Aramark (NYSE:ARMK) Q1 2023 Earnings Call Transcript

Aramark (NYSE:ARMK) Q1 2023 Earnings Call Transcript February 7, 2023

Operator: Good morning, and welcome to Aramark’s First Quarter Fiscal 2023 Earnings Results Conference Call. My name is Norma, and I will be your operator for today’s call. At this time, I would like to inform you that this conference is being recorded for rebroadcast, and that all participants are in a listen-only mode. We will open the conference call for questions at the conclusion of the company’s remarks. I will now turn the call over to Felise Kissell, Vice President, Investor Relations and Corporate Development. Ms. Kissell, please proceed.

Felise Kissell: 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 Zillmer; as well as our Chief Financial Officer, Tom Ondrof. As a reminder, our notice regarding forward-looking statements is included in our press release this morning, which can be found on our website. During this call, we will be making comments that are forward-looking. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties, and important factors, including those discussed in the Risk Factors, MD&A and other sections of our Annual Report on Form 10-K and our other SEC filings.

Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. 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.

John Zillmer: Thanks, Felise. 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 2023 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 accreted 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 third — 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, 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 U.S. 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 in collegiate hospitality, partially offset by the end of universal government-sponsored programs in K-12 student nutrition. Sports, Leisure &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 complimented by a substantial step up in net new business compared to historical levels. And Facilities & Other grew as a result of expanded services and frequency, particularly from large client accounts, along with a strong level of new business start-ups. 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 B&I portfolio where we experienced greater lunchtime participation rates and a return of catering activity for special events, including holiday celebrations and work — networking gatherings.

Organic revenue in our Uniform 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 experienced 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 our 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 Uniform 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 skillset 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, crude 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 this 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 2023 annual incentive plan for our senior leadership team.

I’m proud of those 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 value — 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 Uniform Services upon the spin. I will now pass it over to Tom for detailed financial review of the business.

Tom Ondrof: 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, constant currency increase of 47% compared to the first quarter last year. AOI margin increased just over a 100 basis points to 5.3%.

Improved profitability during the quarter compared to 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 and 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 start-up 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.

Photo by Louis Hansel on Unsplash

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 $0.44 on a constant currency basis, nearly double the $0.23 reported in the first quarter fiscal 2022. FX impacted adjusted earnings by per share by $0.03 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 $0.28 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 2019 and was not expected to be fully recovered until next year.

But 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 2023. We maintain our previously stated full-year outlook while updating certain measures associated with the sale of our interest in 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 million to $525 million before payment for the $64 million FICA payment just completed this quarter and the anticipated cash flow of approximately $100 million 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 million 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 4x by the end of this fiscal year. We begin the New Year as we finished 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?

John Zillmer: 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 will be competing in the Super Bowl this upcoming weekend. And operator, we’ll now open the line for questions.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. . And our first question comes from the line of Toni Kaplan with Morgan Stanley. Your line is now open.

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

John Zillmer: Sure. I — 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 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 in that 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.

Toni Kaplan: Great. And we’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.

Tom Ondrof: Sure. The — for next year you’re meaning fiscal 2024.

Toni Kaplan: Oh, sorry. Yes. Within 2023 and –?

Tom Ondrof: Within this year?

Toni Kaplan: Yes, yes, exactly.

Tom Ondrof: Sure, sure. Well, like I said just a minute ago, the base sort of pre-COVID AOI level was roughly $30 million, if not fully recovered yet. So the AOI impact will be less than that for the full fiscal year. And obviously we’ll be missing by the time we close about half that number. So I — something a bit less than $30 million roughly divided by two is the AOI impact and that that’s roughly the 2% in 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. So the net of those two really gives you the accretion between the two numbers, the AOI given up in the interest savings.

Operator: Thank you. One moment for our next question. Our next question comes from Ian Zaffino from Oppenheimer. Your line is open.

Ian Zaffino: Hi, thanks. Very small quarter. I just wanted to follow-up maybe if I could on this AIM, maybe talk about the multiple, I mean I’m calculating about 18 times, what sort of drugs have that work? And then also maybe you could touch upon any — like any other opportunities that you could identify maybe that you haven’t mentioned so far. And I’ve a follow-up. Thanks.

John Zillmer: Sure. We’ve talked in the past about monetizing our potential sports teams’ ownership in the San Antonio Spurs. There 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. We have a couple of other joint venture opportunities that we’re always evaluating in various parts of the world as well. So nothing specific to report currently, but as we said, we’re always evaluating those for potential value creation opportunities for our shareholders.

Tom Ondrof: I think the driver Ian was the ability to grow those businesses and 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. So that 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.

John Zillmer: Yes. 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 our 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.

Ian Zaffino: Okay. Thanks. And then just on the inflation front, can you maybe give us an outlook on 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 hold onto some of the pricing especially on the P&L side as maybe inflation rolls over. Thanks.

Tom Ondrof: Yes. I mean persistence the word, I think John and I both used it that that’s especially on the food side. So if you look under the — some of the headlines that you’re seeing recently 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. So 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, and our ability to hold onto the pricing and the P&L contract environment, I think should be strong. I think we’ll be able to hold onto 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.

Operator: Thank you. One moment for our next question. Our next question comes from Andrew Steinerman with JPMorgan. Your line is now open.

Andrew Steinerman: Hi, it’s Tom. If you could 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 of the 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 a second question about FX. So also now looking at that full-year guide on Slide 13, your model assumptions, I see this line that says FX will be a 2% drag on fiscal 2023 guide at current FX rates. I assume that’s a revenue figure. So if you could, what is the assumed FX drag on EPS? And of course, you can imagine I’m talking about at current FX rates.

Tom Ondrof: Yes. About both for — 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.

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

Tom Ondrof: Yes, 3% in the quarter. We were expecting — you asked that —

Andrew Steinerman: $0.03.

Tom Ondrof: Yes, to begin with.

Andrew Steinerman: Yes, $0.03. Yes.

Tom Ondrof: It’s probably a little bit more than we expected.

Andrew Steinerman: Okay. That makes sense.

Tom Ondrof: Beginning of the year and then we expect it to be a little bit lower to average out about 2% for the year.

Andrew Steinerman: I understand now. Thank you so much, Tom.

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

Neil Tyler: Yes. Thank you. Good morning, John. Good morning, Tom. Quick question on the revenue guidance and breaking that out into the components. You are running I think you said pricing is running around 6%. I understand the base effect will cause that to slow. But then if you add net new into on top of maybe a mid-single-digit price effect that doesn’t leave a lot within the mid-point of your revenue guidance for further organic growth recovery given the trajectory you’re on. So are you being — are you seeing any sort of signs of maybe participation rates declining anywhere or any other trends that would cause you to be sort of cautious on the recovery of the base business?

Operator: One moment, please standby. Ladies and gentlemen, please standby. Your call will resume momentarily. Ladies and gentlemen, please standby. Your call will resume momentarily. Ladies and gentlemen, please standby. Your conference will resume momentarily. Ladies and gentlemen, please continue to standby. One moment please.

John Zillmer: Okay. Can you hear us now?

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

Neil Tyler: Yes. Hi guys. Yes, so the question I had was really on the revenue guidance and taking the mid-point 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 your net new contribution in the mid-point, then that doesn’t leave a lot left for the base business recovery. So I suppose the question, is there anything in the business that you are seeing that would cause you to expect that to sort of — to 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.

Tom Ondrof: No, really don’t. It’s just really a gradual lapping of last year’s recovery because we started the year in the mid-1980s, finished the year in the mid-1990s. And so the recovery is going to ease the sort of base recovery is going to ease as we go throughout the year with net growth staying in that sort of 4% to 5% range that we’ve talked about. And then pricing obviously will ease a bit too as we lap what was very strong pricing this past Q4 as we get to the next this year’s Q4. So I think all those things will naturally ease the net growth will stay constant.

Neil Tyler: Okay. And then I suppose — yes, so in that context, when you spoke previously about the sort of bridge to your revenue targets and trajectory and you talked about $1.6 billion 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 $.5 billion left. Can you give us some updated thoughts on how much of that you think may not come back?

Tom Ondrof: Well, yes, the bulk of it is B&I and it could be 80% of that that balance. I mean we’re so far well beyond the 2019 number that it in terms of recovery it’s almost irrelevant now. And it’s also hitting the crosswinds of what is not COVID recovery and what is the beginnings of recessionary impact layoffs and that type of thing, particularly within B&I and you see in the tech sector. So it’s really hard to disaggregate 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 with respect to the question, I — it’s just becoming less and less relevant, especially as we’re moving way beyond our COVID-19 base revenue levels.

Neil Tyler: Okay.

John Zillmer: Yes. I would — Neil, I would just add that there 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 B&I, 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 it’s just really hard to predict. But we fully expect that B&I as a business will be very profitable and will continue to grow going forward. And so we’re not really focused on the recovery — on that recovery number any longer.

It’s just business growth driving base revenues and growing new accounts, adding new accounts and the like. So — and I have to also add my apologies for the technical difficulty. Sorry, that call dropped. We couldn’t reconnect. So apologize to the listeners for that brief gap in coverage.

Neil Tyler: Thanks very much. I’m glad it wasn’t something I said.

John Zillmer: No, not at all, Neil, thank you.

Operator: 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 Shlomo Rosenbaum.

Shlomo Rosenbaum: Hi, thank you.

Operator: Our next question comes from Shlomo Rosenbaum with Stifel. Your line is now open.

Shlomo Rosenbaum: Hi, thank you very much for taking my questions. Tom, may 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 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 above — much above average growth well into the future? How should we think about that?

Tom Ondrof: Yes. Well, the quarter was obviously heavily impacted by Merlin internationally compared to first quarter last year. That remind me, John, the opening was early summer, so it would’ve been third —

John Zillmer: Right.

Tom Ondrof: Early third quarter last year. So first and second quarter, have a bump for international because of the size of that that account win. But again, they’ve also maintained very consistent growth levels throughout the years and have benefited from that. And then also have had — they’re a little higher B&I mix in international business than the U.S. And so that recovery post Labor Day in the first quarter also helped them a bit more than the U.S.

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

John Zillmer: Yes. I would say that retention rates are very high across the Board, both domestically and internationally all businesses performing extraordinarily well, well above our targeted range. And so we’re very pleased with the current results year-to-date and continue to drive towards those very high numbers. We’re consistently setting the target at 96 plus and we are really on target to achieve those numbers again this year.

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

Heather Balsky: 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 taking into account what you’re seeing in FX and inflation, it would be great to just touch on that again.

Tom Ondrof: Yes. Are you talking about the impact of AIM on — specifically on the —

Heather Balsky: Yes, yes.

Tom Ondrof: Math-wise, I think it was about 20 basis points for the company. So that would probably be the impact as we move into the 2024/2025. In terms of inflation outlook, John?

John Zillmer: Yes, I think we’re — we have an expectation that inflation will continue to moderate over the balance of this year, but still running at fairly high levels 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 we’re — our expectation is that it will 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 we’ll find the appropriate mechanisms to go ahead and offset those cost increases as we move forward.

Heather Balsky: Thank you.

Tom Ondrof: Heather, you asked about —

Heather Balsky: Go ahead. Sorry.

Tom Ondrof: FX, Heather, you asked about that. I think we expect it to soften a little bit as the year goes on, the first quarter being a heavier impact than the second half of the year is the current expectation.

Heather Balsky: Okay. And you mentioned earlier in the Q&A about — on inflation that there’s a little bit of an education piece now, just given the disconnects between food costs and food inflation and big headline around CPI. I guess, how — can you talk a little bit more about how those conversations are going? Are you seeing more resistant? Like have you been getting the price increases that you want through?

John Zillmer: Yes. I would say that generally, we’re getting the price increases that we need. You’ve got timing issues that affect some of the businesses with respect to when they can achieve pricing, some regulatory in nature, state — state-oriented purchasing contracts that require certain pricing on certain dates, particularly in the Corrections business. You see some of that in the K-12 sector as well. And delayed pricing in collegiate hospitality as Board rates were negotiated literally the year before. So there are 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 talked — 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, so 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. 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 results that you need to achieve.

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

Leo Carrington: Good morning. Thanks for taking my questions, John and Tom. If I may ask, firstly, a follow-up really on AIM Services. The underlying operating income guidance was lowered to reflect disposal, but the free cash flow guidance was maintained or has been maintained. Can you help bridge this gap and explain the moving — the difference? And then, as a follow-up, on guidance for the year, Q1 margins, in particular, FSS United States and to some degree, Uniforms took a step back in Q1 2023 compared to Q4 2022 on a versus 2019 basis. Can you explain — maybe you have already explained why this is beyond the timing of contract openings? And also why this gives you the confidence to leave the guidance unchanged for the rest of the year that would be great. Thank you.

Tom Ondrof: Leo, just to be clear that last part of that question, you were comparing it sequentially, right, Q4 of 2022 to Q1 of 2023?

Leo Carrington: Yes. But the progress, if you like in basis points versus 2019 as a base.

Tom Ondrof: Got you.

Leo Carrington: And I’m — and I’m — I suppose tough comp of Q1 2019 because FSS United States margin was very healthy back then but –?

Tom Ondrof: 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..

Leo Carrington: Sure.

Tom Ondrof: If that’s okay. On AIM Services cash flow, because it was non-controlling interest, we would receive a dividend from them. We really didn’t have the cash crossing borders and that that dividend was de minimis, to be honest. I’m 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? Is it just — it wasn’t big enough for us to call out.

Operator: Thank you. And our next question comes from Faiza Alwy with Deutsche Bank. Your line is now open.

Faiza Alwy: 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 spend in the back half of the year. Give us some color on when we should expect carve-out financials and give us a better sense of what’s been happening with this business? Has it trended sort of — since you’ve made the announcement, has it been trending in line with your expectations both from a revenue and margin perspective?

John Zillmer: Yes. I would say that the business has generally been trending according to our expectations and the plans that we’ve established for, 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 so the process continues at pace. As we said, we expect to close it by the end of this fiscal year or in the back — 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 we’ll 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 are also — we also are giving consideration in 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, the business is performing at expectations and according to plan.

Operator: Thank you. Our next question comes from Andrew Wittmann with RW Baird. Your line is open.

Andrew Wittmann: Great. Thanks. I guess, Tom, my question for you. The cash flow from ops 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 loss in 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.

Tom Ondrof: It’s — it’s — it is in there. It’s in the — 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 going to perform to our expectations as opposed to their very ambitious goals at the onset of the deal. So that’s just a reversal of some of that earn-out.

Andrew Wittmann: 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 COVID, kind of ramp, you’ve got the layoff trends. There’s a lot of different things that are affecting volume today. But I was just wondering specifically if the end market consumer is reacting to these and changing behavior at all that you can see.

John Zillmer: Yes. Great question, Andrew. I would say that consumer behavior continues to remain very consistent. Our participation rates are rising, which would indicate that customers are satisfied and our 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 characterize as related to pricing dynamics. So that’s really the only way I can answer it. I think it’s so far no impact.

Operator: Thank you. And our next question comes from Stephanie Moore. Your line is now open.

Stephanie Moore: I wanted — 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 would love to get your thoughts on that as we navigate what might be a weaker macro?

John Zillmer: Yes. 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-op 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. And it’s not just the food; it’s also facilities as well.

Stephanie Moore: Great. And that’s really helpful. And then switching gears to B&I. Curious if you can callout maybe any specific markets where you’ve seen a more acute increase in activity as of late?

John Zillmer: Well, we are seeing B&I 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 continued B&I business improvement in Continental Europe. And so we’re very pleased with that and continue to see that business growing nicely.

Stephanie Moore: 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 and cost plus and is where you are in that transition for the end of the last quarter? Thank you.

John Zillmer: Yes. 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. If you continue to have companies struggling with their return-to-work strategies, the three-day work week, four-day work week. 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 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.

Operator: Thank you. Our next question comes from Jaafar Mestari with Exane BNP Paribas. Your line is now open.

Jaafar Mestari: Hi, good morning, everyone. And 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 and the recovery in like-for-like volumes, which, obviously, towards the end of the year, you won’t have much of that left, inflation will be normalized. And 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. And I’m really curious what sort of Q4 performance you’re seeing once most of these factors normalize or slowdown is going to be a very, very interesting data point that exit rate of organic growth is almost test to what you can do medium-term?

So yes, I guess my question is, if you’ve — talk a little bit more about the quarterly sequencing, and do we think the sequence of organic growth is going to be 18%, 14%, 10%, 6% or a bit stronger than that the exit rate? Or on the contrary, a lot more content loaded in that with the volume recovery and the inflation that’s above trend in H1?

Tom Ondrof: Well, yes, I think directionally, you’re correct. We said at Analyst Day, 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 the base volume recoveries subsided and that also included 1% to 2% pricing. So if you strip it all the way back to that that net growth number, we would continue to expect to see that anchor that 4% — sort of that 5% — 4% to 5% as we exit the year and going into 2024 and 2025, the variables are what’s pricing. And is there any remaining COVID recoveries for what that’s worth as we continue to get further away from that. So something that’s more with what we said at Analyst Day, the four to five days plus pricing is probably roughly going to be what the Q4 year-end exit rate going into 2024, 2025.

Jaafar Mestari: All right. Super. And then are there any specific breakpoints in the year that you flagged? Or is the volume recovery and inflation subsiding? Is that going to be very progressive throughout the year?

John Zillmer: Yes. I would say it’s very hard to predict exactly when inflation will abate. We are continuing to move price to offset the cost 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 grow the company through those new account acquisition opportunities.

So hard to say exactly when those breakpoints will be. But we’re focused on delivering net new and ultimately growing the company in that way.

Tom Ondrof: I’d just add one more comment that it’s coming off of 1% to 2% growth for a number of years pre-COVID to then exit this as we get into 2024, 2025 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 incrementally new level of growth as we go forward.

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

Ronan Kennedy: Hi, good morning. It’s Ronan Kennedy on for 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?

John Zillmer: Well, the sources — we haven’t really disclosed the sources of new wins. 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, but — and we expect that, that trend may continue throughout this year. So that’s our anticipated source. And I’m sorry, the second part of your question was?

Ronan Kennedy: Competitive dynamics?

John Zillmer: Competitive dynamics. I think nothing has really changed. It’s a very competitive marketplace, and 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, in growing the business dramatically. And achieving what Tom just highlighted in that mid-single-digit net growth number is 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?

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

Ashish Sabadra: Thanks for taking my question. I wanted to drill down further on the prior question on the Uniform business. And then particularly, on the pricing, there was a particular callout on pricing, I was just wondering if you could talk about how the pricing realization is trending compared to prior year — pre-pandemic levels? And also a question on the growth and demand environment there, some concerns around unemployment 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.

John Zillmer: Sure. I think we’ll see continued demand improvement in the Uniform sector, continue to see lots of opportunity to convert non-users, non-wearers to Uniform to weekly rental uniforms. And we continue to see very strong demand for ancillary services in 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 those — 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 the — 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.

Tom Ondrof: 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 have on the back of the energy increases over the last year or so, really worked very hard to get pricing into their clients, both appropriate through the energy surcharges but also just the base pricing and they feel like 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 in specific.

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

John Zillmer: 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.

Operator: Thank you for participating. This concludes today’s conference. You may now disconnect. Everyone, have a wonderful day.