Aramark

Good morning and welcome to Aramark's first quarter fiscal 2023 earnings results conference call. My name is Norma and I'll be your operator for today's call. At this time, I would like to inform you that this conference is being recorded for rebroadcast and that all participants are in 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 Development. Ms. Cassell, please proceed.

Thank you and welcome to Aramark's first quarter fiscal 2023 earnings conference call and webcast. Hope you all are doing well. This morning we will be hearing from our Chief Executive Officer, John Zilmer, as well as our Chief Financial Officer, Tom Androff. As a reminder, our notice regarding forward-looking statements is included in our press release this morning, which can be found on our website. During this call, we will be making comments that are forward-looking. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties, and important factors, including those discussed in the risk factors, MD&A, and other sections of our annual report on Form 10-K and our other FCC 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. Thank you all for joining us today and I hope your year is off to a great start. I'm pleased to share that Aramark began fiscal 23 with strong performance driven by a continued commitment to provide exceptional service to clients. I am incredibly proud of our teams across the globe who demonstrate each and every day what makes Aramark so remarkable. This morning, Tom and I will review our fiscal first quarter results as well as the key initiatives currently underway that we believe will drive continued success. As announced just last week, we reached an agreement to sell our non-controlling 50% equity stake in AIM Services for $535 million. The proceeds are intended to be used for accelerated debt repayment, and we expect that monetizing this interest will further enhance operating focus, strengthen our balance sheet, and be accretive to EPS. The sale to Mitsui, our partner in the joint venture since it was established decades ago to provide food services in Japan, is expected to close at the beginning of our fiscal third quarter, subject to customary closing conditions and approvals. We will continue to identify these types of opportunities, specifically in areas where we have a non-controlling interest to enhance our ongoing focus on delivering profitable growth and shareholder value. Operationally, we remain focused on managing our cost structure and maximizing unit efficiencies, coupled with pricing to counter persistent inflation. We continue to work closely with clients to tailor solutions that meet their needs and leveraging our extensive supply chain network and are constantly monitoring evolving market conditions for opportunities to benefit from improving pricing and product availability trends. Our results in the quarter built on both the top and bottom line momentum we've established over the past couple of years. Organic revenue grew 18% and adjusted operating income increased 47% on a constant currency basis, resulting in more than 100 basis points of improvement to AOI margin. Within the US food and facilities segment, organic revenue also increased 18% compared to the first quarter last year, driven by strong performance from all sectors. Education experienced increased student enrollments and improved presence of staff and more events on campuses and collegiate hospitality, partially offset by the end of universal government sponsored programs in K through 12 student nutrition. Sports, leisure, and corrections continued its strong growth trajectory again this quarter, primarily from increased event pricing and per capita spending, as well as a more robust event calendar. Corrections particularly benefited from a significant level of new business growth. Workplace experience group growth levels led the way with a year-over-year increase of more than 40%, driven by client pricing, higher meal participation rates, and greater in-person activity, in addition to solid new business openings. Healthcare Plus continued its exceptional performance driven by ongoing base business growth from vertical sales and greater visitor presence that was complemented by a substantial step up in net new business compared to historical levels. And facilities and other grew as a result of expanded services and frequency, particularly from large client accounts, along with a strong level of new business startups. International organic revenue is higher by 28% year-over-year, driven by consistent net new business performance, pricing, and ongoing base business volume recovery, particularly within the BNI portfolio, where we experienced greater lunchtime participation rates and a return of catering activity for special events, including holiday celebrations and networking gatherings. Organic revenue in our uniformed services segment increased 7% compared to the first quarter last year, due to solid new business sales and retention rates, as well as the implementation of additional pricing strategies. Our U.S. and Canadian operations experience strong recurring rentals and double-digit growth in adjacency services. We continue to make progress on the uniform spin and still expect completion in the second half of this fiscal year. Within the last few weeks, Kim added the final pieces to her executive team, complementing the leaders already in place, including a chief technology officer. We have identified the individuals who we expect to serve as the Board of Directors for Uniformed Services after the SPIN is complete and who will be available to act in an advisory capacity throughout the separation process. We are extremely pleased with the skill set and industry expertise that we believe will make a significant strategic impact on the business. Last week, we released a comprehensive update on our ESG platform. The Be Well, Do Well progress report is the latest chapter documenting our ESG journey, and in it, we highlight our ongoing commitment to diversity initiatives, community building, climate-related actions, food and worker safety, and the progress we've made in responsible sourcing and waste reduction. MSCI recently gave us an A rating, and Newsweek recognized us as one of America's most responsible companies. We continue to drive the importance of ESG metrics reflected by the inclusion of an ESG scorecard in our fiscal 23 annual incentive plan for our senior leadership team. I'm proud of the significant measures we've taken to make a positive impact on people and the planet and the efforts underway focused on making a lasting impact. Before turning it over to Tom, I would like to highlight the recent election of Kevin Wills to Aramark's Board of Directors at our annual meeting on Friday. Kevin's impressive background and accomplishments are an excellent addition to our board and align with the company in strategic vision. I also want to thank board member Dan Heinrich for his numerous contributions and partnership. It is our intent that Dan will move over to serve on the board of directors for uniformed services upon the spin. I will now pass it over to Tom for a detailed financial review of the business.

Thanks, John, and good morning, everyone. Our performance in the first quarter reflected continued momentum across the Aramark portfolio as we delivered revenue and AOI results that demonstrated the team's growth mindset and commitment to deliver great service to our clients and increasing profitability for our shareholders. For the total company, organic revenue of $4.7 billion was 18% higher year over year and consisted of more than 4% from net new business, roughly 6% of pricing, and approximately 8% related to higher base business volume. Adjusted operating income was $242 million, a constant currency increase of 47% compared to the first quarter last year. AOI margin increased just over 100 basis points to 5.3%. Improved profitability during the quarter compared to the prior year was due to leveraging higher sales volume from broad-based net new business growth, pricing, and base business recovery primarily within the B&I sector and sports entertainment business, as well as disciplined operational and administrative cost management, all of which more than offset inflation, a tight labor market, and new account startup costs. Generally, we've experienced an increase in the use of agency labor to support the rapidly growing level of operations, particularly in collegiate hospitality, which we expect to manage down over time. In addition, we are encouraged by the continued signs of stabilization within the global supply chain that have allowed us to begin to gradually transition back to preferred sourcing programs where possible and appropriate. This has helped partially mitigate rising food costs due to persistent inflation that we continue to experience during the quarter. Over the medium term, we continue to see four key opportunities to drive improved profitability, despite a tough economic backdrop. continued supply chain stability and ever-increasing purchasing power from growing our managed spend and GPO business. Second, the improving profit profile of past new business wins as they mature over the coming years, coupled with our ability to consistently maintain our higher level of net growth into the future. Third, continued tight management of above-unit cost, and lastly, the potential to benefit from pricing actions already implemented as inflation mitigates. These opportunities, together with the ongoing option to create value through actions such as the AIM services sale, give us confidence in our ability to continue to grow our bottom line over time. Our results in the quarter led to adjusted EPS of 44 cents on a constant currency basis, nearly double the 23 cents reported in the first quarter fiscal 22. FX impacted adjusted earnings per share by 3 cents, due to the stronger dollar relative to this time last year. On a GAAP basis, Aramark reported consolidated revenue of $4.6 billion, operating income of $200 million, and diluted earnings per share of 28 cents for the first quarter. Now turning to cash flow. In the quarter, net cash used in operating activities was $607 million, and free cash flow was a use of $706 million. As expected, the first quarter experienced a cash outflow associated with Aramark's normal seasonal business cadence, specifically in the collegiate hospitality business. In addition, accounts receivable increased due to strong year-over-year revenue growth in the quarter, and accounts payable was a higher use of cash in the quarter, largely from the timing of supplier disbursements. Cash flow results also reflected the scheduled remaining deferred FICA payment of $64 million granted under the CARES Act that we highlighted during our last earnings call. At quarter end, Aramark had approximately $1.1 billion in cash availability. As John mentioned, and as you saw in our announcement last week, we reached an agreement to sell our equity stake in AIM Services, and we plan to use the proceeds for debt repayment. Let me make a few quick comments on the P&L impact from the transaction. As a non-controlling interest, revenue from AIM Services was not historically recorded as a part of our financials, so there will be no impact to future revenue. We did record our share of income, which contributed approximately $30 million to pre-COVID AOI in fiscal 19, and was not expected to be fully recovered until next year. With the planned debt repayment associated with the sale, We expect annualized interest savings of more than $30 million, making it immediately accretive to EPS. So let me conclude with our outlook for fiscal 23. We maintain our previously stated full-year outlook while updating certain measures associated with the sale of our interest and AIM services. With that, we currently expect organic revenue growth between 11% and 13%, adjusted operating income growth of 32% to 37%, reflecting the effect of the AIM transaction. Free cash flow in the range of $475 to $525 million before payment for the $64 million FICA payment just completed this quarter, and the anticipated cash flow of approximately $100 to $120 million related to restructuring charges and transactions fees associated with the uniform spend. After these specific items, We expect our reported free cash flow to be in the range of $300 to $350 million. And finally, as I just mentioned, we plan to use the proceeds from the AIM Services transaction toward debt repayment that is expected to bring our leverage ratio to approximately four times by the end of this fiscal year. We begin the new year as we finish the last, resolute in our commitment to drive profitable growth. The new fiscal year is off to a solid start, and as we manage the business in the midst of the current ongoing macroeconomic challenges, we will continue to work to balance delivering short-term results without sacrificing our ability to sustainably grow the top and bottom line over the long term. Thanks for your time this morning. John?

Thank you, Tom. We believe there are numerous opportunities for the business and that we are well on our way toward achieving them. We will continue to manage our portfolio to drive significant and sustained value through organic growth, margin progression, and a strengthened balance sheet. Our new business pipeline is strong, and we're highly motivated to continue winning. I'm immensely grateful for our teams across the globe who are the driving force behind our success now and in the future, serving our clients, employees, and the communities we live in. I also want to take this opportunity to congratulate our clients, the Philadelphia Eagles and Kansas City Chiefs, who will be competing in the Super Bowl this upcoming weekend. An operator will now 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 1-1 on your touchtone phone. If you're using a speakerphone, you may need to pick up the handset before pressing the numbers. In order to accommodate participants in question queue, Please limit yourself to one question and one follow-up. One moment for our first question, please. And our first question comes from the line of Tony Kaplan with Morgan Stanley. Your line is now open.

Hi, thanks so much. I was hoping you could talk about the new business trends this quarter versus last quarter and areas of notable strength or weakness. and particularly maybe within education as well. Thanks.

Sure. The first quarter is always probably our slowest quarter from a new business development perspective, as you would expect, particularly in education. Most of the sales activity occurs in the latter half of the year as accounts go out for bid and are then awarded typically towards the springtime. But I would say it's very consistent with prior year's performance. Pipeline is very strong. We have a lot of verbal new wins that we don't count until we have a signed contract. So we're very pleased with the current results, and our expectations are that we will be able to deliver on the net new business as we project it. So nothing to add beyond that.

Great. And I've gotten a couple of questions this morning on basically the understanding the impact of the divestiture on AOI for next year. Any sort of clarification that you can give on that just so that I think people can understand it a little bit better? Thanks.

Sure. For next year, you're meaning fiscal 24?

Oh, sorry. Yeah, within 23. Within this year? Yeah, yeah, exactly.

Sure, sure. Like I said just a minute ago, the base sort of pre-COVID AOI level was roughly 30 million. It's not fully recovered yet, so the AOI impact will be, you know, less than that for the for the full fiscal year and obviously we'll be missing by the time we close about half that number. So, you know, something a bit less than 30 roughly divided by two is the AOI impact. And that's roughly the 2% decrease in the – or move in the AOI guidance that we put out. And then our savings on the interest side should be in excess of $30 million. know the net of those two really gives you the uh the accretion between the uh the two numbers the aoi given up and the the interest savings perfect thanks so much thank you one moment for our next question our next question comes from ian savino with oppenheimer your line is open hi thanks um very small quarter um i just just wanted to follow up maybe if i could on this aim

um maybe you talk about the multiple i mean i'm calculating about 18 times you know what sort of um you know drove that had that work um and then also maybe you could touch upon any like any other opportunities that you could identify um maybe that you haven't mentioned so far you might have a follow-up thanks um sure you know we've uh we've talked in the past about monetizing our potential sports

James Jensen, teams ownership in the San Antonio spurs you know there's no nothing to report on that front currently but that's obviously a non controlling interest that that we wouldn't historically continue to own. James Jensen, You know, we have a couple of other joint venture opportunities that we're always evaluating. in various parts of the world as well. Nothing specific to report currently, but as we said, we're always evaluating those for potential value creation opportunities for our shareholders.

I think the driver, Ann, was the ability to grow those businesses. A lot of times when we don't have a controlling interest, it's a little tougher to have the impact that we'd like to have. That's where we're really evaluating these, and if they're just meandering along, so to speak, we'll monetize and use that elsewhere.

Yeah, I would follow up that comment with AIM Services has obviously been a terrific joint venture for us over multiple decades. We've enjoyed a wonderful relationship with Mitsui, and we expect to continue to enjoy a relationship with them, helping to build other businesses in other parts of the world. and are working to develop a memo of understanding to that effect going forward. So we expect to continue these kinds of relationships and look for opportunities to grow strategically. But ultimately, in the end, with AIM Services, clearly it required a significant amount of energy for the company, yet we didn't book the revenues and we had little impact in terms of the management of the business itself. So this allows our international team to really focus on driving, growth in those companies and those countries where we're fully baked, if you will, and really allows us to focus from a development perspective and a management perspective more effectively going forward.

Okay, thanks. And then just on the inflation fund, can you maybe give us an outlook and sort of, I know you touched upon it, maybe a little bit more of a detailed outlook. And then also remind us your ability to to hold on to some of the pricing, especially on the P&L side, as maybe inflation rolls over? Thanks.

Yeah, I mean, persistence, the word, I think John and I both used it, especially on the food side. So if you look under some of the headlines that you're seeing recently, you know, where inflation is slowing, it's certainly not. reducing but its rate of increase is slowing. Underneath that headline, food is persistently high. So we're experiencing that and our units are hanging onto that. We're having to communicate that fact to our clients because sometimes the headlines do change opinions without looking underneath it. We're in that mode right now where we're really continuing to keep up, keep the pricing mindset going within our units. I don't think that for the balance of the year we really are going to be looking at much of a softening of the inflation, the food inflation. We certainly hope it's coming. Our ability to hold on to the pricing in the P&L contract environment I think should be strong. I think we'll be able to hold on to it and keep that impact in place. I mentioned that as one of our ability to drive profitability as we go forward into the future.

Thank you. One moment for our next question. Our next question comes from Andrew Steinerman with J.P. Morgan. Your line is now open.

Hi, it's Tom. If you can believe it, I'm going to ask my two questions about FX. So the FX drag in the just reported quarter was $0.03, and you said, of course, it's a stronger dollar than a year ago. Could you just tell us how much FX drag on EPS was expected by management in the just reported quarter, kind of like back in November when you started to guide? And I might as well just give you our second question about FX. So also now looking at that for your guide on slide 13, your model assumptions, I see this line that says FX will be a 2% drag on fiscal 23 guide at current FX rates. I assume that's a revenue figure. So if you could, you know, what is the assumed FX drag on EPS? And of course, you can imagine I'm talking about at current FX rates.

Yeah. About both is the answer for, or about 2% for both, both what we anticipated and then what we expect for the full year. And then it does impact revenue and bottom line equally.

You said, just to make sure I heard you, you said you were expecting about $0.03 of FX drag in the quarter.

Yeah, 3% in the quarter. We were expecting you to ask to begin with.

Yeah, 3%.

It's probably a little bit more than we expected. Okay, that makes sense. We expect it to be a little bit lower to average out about 2% for the year.

I understand now. Thank you so much, Tom.

Thank you. One moment for our next question. And our next question comes from Neil Tyler with Redburn. Your line is now open.

Yeah, thank you. Morning, John. Morning, Tom. A quick question on the revenue guidance and breaking that out into the components. I think you said pricing was running around 6%. I understand the base effect will cause that to slow. But then if you add net new on top of maybe a mid-single-digit price effect, that doesn't leave a lot of within the midpoint of your revenue guidance for further organic growth recovery given the trajectory you're on. Are you seeing any signs of maybe participation rates declining anywhere or any other trends that would cause you to be cautious on the recovery of the base business?

One moment, please stand by.

Ladies and gentlemen, please stand by. Your call will resume momentarily. Ladies and gentlemen, please stand by. Your conference will resume momentarily. Ladies and gentlemen, please stand by. Your conference will resume momentarily.

Ladies and gentlemen, please continue to stand by.

One moment, please.

Okay. Can you hear us now?

Yes, I can hear you now. Thank you. Our next question comes from Neil Tyler with Redburn. Your line is now open.

Hi, guys. Yeah, so the question I had was really on the revenue guidance and taking the midpoint of that organic revenue guidance. And if I deduct pricing, which I think you said is running at about 6%, obviously that will ease due to base effects. And if I deduct net new contribution in the midpoint, then that doesn't leave a lot left for the base business recovery. So I suppose the question is they're ending in the business that you're seeing that would cause you to expect that to sort of the rate of recovery to slow meaningfully, i.e. participation rates going in the wrong direction or any longer term caution on the impairment of any of your businesses. Thank you.

No, I really don't. It's just really a gradual lapping of last year's recovery because we started the year in the mid-80s, finished the year in the mid-90s. And so, you know, the recovery, you know, is going to ease. The sort of base recovery is going to ease as we go throughout the year, you know, with net growth, you know, staying in that sort of 4% to 5% range that we talked about. And then pricing obviously will ease a bit too as we we lap what was very strong pricing this past Q4 as we get to this year's Q4. So I think all those things will naturally ease. The net growth will stay constant.

Okay. And then I suppose, yeah, so in that context, when you spoke previously about the bridge to your revenue targets and trajectory, and you talked about $1.6 to $1.9 billion at the beginning of last fiscal year, and I guess you sort of overshot that a bit, so maybe there was $1.5 billion left. Can you give us some updated thoughts on how much of that you think may not come back?

Well, yeah, the bulk of it is BNI, and it could be 80% of that I mean, you know, we're so far well beyond the 19 number that, you know, in terms of recovery, it's almost irrelevant now. It's also hitting the crosswinds of, you know, what is not COVID recovery and what is the beginnings of recessionary impact, you know, layoffs and that type of thing, particularly within B&I. and you see in the tech sector. So it's really hard to disaggregate, you know, coming up on three years on or past three years on as to what is layoffs, what is COVID recovery, what is participation rates, what is pricing. So, you know, with respect to the question, it's just becoming less and less relevant, especially as we're moving way beyond our COVID-19 base revenue levels.

Yeah, I would agree. Neil, I would just add that, you know, there are really all the other businesses have gone well beyond the COVID recovery index and are growing rather nicely without significant impairments. Really, the only business that has any lasting impacts is BNI, which still has some return to work kind of activities taking place. But you're seeing those trends accelerate. So hard to predict exactly how the rest of that business will get layered in, whether companies continue to maintain four-day work weeks or continue to re-expand their work schedules. So just really hard to predict. But we fully expect that BNI as a business will be very profitable and will continue to grow going forward. And so we're not really focused on that recovery number any longer. It's just business growth. driving basic revenues, growing new accounts, adding new accounts, and the like. And I have to also add my apologies for the technical difficulties. Sorry that call dropped. We couldn't reconnect. So I apologize to the listeners for that brief gap in coverage.

No, thanks very much. I'm glad it wasn't something I said.

No, not at all, Neil. Thank you.

Thank you. And our next question comes from the line of Heather Balsky with Bank of America. Your line is now open. Our next question comes from Slow Mo Rosenbaum. Our next question comes from Slow Mo Rosenbaum with Stifel. Your line is now open.

Hi. Thank you very much for taking my questions. Tom and John, maybe you could give a little bit more detail into the growth in FSS International, maybe break it apart a little bit into new business growth. You said you're not so focused on COVID recovery, but it seems like there was some kind of COVID recovery over there. Can you just give us some of the components maybe like you did for the overall business and Is there something in particular where you're winning a lot more business internationally that might be driving much above average growth well into the future? How should we think about that?

The quarter was obviously heavily impacted by Merlin internationally compared to first quarter last year. Remind me, John, the opening was early summer, so it would have been early third quarter last year. So first and second quarter are going to have a bump for international because of the size of that that account win but again they've also maintained very consistent you know growth levels throughout the years and have benefited from that and then also have had a little higher B&I mix in international business than in the US and so I that recovery post Labor Day in the first quarter, you know, also helped them a bit more than the US.

Okay, great. And can you talk about the trends in retention just by business unit a little bit more? Is there any, you know, is there any nuances or change from last quarter? And, you know, are there any specifics you can give us? Because I know that was, John, that was a big focus of yours coming in, you know, in terms of, you know, strategically. improving the services to improve the retention in the business?

Yeah, I would say that retention rates are very high across the board, both domestically and internationally. All businesses performing extraordinarily well, you know, well above our targeted range. And so we're very pleased with the current results here today and continue to drive towards You know, those very high numbers were consistently setting the target at 96 plus. And, you know, we are really on target to achieve those numbers again this year.

Great. Thanks. Thank you.

Our next question comes from the line of Heather Balsky with Bank of America. Your line is open.

Hi, thank you for taking my question. My first question is just with regards to your long-term outlook and the business exit and how to think about margins and is there an impact there? And also, you know, also taking into account what you're seeing in FX and inflation, it'd be great to just touch on that again.

Are you talking about the impact of AIM specifically on the... Yeah, yes. Yeah. Math-wise, I think it was about 20 basis points for the company. So that would, you know, that would probably be the impact as we move into the, you know, 24, 25. In terms of inflation outlook, John?

Yeah, I think we're, you know, we have an expectation that inflation will continue to moderate over the balance of this year, but still running at fairly high levels today. from both the food and labor rate perspective. So our units are working very hard to continue to recover those cost increases, looking at opportunities for service changes, menu changes, and the like, just managing actively the P&L. And so our expectation is that it'll be here for the next couple of quarters. We're going to work very hard to offset it. and so far we've been able to minimize the impact from a P&L perspective. You see things like the price of eggs, and everybody responds to those headlines. If you can imagine, eggs are a big component of collegiate education, and it's a significantly higher cost than expected, but our units are finding a way to work around it, and that's the expectation we have.

and uh we'll find uh we'll find the appropriate uh mechanisms to go ahead and offset those cost increases as we move forward thank you about that i think we expect it to to soften a little bit as the year goes on um the first quarter being a heavier impact than in the second half of the year is the current expectation okay and um

You mentioned earlier in the Q&A on inflation that there's a little bit of an education piece now, just given the disconnect between food costs and food inflation and big headlines around CPI. Can you talk a little bit more about how those conversations are going? Are you seeing more resistance? Have you been getting the price increases that you want through?

Yeah, I would say that generally we're getting the price increases that we need. You know, you've got timing issues that affect some of the businesses with respect to when they can achieve pricing. Some are regulatory in nature, state-oriented purchasing contracts that require certain pricing on certain dates. You know, particularly in the corrections business, you see some of that in the K-12 sector as well. and delayed pricing and collegiate hospitality as board rates are negotiated literally the year before. So there's some of those kinds of timing impacts in terms of when you're able to actually achieve the price that you need. But one of the things that we do is we provide our frontline managers with very detailed tools that they can use as talking points with their customers and clients related to what the real cost of food is on a food away from home perspective, what they're dealing with from an actual cost perspective. So they have those tools that are provided to them on a monthly basis that they can use in those pricing discussions and negotiations, and they also use those as tools to help them manage the menu mix, if you will, going forward. So there are active discussions all the time, and pricing is one of those things that we're consistently doing, and we call it hand-to-hand combat. It's basically you're in there negotiating consistently to go ahead and achieve the result that you need to achieve.

Great. Thank you so much.

Thank you.

And our next question comes from Leo Carrington with Citi. Your line is now open.

Good morning. Thanks for taking my questions, John and Tom. If I might ask firstly a follow-up really on AIMS services, the underlying operating income guidance was lowered to reflect this disposal, but the free cash flow guidance was maintained or has been maintained. Could you help bridge this gap and explain the difference? And then as a follow-up, on guidance for the year. Q1 margins, in particular, FSS, FSS United States, and to some degree, Uniforms took a step back in Q1 23 compared to Q4 22 on a versus 2019 basis. Can you explain, maybe you have already, but explain why this is beyond the timing of contract openings? And also, why does it give you the confidence to leave the guidance unchanged for the rest of the year? That would be great.

Thank you. Leo, just to be clear, that last part of that question, you're comparing it sequentially, right? Q4 of 22 to Q1 of 23?

Yes, but the progress, if you like, in basis points versus 19 as a base. And I'm, I suppose, tough comp of Q119 because FSS United States margin was very healthy back then.

But let me, rather than give you a quick answer, I'd rather, let me look at that and then we'll come back to you specifically on an answer to that one. Sure. If that's okay. On AIM Services cash flow, because it was not controlling interest, we would receive a dividend from them. We really didn't have the cash crossing borders. And that dividend was de minimis, to be honest, not particularly material and not certainly material enough to change our free cash flow guidance for the year. So that's why you don't see a change in that. It wasn't big enough for us to call out. Okay. Thank you.

Thanks.

Thank you. And our next question comes from Saja Alway with Deutsche Bank. Your line is now open.

Great. Thank you. Good morning. I wanted to ask about the uniform business, actually. I know you mentioned that you're still on track for a spin in the back half of the year. Give us some color on when we should expect carve-out financials. And, you know, give us a better sense of what's been happening with the business. Has it trended sort of since you made the announcement? Has it been trending in line with your expectations, both from a revenue and margin perspective?

Yeah, I would say that the business has generally been trending according to our expectations and the plans that we've established for it as we work through the process of achieving the separation, adding the public company costs to the business to go ahead and adding resources to the business to go ahead and prepare it for the separation. And, you know, so the process, you know, continues apace. You know, as we said, we expect to close it by the end of this fiscal year or in the second half of this fiscal year, if you will. And I think that's all we're prepared to guide to at this stage. We've gone through the process of the separation audits. Those are largely complete. We've established the board that will be making an announcement in the future about the actual the people selected to serve on the board going forward as an independent public company. And there are a number of other steps that we're taking over the course of the next several months. We also are giving consideration to the capital markets and what the potential timing might be to go ahead and do whatever the debt raise might be for the business and looking at optimal timing from that perspective. So there's a number of variables that will impact the timing ultimately, and we're working through all those. But I would say at this point, business performing at expectations and according to plan.

Great, thank you so much. Thank you.

Our next question comes from Andrew Whitman with RW Baird. Your line is open.

Great, thanks. I guess, Tom, I have a question for you. The cash flow from OP section of your report shows a $30 million reduction to a contingent liability. I was hoping you could talk about what that is and how it affected if at all, your adjusted earnings. It's not specifically called out in your reconciliation. And so I guess that's the genesis of my question. You have this other line here, gains, losses, and settlements, but I don't know if it's in there or not. So hoping you could just talk about what that was and how it affected your adjusted results.

It is in there. It's in that net 12 I think you're looking at. and it's related to the next level earn out. The long and short of that is that we, in order to get the deal done, we had a gap in price as you normally do with buyers and sellers, and their expectation was high, and ours was a little bit lower, and so to fill that gap, we had an earn out construct, and they're gonna perform to our expectations as opposed to their very, you know, ambitious goals at the onset of the deal. So that's just a reversal of some of that earn out.

Okay, that's helpful. And then I was just wondering secondarily, with, I guess, 6% price in there, are you able to understand how the elasticity of demand is either affecting your customers or the end market consumers? of your product. I mean, you've got the, you know, the COVID kind of ramp, you've got, you know, the layoff trends. There's a lot of different things that are affecting volume today, but I was just wondering specifically if, if the end market consumer is reacting to these and changing behavior at all that you can see.

Yeah. Great question, Andrew. I would, I would say that, uh, consumer behavior continues to remain very consistent. Our participation rates are rising. which would indicate the customers are satisfied and are understanding of the pricing needs, if you will. So participation rates increasing in the core business. And so really no change to real consumer behavior over the last several quarters related to what I would characterizes related to pricing dynamics. So, you know, that's really the only way I can answer it. I think it's so far no impact.

Okay. Thank you very much.

Thank you.

And our next question comes from Stephanie Moore. Your line is now open.

Hi. Good morning. Thank you.

Good morning.

Good morning. I wanted to just ask about your view on customer appetite for outsourcing, how this might change in a weaker macro environment. I know that this is a secular tailwind for the business, so I'd love to give your thoughts on that as we navigate what might be a weaker macro.

Yeah, I would say, again, very good question. I would say we continue to see an increased trend towards outsourcing in a number of the businesses that was first originally driven by the COVID environment and the transition. Now we see continued improvement in that outsourcing environment due to cost pressures that may be facing those self-operators. from both an inflation perspective and a labor staffing perspective. So it continues to be a tailwind. The pipeline of opportunities that we have is still significantly populated with self-off conversion opportunities. And so I would say it continues to be a significant source of new business potential for us. And it crosses a range of the businesses that we operate in. It's not just the food. facilities as well.

Great. That's really helpful. And then switching gears to BNI, I'm curious if you can call out maybe any specific markets where you've seen a more acute increase in activity as of late?

Well, we are seeing BNI business in Europe has been increasing at a rapid rate. It was more depressed last year. The rate of recovery in the international was slower. This year it's accelerating. We're seeing, you know, continued BNI business improvement in continental Europe. And so we're very pleased with that and continue to see that business growing nicely.

Okay, and then lastly for me, and I apologize if I missed it, but did you touch on the P&L transition and the back to P&L from COFF Plus and just where you are in that transition for the end of the last quarter? Thank you.

Yeah, I would say it's really unchanged. There is no significant pressure from client organizations to transition back to P&L. And I would say it's relatively consistent. With prior quarters, we continue to be predominantly management fee in the B&I sector, except in the very large operations that have P&L capability. You continue to have companies struggling with their return to work strategies, you know, the three-day workweek, four-day workweek. And so there has not been significant pressure to transition back to P&L. And frankly, in this inflationary environment, when you've got both food cost inflation and labor rate inflation, you know, that actually works to our advantage to continue to stay on a management fee or cost plus basis as we grapple with the challenges in those segments, particularly if you're not fully up to speed or fully back operational in a particular customer or client location.

Thank you. Our next question comes from this Farah Mastari with Exane BNP Paribas. Your line is now open.

Hi. Good morning, everyone. Just one question, really, which is trying to put together all the comments you've made on inflation trends through the year, new business trends through the year, the recovery in like-for-like volumes, which, you know, obviously towards the end of the year, you won't have much of that left. Inflation will be normalized. So now that the year has really started and you had this first Q1 and you're able to reiterate the full year guidance for 11% to 13% organic growth, I'm really curious what sort of Q4 performance you're seeing. Once most of these factors normalize or slow down, it's going to be a very, very interesting data point that exit rate of organic growth is almost a test to what you can do medium term. So, yeah, I guess my question is if you thought a little bit more about the quarterly sequencing, do we think the sequence of organic growth is going to be 18, 14, 10, 6, or a bit stronger than that in the exit rate, or on the contrary, a lot more front-end loaded than that with the volume recovery and the inflation that's above trend in H1?

Yeah, I think directionally you're correct. You know, we said at Analyst Day, you know, our medium-term algorithm is 5% to 7% top-line growth. That's what we'd expect from the business on an ongoing basis once the COVID recovery and those base volume recoveries subsided. That also included 1% to 2% pricing. So, you know, if you strip it all the way back to that net growth, uh, number, you know, we would continue to expect to see. That, um, that anchor that floor of sort of that 5 to 4 to 5%. You know, as we exit the year, I'm going into 24 and 25. The variables are what what's pricing and and, you know, is there any remaining covered recovery for what that's worth as we, we continue to get further and further away from that. So, um, something that's more with with what we said at analyst day. Um. you know, the four to five days plus pricing is probably, you know, roughly going to be what the Q4 year end exit rate is and going into 24, 25.

All right, super. And then are there any specific break points in the year that you'd flag or is the volume recovery and inflation subsiding? Is that going to be very progressive throughout the year?

Yeah, I would say it's very hard to predict exactly when inflation will abate. We are continuing to move price to offset the costs of food and labor rates throughout the year. So I would expect pricing to remain relatively high going into the close of the year and call it the second, third and fourth quarters. So unless we see something drastically change in terms of the overall environment, I would expect pricing to continue to be at a relatively high level compared to prior years. But we do anticipate that at some point it will transition and normalize. So what we're really focused on is selling the net new business and growing accounts and the core growth of the company. And just using the inflation impact or using pricing to offset the impact of inflation and to generally You know grow the company through those new account acquisition Opportunities so hard to say exactly when those breakpoints will be But we're focused we're focused on delivering net new And ultimately growing the company in that way. I just add one more comment that it's a

you know, coming off of 1% to 2% growth for a number of years pre-COVID to then exit this as we get into 24, 25 and beyond at mid-single digits, it's maybe easy to lose perspective on how good an improvement, how fundamentally different that is pre-COVID to sort of going into next year and beyond from 1 to 2 to mid-single digits or upper single digits. So we're proud of what the business has accomplished and changed throughout the last few years to be able to get us to that, you know, incrementally new level of growth as we go forward.

Thank you. Our next question comes from Manav Paneik with Barclays. Your line is now open.

Hi, good morning. It's Ronan Kennedy. I'm from Manav. Thank you for taking my questions. May I ask, can you just recap the sources of new wins? and also your current assessment and outlook for competitive dynamics within the industry?

Well, the sources, we haven't really disclosed the sources of new wins. You know, we typically, if you look at the historic trends, we typically sell about 35% of self-op conversions, about 35% from our core competitors, and then the balance from small to regional competitors. So I think that's very consistent with the historical trends. Maybe a little bit higher rate on the self-op conversions over the last couple of years, and we expect that that trend may continue throughout this year. So, you know, that's our anticipated source. And I'm sorry, the second part of your question was? Competitive dynamics. Competitive dynamics. I think nothing has really changed. It's a very competitive marketplace. We're all competing aggressively for new business, but our win rates are going up. We've achieved record new account wins in the last two years, and we expect to achieve, again, another great result this year. And we're very focused on that net new perspective, if you will, and growing the business dramatically and achieving what Tom just highlighted in that mid-single-digit net growth number is just truly an extraordinary result that we've been able to achieve the last couple of years and have expectations for continuing that trend going forward. Operator, are there any further questions?

Our last question comes from Ashish Subhadra with RBC Capital Markets. Your line is now open.

Thanks for taking my question. I wanted to drill down further on the prior question on the uniform business, and particularly on the pricing. There was a particular call-out on pricing. I was just wondering if you could talk about how the pricing realization is trending compared to pre-pandemic levels, and also a question on the growth and demand environment there. some concerns around employment or employment slowing down could be on the growth in that business. I was just wondering if you could help respond to that and talk about the strength there from ancillary services. Thanks.

Sure. I think we'll see continued demand improvements in the uniform sector, continue to see lots of opportunity for to convert non-users, non-wearers to uniform, to weekly rental uniforms. And we continue to see very strong demand for ancillary services, both in the U.S. and Canada. Both of those businesses grew at double-digit rates last year on the ancillary services side in the last quarter. So we anticipate that demand will continue to be strong and that we can achieve significant growth in that sector, in that business. And I think further commentary at this point is probably left going forward to Kim as she begins to get ready to spin the business. There'll be an opportunity for an investor day and roadshow that will take place later this year. And she'll be able to talk much more openly about the plans for the business going forward in the competitive environment as well.

The one thing I'd add is on pricing, you asked about that, is through the ABS system and just sort of the leadership and Kim's approach to pricing, I think they have been more equipped and more aggressive with pricing than historical. And on the back of the energy increases over the last year or so, you know, have really worked very hard to get pricing into their clients, you know, both appropriate through, you know, the energy surcharges, but also just the base pricing, and they feel like, you know, that is becoming fairly sticky. And again, with the ABS capability, they're able to target that within their client base a little bit more calculated and specific.

That's a very helpful color. Thank you very much.

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

Again, thank you very much for joining us this morning. We really appreciate the support of the company and its operations. Again, thanks to the Aramark team around the world for all the hard work that they do. And again, my apologies for the technical difficulty in the middle of the call. Thank you very much, everybody.

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