Neil Tyler: Thank you. Sorry, I wasn’t – I wasn’t particularly clear in the first part of the question, Tom. I apologize as I meant – I really meant that whether they were sort of contracts you were deliberately sort of leaving behind that were suboptimal in terms of their profitability. So I wasn’t thinking actually sort of on day one necessarily and not switch but when you look at each – each of those portions at their cruising speed, whether there’s much difference in the profitability of the bits that you’ve – you’ve lost versus gained?
Tom Ondrof: No. I don’t think so. I mean not – not ultimately to your point, I mean, a Merlin, is gonna provide a good strong margin for us over time once – once we get it fully implement or up to speed and operational. But no, I don’t – I don’t know how you feel, John. But I – I don’t see any business that we’ve been booking that has any different margin profile than we have in the past.
John Zillmer: Yeah, no and one of the things the mantra inside the organization is profitable growth. So it’s not growth at all costs. It’s growth that is margin accretive and earnings accretive, and that is what the organization is focused on. So if you look at the portfolio of business that we’ve sold over the last three years and this consistent ramp up to growth, it’s all met our pro form a targets and our performance expectations for returns on invested capital and the other metrics we utilize to evaluate the new accounts as we sell them. So no, there hasn’t been a structural change in our expectation and there hasn’t been a structural change in the value of the business we’ve sold relative to the business that we’ve lost over that period of time.
So I’m highly confident the growth engine as designed will stimulate this margin recovery that everybody is so anxious for us to achieve. And we believe in it and we see it happening in the business. I think if you relate – yes I think as we get through the balance of this year, we’ll see continued strong performance, continued strong growth leading to that margin recovery, and hitting the expectations we’ve set for 2025 and 2026.
Neil Tyler: Understood. Great, thank you very much.
Operator: Thank you. Our next question comes from Ian Zaffino with Oppenheimer. Your line is open.
Ian Zaffino: Hi, great. Thank you very much. Impressive results here. I know you guys indicated kind of that U shape, but can you maybe give us a little bit of color on how October is going and some trends you can maybe point to kind of what gives you confidence in the guidance? Thanks.
John Zillmer: Yes, I would say we were very pleased with the results in October, one month is not a year make, but we are very pleased with the results. Excuse me. As you know, we – our units report to us on a weekly basis, we see the results as they come in. As we indicated we’ve seen improved performance in the price recovery area particularly in Corrections and Higher Education that bodes very well for the balance of the year in terms of that earnings improvement, so October – also we had some significant new business wins some of which we’ve just talked about Boston Children’s and many others that we’re still working to get to final contract. So we’re very pleased with the early stages of this fiscal ’24 as we are – as we’re through the first five or six weeks.
Ian Zaffino: Thank you.
Operator: Thank you. Our next question comes from Andrew Steinerman with JPMorgan. Your line is open.
Andrew Steinerman: Hi. This is Alex Hess on for Andrew Steinerman. Just wanted to ask on net new – FSS net new inclusive of Merlin appears to be down 18% year-on-year in 2023. Is that a fair characterization? And then how should we think about the puts and takes around net new, maybe verticals where you’re seeing traction, maybe verticals also where you’re seeing share loss? And then, I’ll follow-up with a question on margins as well.
John Zillmer: Yes. Well, we’re not seeing any verticals with share loss, so that’s an easy question to answer. I think we’re seeing growth across all the businesses and had net new pretty much across the board. Yes, there are some years that are bigger than others based on the size of the whales that we might sell in any given year like Merlin, last year being such a significant component of that, but this last year represented our third best historical performance for growth – for net new growth. So, we’re very pleased with the results. And one of the things that people have to remember is that while we measure it in fiscal year terms and report on it on that basis, sales activity is driven by the client’s decision dates. And so many of the decisions that leaked into 2024, for example, were decisions that we would have expected potentially in actually in 23%.
So we don’t see the change from year-to-year as the performance drop off. We just see it as a kind of a lag in decision making around some of those large customers and large clients, some of which are very significant in size. So, again our third best performance ever last year in terms of net new and again contributing to that three-year history or three-year track record of net new growth, which is quite frankly a significant change from the history of the company. So, we’re very pleased with it.
AndrewSteinerman: Got it, John. Thank you so much. And then on margins, if I interpret this right – your FSS sort of pro forma margins were up something in the range of 80 basis points to 90 basis points in 2023. Your guide seems to imply something closer to 40 basis points this year and then that would have to sort of pick up perhaps a little to hit the now fiscal ‘26 target of at least 5.9%. Is that a fair framing? And then is there anything sort of in this year that is specifically compressing that optical margin?
John Zillmer: Yes. I think that yes, the margin this year was – was a little over 90 approach 100 bps improvement. We still had a little bit of tailwind in – in COVID, particularly within the B&I world this year, so that helped drive that outsized performance.
Tom Ondrof: Yes, again the margin is something that is a result, not a cause for us. We continue to focus on driving the AOI dollars, retaining our clients, reinvesting in the business and so it’s a balance of all that as we move forward. I’ll say it again, we’re confident in being able to achieve the financial goals, into ‘25 and ‘26 as we just laid out. So I don’t know what else to really say, except for we are feeling confident about that and continuing to balance and do the right thing for the business when it comes to driving profitability and as a result the margin.
