Good morning and welcome to Aramark Second Quarter 2022 Earnings Results Conference Call. My name is Josh, and I'll be your operator for today's call. At this time, I'd like to inform you that this conference is being recorded for rebroadcast and that all participant lines are in a listen-only mode. We will open the conference call for questions at the conclusion of the company's remarks. I will now turn the call over to Felise Kissell, Vice President, Investor Relations and Corporate Affairs. Ms. Kissell, please proceed.

Thank you and welcome to Aramark's second quarter fiscal '22 earnings conference call and webcast. We also look forward to reviewing the plan to separate the Uniform Services business into an independent publicly traded company announced this morning. You'll be hearing from our CEO, John Zillmer; as well as our CFO, Tom Ondrof. As a reminder, our notice regarding forward-looking statements is included in our press releases this morning which can be found on our website. During this call, we will be making comments that are forward-looking. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties, and important factors, including those discussed in the risk factors, MD&A and other sections of our annual report on Form 10-K and other SEC filings. Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found in this morning's press release as well as on our website. So with all that, I will now turn the call over to John.

Thanks, Felise. It's good to be with all of you during this transformative time in Aramark's history. While we continue to build on the operational changes we've made over the past 2.5 years to drive a client-focused growth mindset throughout the business, we are also excited about our plan announced this morning, to separate Aramark Uniform Services, or AUS, into an independent publicly traded company. AUS is a terrific business that is well poised for continued success, and one that I believe will thrive as a separate company under Kim Scott's leadership. Clearly, there is a lot to cover today and to ensure we wrap up in our usual timeframe, I will briefly highlight the key takeaways from our second quarter results and provide an update on the current state of the business. Tom will then share his financial perspective on the quarter as well as performance expectations for the remainder of the year. We'll use the final portion of the call to review the planned spin-off and open the line for your questions. Our performance in the second quarter demonstrated the strong foundation we have built and the resilience of the business as organic revenue increased 35% year-over-year and surpassed 95% of the corresponding pre-COVID fiscal '19 levels. The progress on the top line came from all three segments and continued to be driven by the COVID index-based recovery, pricing pass-through to help offset the impact of inflation, and contributions from last year's strong net new business as well as the start-up of this year's net new business, which is on pace for another record year. Our teams remain focused on working closely with clients to effectively manage through this higher inflationary period and tighter labor market. While we're seeing an improvement in hiring availability and supply chain resources, the war in Ukraine is creating added supply chain complexities globally, which we're working to navigate even though we have no operations in the region. We continue to actively utilize our scale, our deep bench of suppliers and menu engineering flexibility to help moderate the inflationary impact in the business. We have been opportunistic over the past year in selectively pursuing accretive tuck-in acquisitions and partnerships that we believe align with our mission and expand our capabilities. Most recently, we signed an agreement to acquire Union Supply Group, a commissary goods and services supplier with a strong infrastructure of distribution centers and warehouses that will serve as a resource for our U.S. food business primarily in corrections. Union Supply generated approximately $250 million in revenues last year. The acquisition is expected to close in the third quarter, subject to customary closing conditions and regulatory approvals. As we enter the second half of this fiscal year, we will continue to execute on our strategic priorities. As an organization, we are rooted in service, and our vision is to be the most admired employer and trusted hospitality partner. Trust is earned by delivering on our commitments and exceeding the expectations of our stakeholders each and every single day. Our deep commitment to these principles enabled Aramark to achieve a perfect score yet again in this year's Human Rights Campaign Foundation's Corporate Equality Index, in recognition of our work towards the LGBTQ workplace equality. Last week, we were also named a top 50 company for diversity by Diversity Inc., and cited as the top company for employee resource groups. In addition, we were once again selected as a top 50 employer by Careers and the Disabled for providing a positive work environment for those with disabilities. We appreciate the extensive accomplishments of our teams and their continued focus on enabling the equity and well-being of our own people, the customers we serve, and communities in which we work. I will now turn it over to Tom before reviewing the announcement regarding AUS.

Thanks, and good morning, everyone. Despite the current challenging macro environment, we stayed committed during the second quarter to implement our strategy aimed at building a customer-focused, growth-oriented company capable of meeting the financial targets we set at Analyst Day. The foundation we've established so far has contributed to strong revenue performance in Q2. As John pointed out, organic revenue exceeded 95% of pre-COVID fiscal '19 levels, compared to 71% at this point last year, with significant improvements across all segments. These results reflect a steady recovery in pre-COVID revenues and were also supported by pricing adjustments and new business contributions, especially from accounts that are now operational from last year's record new business figures, as well as some new clients that began operations in the first half of this year. Consistent with our prior discussions about revenue recovery in the COVID index, many operations have segments that have nearly reached or exceeded pre-COVID organic revenue levels. However, a few specific areas within the portfolio are still recovering more slowly, notably white-collar businesses, retail, catering, higher education, healthcare, conference and convention centers, concerts, certain sports events, leisure, corrections, and some hospitality clients in our Uniform segment. We estimate that pre-COVID base revenues were about 88% to 89% recovered in Q2, with the missing volume coming from the COVID index categories I just mentioned, which compares to an estimated 84% to 85% last quarter. While we are encouraged by the steady progress in the recovery of base volume, we still expect a residual impact from COVID as we conclude the year, projecting around $1.5 billion to $1.7 billion, slightly better than the earlier forecast of $1.6 billion to $1.9 billion shared at Analyst Day. As these areas continue to recover through the remainder of this year and into fiscal '23, we expect an incremental margin of 15% to 20% on the returning volumes. In the second quarter, adjusted operating income improved by $138 million year-over-year, driven by effective cost management and our ability to leverage above-unit operational costs and SG&A support with increased sales volumes. This performance led to a constant currency adjusted operating income margin of 4.5% compared to 5.9% in the second quarter of fiscal '19, indicating that we have now recovered 76% of the same quarter's pre-COVID margins, up from 62% in the first quarter and 60% recovered in Q4 of last year. While we are pleased with the margin recovery progress, which we expect will continue, it is crucial to highlight a few points regarding margins during this period of inflation. First, certain businesses may experience a lag in pricing adjustments amid rising costs. For instance, in higher education, most board plans are repriced twice a year before each semester. Conversely, in sports and entertainment, we can often adjust prices for individual events. Where there are timing delays, we are working proactively with clients to address the effects of rising inflation. Second, for cost-plus contracts, higher costs are passed to the client as incurred, which increases revenue, but our fee typically remains fixed. This pressure affects the margin percentage, although the operating income dollars stay unchanged. We have a greater share of cost-plus contracts than historically following the COVID environment, although clients are gradually transitioning back to profit and loss contracts as volumes return. The unexpected developments in the first half of the fiscal year, such as rising inflation rather than a decrease and the worsening supply chain issues due to the war in Europe, do not alter our business's structural margin profile or our outlook for achieving our fiscal year '25 financial targets. Our ability to restore and exceed our fiscal '19 margin depends largely on the incremental margin from the returning COVID index volumes, maintaining pricing that aligns with inflation, and normalizing off-program supply chain activities, along with our proven capacity to leverage our variable cost base operating model and enhance operational efficiencies. Additionally, when comparing to fiscal '19, the adjusted operating income margin has been impacted by our significant strategic investments in growth-oriented resources and technology infrastructure, including cybersecurity. Our quarterly performance yielded an adjusted earnings per share of $0.22 compared to an adjusted loss per share of $0.24 last year. On a GAAP basis, Aramark reported consolidated revenue of $3.9 billion, with operating income of $142 million and diluted earnings per share of $0.14. These results included a $95 million revenue contribution from next level hospitality, which will continue to be excluded from organic revenue until we surpass the acquisition in June. Upon its completion, the contribution from Union Supply Group will also be excluded from our organic revenue and operating income metrics. We expect to finalize this transaction in the coming weeks, pending regulatory approvals. As John mentioned, unit supply reported revenue of approximately $250 million last year, and we anticipate it to positively impact earnings by the end of fiscal '23. Now, regarding cash flow. In the quarter, net cash provided by operating activities was $375 million, and free cash flow reached $278 million, driven by improved operating income performance as well as effective working capital management. At the end of the quarter, we had over $1.5 billion in cash availability and no significant debt maturities until 2025. In this period of rising interest rates, we will take a strategic and opportunistic approach to debt repayment and refinancing. While we will continue to support our businesses to invest in profitable new opportunities when necessary, we aim to maintain leverage ratios below 3.5x by fiscal '25. To summarize our outlook for fiscal '22, following a strong first half of the year, we are optimistic about the business trajectory, especially our progress in net new business while navigating the current inflationary environment. Therefore, we project the following for the fiscal year: organic revenue growth expectations to be at or near 27%, up from the earlier forecast of 23% to 27%, due to stronger net new business contributions, increased pricing to recover costs from inflation, and slightly improved base recovery; annualized net new business in the range of $650 million to $750 million, compared to previous expectations of $550 million to $650 million, which at the midpoint would reflect 5.8% of prior year revenues and 4.3% of fiscal '19 revenues, marking another record-breaking year for the company. The revised outlook is attributed to better-than-expected new account wins while maintaining last year's improved retention rates. Additionally, we have a strong sales pipeline with improving close rates. We expect the adjusted operating income margin to be around 5% for the full fiscal year, down from previous expectations of 5% to 5.5%, due to initial costs tied to better-than-expected new business wins, ongoing reliance on off-program procurement, slower conversion back from cost-plus to profit and loss contracts, and timing-related pricing adjustments. We anticipate Q3 adjusted operating income margin to be in the mid-4% range and Q4 to be in the mid-6%, with free cash flow expected to be between $300 million and $350 million, slightly lower than the previous expectations of $300 million to $400 million due to working capital needs associated with higher-than-expected revenue and the timing of cost-plus contract conversions. We are continuing to build a strong foundation to achieve our financial targets for '25, centered on a sustainable and profitable growth strategy. The transformative actions we have undertaken in the last two years are significantly impacting our results. Therefore, the planned spin of AUS reflects our confidence in this strong foundation and represents an opportune moment to accelerate future growth, positioning both independent companies for success. I'll now pass it back to John to discuss some of the details of the planned spin-off transaction.

Thanks, Tom. I'll now share my comments on the planned spin-off of AUS, which we believe will create two strong independent publicly traded companies, each greatly positioned for profitable growth. The transaction is structured as a spin-off that is intended to be tax-free to Aramark and its stockholders for U.S. federal income tax purposes and expected to close by the end of fiscal '23, subject to certain customary conditions. One of my top priorities when I rejoined Aramark was to recapture a winning hospitality mindset and to reinvigorate the latent power of our people. Due to the hard work and unwavering support of the entire team, Aramark is a company transformed, now stronger, focused, and more energized than ever before. As a result, we're now able to execute on strategies that we expect will unlock significant value for our businesses. This includes the planned spin-off of AUS. So why now? Together with the Board of Directors and management team, we regularly assess the business portfolio to enhance performance and drive value for all stakeholders. To that end, we believe the growth trajectory we have worked to achieve enables us now to create two successful independent publicly traded companies with distinct growth and profitability strategies, business characteristics, and investment profiles. Importantly, we anticipate this transaction will offer numerous value-creating compelling benefits for both companies, including enabling the executive leadership and Boards of each stand-alone company to focus solely on its respective business. Each business's narrowed focus and the ability to compensate employees with equity incentives, linked solely to its own performance, enhances the ability to attract and retain strong employees. The availability of equity linked solely to its distinct business will facilitate each company's acquisition strategies. The flexibility for optimizing capital structures and capital deployment priorities and the ability for the investment community to value each business independently, which the company expects will result in an optimized total stockholder returns. Kim Scott, our President and CEO of AUS, who you all heard from at Analyst Day, is now firmly established in her role and has a strategic framework in place to successfully lead that business. We have assembled senior executives with extensive public company expertise, including Tim Donovan, as newly appointed General Counsel of AUS, who I worked closely with at Allied Waste and then Republic, as well as Jeff Friedel, as Senior Vice President, Human Resources of AUS, who has over 30 years of experience in labor relations, organizational impact, and diversity and inclusion. Rick Dolan also just joined as the CFO of AUS, adding over 20 years of financial leadership, including experience as a public company CFO and is quickly getting up to speed. Tom and I, along with the rest of the executive leadership team, will remain on the Aramark side. Aramark will continue to operate as a proven global leader in Food & Facility services with world-class scale and capabilities. Food & Facilities reported pre-COVID full year fiscal '19 revenues of $13.6 billion, operating in an extremely attractive and growing addressable market, which is estimated to be approximately $500 billion in revenues, with favorable outsourcing trends. Last fiscal year, Food & Facilities achieved record net new business performance, nearly 5x higher than the historical 5-year average, reflecting new business wins over $1 billion and retention rates of approximately 96%. This momentum has continued into fiscal '22, and we believe this is only the beginning. As you know, AUS provides customers with full-service rental programs, resulting in a compelling contract-based recurring revenue model with pre-COVID full year fiscal '19 revenues of $2.6 billion. The estimated $40 billion revenue market presents a substantial opportunity for growth. In the second quarter of '22, AUS's quarterly performance surpassed pre-COVID fiscal '19 year levels, and we see tremendous upside ahead. We remain committed to the financial targets provided at Analyst Day, which reflect opportunities for both companies to capitalize on accelerated organic growth and margin progression. While the separation will enable Aramark and AUS to implement capital allocation strategies that reflect their distinct growth opportunities and cash flow profiles, we expect both companies to have leverage ratios below 3.5x by fiscal '25. Consistent with our messaging at Analyst Day, it is our intention that the two companies will maintain an aggregate dividend, aligned with our historical practice, following the completion of the spin-off. Today marks a milestone in Aramark's storied history and sets the stage for us to reach new heights of performance success. I have never been more excited about the company's prospects ahead within both Food & Facilities and AUS and with the teams we have in place to get us there. Operator, we'd now like to open the line for questions.

Our first question comes from Kevin McVeigh with Credit Suisse. You may proceed.

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

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

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

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

Thank you. Our next question comes from Stephen Grambling with Goldman Sachs. You may proceed.

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

Do you want to take the segment reporting?

Yes, I believe it is generally accurate. As we've discussed for some time, these businesses have been managed quite separately. This should give you a good sense of where we're heading. We're working through some costs that Kim and the team are beginning to compile, including some public company expenses that will be incurred. We still see potential for greater efficiency in other areas. We will determine what this means and eventually provide a clear indication of our expectations for the next few years. Overall, the businesses are quite distinct.

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

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

Yes, eventually Kim and the team will discuss the opportunities with AUS. Overall, I believe they will continue to pursue opportunities to increase density across various regions of the country through smaller acquisitions. These moves are highly synergistic and add value, and they have had positive experiences in the past with similar strategies. I expect this to remain a focus for AUS in terms of mergers and acquisitions. On the food side, we have been active over the last year and a half, and we are pleased with some recent deals, including the announcement with Union Supply in Wilsonville. We will keep seeking targeted opportunities to enhance our service offerings and strengthen our management teams across all sectors. While I don't see any major changes in the food segment, I anticipate more of the same strategies we have been implementing.

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

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

Hi great. Just wanted to kind of touch on the core business. On the net new business side, very, very strong. Are there areas that are like, let's just say, massively outperforming expectations that's really pushing this up or anything that's particularly strong you'd like to call out? And then I have a follow-up.

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

Okay. As a follow-up, could you discuss the margin progression? How are you achieving the mid-6% by the end of the year? Also, regarding your leverage ratio of three-and-a-half times, can you explain how you arrived at that figure? Why is it considered the optimal level, and how does it apply to different types of businesses?

I'll start with the 6%. It's important to look back at 2019 to understand the seasonality of our margin in a normal year. Both the first and fourth quarters are higher-margin periods, with the fourth quarter being the highest. There's some seasonality contributing to the mid-6% figure compared to our traditional performance. As I've mentioned, relative to the margins of 2019, we're making progress, and the rise to the mid-6s indicates further progress back to those 2019 levels when compared to the last three or four quarters. This increase isn't just due to seasonal trends, but rather our recovery to those 2019 levels. Regarding the 3.5 times leverage ratio, as we mentioned at Analyst Day, there's no specific reason for it. It's a target we believe we need to reach. From that point, we'll assess our options. It could potentially decrease based on acquisition opportunities or organic growth, or we could have some promising prospects leading up to 2025 that would keep us around that 3.5 times ratio. For now, it's a goal for us to aim for, and once we achieve it, we’ll evaluate our position.

Ian, I would just add that we are obviously very comfortable operating at higher leverage levels. We recognized that the investment community would like to see us with lower leverage, so we're being respectful of that desire and that inclination, but the organization is extraordinarily well equipped to operate in this higher debt environment. As interest rates rise, we recognize the desire to go ahead and pay down interest to reduce our interest expenses. I'm not sure what the optimal debt level is. And I think over time, the investment community will help educate us to give us the optimal capital structure, but we know that we can achieve 3.5. We're focused on and committed to delivering on that level, and we'll see where that leads us going forward.

Our next question comes from Andy Wittmann with Baird.

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

As we move forward with the transaction, we will share more details and provide clarity on leverage. There is a lot to address regarding the carve-out financials, and we are working to ensure Kim and the team are ready to proceed. I don't want to minimize this, but we will have more information soon regarding the tax basis, debt structure, and other aspects related to the spin-off.

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

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

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

And allows us a platform with the distributed model and in essence, pick-and-pack capabilities that could serve other parts of our business.

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

Our next question comes from Heather Balsky with Bank of America.

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

Certainly. We'll both address this question. I'll begin with the education aspect. As you know, universities set Board plan pricing a semester or a year in advance. Therefore, it's challenging to increase prices for college freshmen who are already on campus and have paid for the Board plan they are using. Prices usually lag by at least a semester, sometimes even longer. So, as we negotiate the new Board plan rates for the upcoming fall semester, we will begin to see the benefits of cost recovery. We can actively adjust prices for both the retail and catering businesses on campus, taking advantage of those opportunities. There are two different pricing elements for higher education. We expect that the inflation environment will continue throughout the remainder of the year. There is a strong focus on cost recovery through pricing strategies as well as cost reductions achieved via menu engineering and flexibility. We have various strategies at our disposal to mitigate the higher costs impacting our frontline operations. Additionally, beyond inflation, the supply chain issues have significantly affected specific areas of our business and certain commodities and proteins. We are actively addressing those challenges too. The fact that we met our earnings target for the quarter demonstrates strong performance, especially since the teams have managed substantial inflation in both food and wages during this period. We believe we will be able to continue recovering. We possess the necessary contractual and operational flexibility to keep addressing those cost increases moving forward.

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

I'm curious about the sales aspect. Should we view inflation as a positive factor for companies or are you observing more demand for self-op conversions in this inflationary environment?

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

Our next question comes from Andrew Steinerman with JPMorgan.

I wanted to verify that you mentioned a mid-4s operating margin for the third quarter. Additionally, I was curious if you could provide some comments on segment-level margins for the current quarter, the June quarter. I also noted your point about the seasonal lift in the fourth quarter, which typically adds around 200 basis points as we transition from the third to the fourth quarter for Aramark. However, I was intrigued by your remark regarding the higher than expected gross wins impacting margins. I assume this effect is primarily relevant to the fourth fiscal quarter?

I'll address your second question. The underlying strength of the margin offsets it. To put it another way, without the new business wins, which we wouldn't prefer, we believe we could perform a bit better even in the fourth quarter as we move into 2023. It is a combination of seasonality providing that lift, along with recovering base volumes and higher incremental margins, while we continue to enhance efficiencies within the business. I appreciate your inquiry for more detailed margin information by sector, but for now, let's maintain the overall company margin at 4.5% for the third quarter.

Our next question comes from Toni Kaplan of Morgan Stanley.

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

Yes. I believe there are two key points regarding international performance. They are doing exceptionally well, thanks to Karl and the leadership team who have risen to meet the challenges they face. As I mentioned earlier, dealing with inflation is a routine aspect of their operations year after year. This allows them to respond to inflationary pressures more rapidly than other parts of the business, particularly in Latin America, where the effects are quite noticeable. Additionally, they have consistently secured new business wins over several years, which contributes positively to their operations. The maturity of contracts won two or three years ago is now yielding benefits, which helps offset the startup costs associated with new business opportunities, with Merlin being a minor exception due to its size. When you consistently win business and have older contracts maturing, alongside familiarity with an inflationary environment, it combines to enable strong performance during these times.

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

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

Our next question comes from Shlomo Rosenbaum with Stifel.

I just wanted to start out a little bit with the nature of the new wins, the raised $100 million guidance. Is this kind of broad-based or concentrated in one sector? And how much of the pressure on the March is coming from the start-up costs from the new wins? Or is this really tangential and think about it as overwhelmingly from the inflationary pressures, and this is just kind of a tangential pressure?

It's likely a bit more than just tangential, especially as we emerge from a period of stagnation that we discussed during Analyst Day. We hadn't seen any net growth for several years until we experienced significant new business opportunities last year, particularly in the latter half and into this year. While this is more than just tangential, we expect this trend to diminish as we progress into 2023 and certainly into 2024, as long as we consistently achieve net growth, which is our objective. Currently, inflation is a major factor influencing our guidance, which is in the range of 5% to 5.5%. As for timing delays, inflation seems to weigh a bit more heavily on us right now compared to the start-up costs.

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

Our next question comes from Faiza Alwy with Deutsche Bank.

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

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

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

Okay. Great. At Investor Day, you mentioned a long-term growth rate of 5% to 7%. I'm interested in discussing the growth framework for Uniform compared to the rest of the business. Additionally, would you be willing to share your thoughts on the relative valuation of the two businesses as you considered different strategic options?

We'll begin to formalize the spin structure and details, allowing us to present a framework that outlines the 3-year plan for the business. I want to proceed cautiously. Right now, we are focused on creating an environment for the spin, aligning the team with the project, and detailing the narrative and the plan. This will take some time in the coming months as we work on the separation. Thus, it may be premature to provide specific valuation metrics at this stage. However, we strongly believe that separating these businesses will be beneficial, enabling each to concentrate on optimizing their strategic focus and flexibility. Each management team will be better positioned to prioritize what is best for their operations, including capital and acquisition strategies. We have identified several advantages, and ultimately, we expect the performance of both organizations to improve. Over the next few months, we will have the chance to connect with the investment community to discuss the spin and the future plans.

Our next question comes from Rishi Sabadra with RBC Capital Markets.

This is John filling in for Rishi. How should we think about the volume recovery in some of the lagging areas, such as B&I, retail, catering, conference?

In terms of their ultimate recovery, it seems that things have been delayed a bit. At the beginning of the year, we expected the white-collar B&I and technology finance sectors to bounce back by now. However, the onset of the Omicron variant has pushed timelines further out. We are still observing a steady recovery in that area, which we anticipate will persist through the summer and into the fall. We are confident that progress will continue in that segment. The convention and conference center business has remained sluggish, slower than we anticipated throughout the winter and spring due to various variants. However, we expect that this sector will also start to improve as we enter the fall and into 2023. Concert activities are increasing as we move into summer, especially at outdoor venues. The hospitality sector, particularly smaller restaurants, is experiencing some ups and downs. Overall, the impacts of COVID-19 are progressing as we expected, possibly even slightly better. We continue to see signs of improvement and believe that as the year goes on and into 2023, we will witness further recovery in those volumes.

Our next question comes from Harry Martin with Bernstein.

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

We believe that the overall outcome will exceed the individual contributions of each organization. We are confident that both companies will experience enhanced performance, including improved margins. Our expectation is that the spin-off will lead to performance improvements for both entities, and we are currently on a very positive path. The business is showing year-over-year improvement and making substantial progress. We will provide more detailed expectations for each company in the future, but we anticipate significant improvement for both businesses.

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

Thank you all for joining us this morning. This is an exciting time and a historic day for Aramark. We are very pleased with the quarterly results and the company's trajectory. I want to recognize the hard work of everyone in our organization, particularly in Aramark Food and Support Services and AUS. These teams have been dedicated to serving our customers consistently, and the results reflect their efforts. Thank you to all Aramark team members, and again, thank you for being here this morning. Take care.

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