take some time over the next few months as we work to do the separation. So I think it's a little premature to go ahead and give relative valuation kinds of metrics. But again, we really believe that these businesses will be served well by the separation, that they'll each be able to focus on their optimizing their strategic focus and their flexibility. and that each management team will be able to really focus on what's best for their operations from both a capital strategy as well as an acquisition strategy. There's just a number of benefits that we've highlighted, but ultimately we think the performance of both organizations will be enhanced, and we will, over the next several months, have an opportunity to meet with the investment community to talk about what the spin looks like and what the forward-looking plans are.

Thank you. Our next question comes from Ashish Savadra with RBC Capital Markets. You may proceed.

Hi, this is John Fillingham for Ashish. How should we think about the volume recovery in some of the lagging areas such as B&I Retail Catering Conference? Thanks.

In terms of their ultimate recovery, I think things have been pushed out to the right a little bit. Certainly, when we started the year, we felt like a lot of the the white-collar B&I, the technology finance base would be back by first of the year. Omicron variants set in, and that's pushed things out. So we continue to see a steady recovery in that category, and I think that will continue throughout the summer and then into the fall. So we're confident that the progress of recovery continues in that segment. I think you'll see the same in The convention and conference center business, that's remained slow, I think, through the various variants, or slower than we thought through the winter and spring. But I think as we get into the fall, that also, and into calendar 23, that will also continue to pick up. Concert activity, I know, is picking up quite a bit as we get into the summer, particularly the outdoor venues. you know, the hospitality, the linen side of uniforms and the hospitality, particularly the smaller restaurants, you know, continue to have a little bit of a stop and start. So all of that remaining COVID index, as we said, has moved along about as we thought, maybe a little bit better, but we continue to see progress and feel as though as we move into the balance of this year and certainly in the 23, we'll continue to see some recovery of those volumes.

Thank you. Our next question comes from Harry Martin with Bernstein. You may proceed.

Oh, hi. Good morning, everyone. I just wondered if I could ask a question really about the targets that you gave at the CMD. You said you're sort of happy with that commentary, but based on the commentary you've given about the separation having benefits, more focused management team being able to accelerate that growth, I mean, can we expect ultimately to get the sum to be more than the parts in terms of financial performance and any sort of early commentary you're willing to share on how quickly we can sort of start expecting that improvement to come sort of post-2023?

Well, you know, I would certainly say that we can expect the sum to be greater than the parts, that we honestly believe that the performance of both organizations will be enhanced, the ability to grow, improve margins, you know, will be enhanced as well. So it's our expectation that um, that, uh, that both companies, uh, will see performance improvement, uh, as a result of the spin and, uh, in that we're on a very favorable trajectory right now. Uh, the business is showing, uh, improvement year over year and making significant progress. And, uh, again, we'll detail, uh, our expectations, uh, for the two companies, uh, separately, uh, going forward. Um, but, um, I would say that our expectation is for both businesses to show significant improvement.

Great. And then just a follow-up on new business, I guess a second sort of consecutive record year for you. How do you feel about how much of that is the new normal versus some of those market impacts from supply chain and from inflation sort of accelerating some outsourcing for today? Or can your sort of run rate guidance for new wins actually also come up over time if we carry on seeing quarters have such impressive performance?

Yeah, no, we're very happy with what the progress the teams have made over the last 18 months, really, again, coming from a standstill start. I think the performance is more to do with our reinvestment and our focus on growth than on any of these tailwinds, air quotes again, on the pandemic and first-time outsourcing. Those are great. I've said that before. They're They're great to have. Inflation may add a bit more. And we love the opportunity to take this big pile of self-operated business that's within our total addressable market, $500 billion, and have people come to market and consider outsourcing. But we believe so strongly in this market and the growth rates, even without that, even if that returned to normal. that we still believe this mid-single-digit growth rate is very sustainable for a very long time, as long as we remain resolved and focused on growth and keep that front and center as the lifeblood of the company. So, again, I've said over and over again, I said at Analyst Day, I don't want people to think that this, you know, spike up, this increase in that growth is just due to first-time outsourcing. This is fundamentally... how strong and how fertile this contract food service environment is for growth.

That's absolutely right. It's really the change in culture and the investment we've made in both growth resources and the management teams that are driving this performance. We have an expectation that we'll continue to see improvement year over year. This year's results were planned to be better than last year's, and we expect to plan that next year's will be better than this year's. And You know, we have an expectation that we'll continue to see an improving trajectory for long-term growth for the company. That's the model that's been built, and that's the commitment of the management team. And it's the kind of culture that we've been able to recreate to drive that performance.

Thank you. And our last question comes from Neil Tyler with Redburn. You may proceed. Your line is now open, Neil. And I will now turn the call back over to Mr. Zilmer for closing remarks.

Terrific. Well, thank you very much, everybody, for your time this morning. This is an exciting time, really a historic day for Aramark. We're extraordinarily pleased with the results for the quarter, and we're also very pleased with the trajectory of the company. I want to acknowledge the performance of the entire organization. I think both Aramark Food and Support Services and AUS, these teams have been hyper-focused on doing what's right in terms of serving their customers day in and day out, and the results of the company has been able to demonstrate are the result of their hard work and effort. So thank you to all the Aramark team members. And again, thank you to all of you for attending this morning. Take care.

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