Aramark Q3 FY2022 Earnings Call

Good morning, and welcome to Aramark's Third Quarter 2022 Earnings Results Conference Call. My name is Olivia, 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. I will now turn the call over to Felise Kissell, Vice President of Investor Relations and Corporate Affairs. Ms. Kissell, please proceed.

Thank you, and welcome to Aramark's Third Quarter Fiscal 2022 Earnings Conference Call and Webcast. I hope all of you 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.

Thanks, Felise, and thanks to all of you for joining us. As you know, over the past couple of years, we've been focused on several actions to transform the company, including reigniting a hospitality culture and instilling a growth mindset, all while navigating through major macroeconomic challenges. This morning, I will review our progress in those areas, all of which have led to strong business performance in the quarter. I'll also provide an update on the planned spin-off of Aramark Uniform Services, which is intended to be tax-free to Aramark and its stockholders. Against a tough backdrop, I couldn't be more pleased with the team's delivery in the early stages of our strategic growth plan, which continues to drive momentum across our organization and create long-term value for Aramark shareholders. Our results in the third quarter reflected an acceleration of new business growth and effective cost management across the business. And we have reached a significant milestone, with revenue now surpassing pre-COVID fiscal '19 levels across all segments. Business & Industry, which had been slower in its return, demonstrated continued progress over the course of the quarter, and we believe is well poised for ongoing recovery. Net new business through the first 3 quarters has already surpassed last year's record-breaking full-year number. And we expect to capitalize on a robust sales pipeline through the remainder of the year, positioning us well to achieve our raised net new business target this fiscal year and carrying that momentum into next year. While global inflation trends remain elevated, we are operating with a heightened focus to reduce the impact on the business. As we have previously discussed, we believe that we have extensive resources to efficiently manage this inflationary environment, including menu reengineering, labor optimization, and technology deployment, among others. Revenue in the quarter also included 5% growth from pricing compared to the prior year as we work closely with clients to mitigate costs and navigate through this inflationary period. Our supply chain team is providing real-time insights for effective client pricing strategies, tailored to specific clients, sectors, and geographies. Each of the 3 business segments continue to gain momentum, both on the top and bottom line, reflecting the hard work our teams have put into driving the business forward. Within the U.S., Food and Facilities, organic revenue grew by 45% year-over-year, with all lines of business contributing. Education performed strongly through the end of the academic year, while our team is currently preparing for the new school season in both Collegiate Hospitality and Student Nutrition, our newly branded Higher Education and businesses. We have begun implementing enhanced pricing strategies for upcoming board plans and on-campus retail outlets in Higher Education. Sports, Leisure & Corrections significantly improved compared to the prior year, led by strong attendance levels. Sports & Entertainment drove increased per capita spending, led by Major League Baseball as well as benefited from the return of a more robust concert schedule at our client venues. Our destinations portfolio experienced greater guest activity, particularly in the National Parks. And Corrections once again performed above pre-COVID levels due to a strong portfolio of new business wins. Business & Industry, now branded as the Workplace Experience Group, continued to show gradual progress as return-to-office levels remain specific to client culture and geography. And speaking with clients, we remain optimistic for even greater in-person interactions in the fall. Clients are already more active with employee engagement events, including social gatherings, networking opportunities, and wellness sessions, a testament to the continued value and importance of in-person engagement. Facilities & Other drove success from ongoing demand in core business offerings, with an added focus on new engineering solutions and client project services. We are advancing innovation and adding capabilities, including robotics as an example. Healthcare+ exhibited growth, led by increased client activity related to elective surgeries and clinical care. The team has successfully renewed several significant marquee accounts and established new offerings, including in Ambulatory Surgical Centers. Additionally, we've made great progress and have created industry excitement by introducing a new healthcare model focused on patient post-care in partnership with Patient Engagement Advisors. International grew organic revenue 49% year-over-year. This performance was led by new business wins and increased event activity, particularly in Sports & Entertainment within Europe as well as improvement in B&I across the countries we serve. The International team continued to drive consistent net growth that was broad-based in both geography and size, particularly in Chile, Germany, Canada, and the U.K., from Healthcare to Education to B&I. Uniform's performance surpassed pre-COVID levels for a second consecutive quarter as momentum builds towards its debut as an independent publicly traded company. Organic revenue grew 11%, driven by rental revenue growth as well as strength in adjacency services, and the team is beginning to execute on the many value-creating opportunities available to the business. Since our Uniform spin announcement last quarter, we've made progress in the operational separation and have added leaders with extensive public company experience to complement the deep industry expertise of the team already in place. We are on track to complete the transaction in the second half of fiscal '23, and we will continue to provide updates as appropriate. I would now like to spend a moment sharing some initiatives taking place at Aramark that speak volumes about the character of our team and the special culture we've been able to create across the company. It's no secret that people are the cornerstone of everything we do. Building an inclusive, accessible, and equitable workplace, where all employees can thrive and grow their careers, is essential to Aramark's success. With that, I am proud to have signed the CEO Letter on Disability Inclusion, and I am even more proud that Aramark was again named one of the 'Best Places to Work for Disability Inclusion' by the 2022 Disability Equality Index. Moreover, our vision for the future focuses on positively impacting people and the planet, as we serve our client partners, employees, shareholders, and other stakeholders. Our progress in this effort continues as we just committed to significantly reduce greenhouse gas emissions associated with the food we serve in the U.S. by 25% by 2030, in conjunction with our World Resources Institute's Cool Food Pledge. We also plan to significantly expand the availability of plant-based, lower-carbon-footprint meals across our portfolio, offering healthier, more client-friendly solutions. I'd now like to turn the call over to Tom for a detailed financial review of the business.

Thanks, John, and good morning, everyone. Our performance in the third quarter took another step forward as we continue to execute on strategies to drive both revenue growth and margin progression. We have a clear line of sight for continued improvement for the remainder of the year. But before reviewing our updated fiscal 2022 outlook, I first want to discuss our financial results in the quarter. For the total company, organic revenue of $4.2 billion was up 39% over the prior year and exceeded pre-COVID levels for the first time, driven by strong net new business and pricing pass-through, as well as the continued recovery of COVID-related volumes, which reached about 93% of pre-COVID levels compared to roughly 88% last quarter. More than half of the remaining volume to be recovered is attributable to white-collar B&I, with the rest associated with ancillary service offerings and other lines of business, including conference and convention centers in Sports and Leisure and retail and catering in higher-end Healthcare. We expect these revenue streams will continue to improve into the fourth quarter and throughout fiscal 2023. As a reminder, we anticipate the returning volumes to carry higher-than-average incremental Adjusted Operating Income margins of approximately 15% to 20%. In the third quarter, adjusted operating income was $178 million on a constant currency basis, growing 73% year-over-year, resulting in an AOI margin increase of 85 basis points to 4.4%. This progression was due to operating leverage from increased revenue levels and tight cost management, particularly on the labor line, where the use of agency and temp labor has been reduced. We've also seen a slight improvement in supply chain fill rates, allowing us to start to move back to negotiated products from preferred suppliers. Margin improvement in the quarter was impacted by increased inflation, as well as the effect of significantly higher levels of new business with related start-up costs and the natural profitability ramp over the life of the contract. While inflation, start-up costs, and new contract inefficiencies have a short-term drag on margins as we accelerate our top-line growth, these factors add to dollar profit growth today, and we expect in time, will benefit margins as well, giving us confidence in our ability to exceed pre-COVID AOI margin levels. Our results in the quarter led to adjusted EPS of $0.25 compared to an adjusted EPS of $0.03 in Q3 last year. On a GAAP basis, Aramark reported consolidated revenue of $4.1 billion, operating income of $148 million, and diluted earnings per share of $0.16. Compared to organic revenue, GAAP results included $85 million in revenue associated with 2 months of Next Level Hospitality and the first month of Union Supply Group, which closed in early June. Next Level is now part of our organic revenue and AOI metrics as we have lapped the acquisition date. Now turning to cash flow. In line with the normal quarterly cadence of the business, net cash used in operating activities was $14 million and free cash flow was a use of $96 million. The increase in working capital, specifically accounts receivable, was the result of significantly increased revenue in the quarter as new business began operating and COVID-based volumes continued to recover. At quarter end, we had approximately $1.3 billion of cash availability and no significant debt maturities due until 2025. In this period of rising interest rates, we will be strategic and opportunistic in debt repayment and refinancing. While we will continue to invest to drive performance in existing accounts and support growing new business activity, we remain committed to achieving a leverage ratio below 3.5x by fiscal 2025. Let me wrap up by reviewing the latest outlook for fiscal 2022. We raised both our organic revenue growth and annualized net new business expectations. Organic revenue growth is now expected to be 31% to 32% for the full year, which would indicate the fourth quarter reached 107% to 108% of pre-COVID fourth quarter fiscal 2019 levels. We had previously provided an outlook of 27% year-over-year organic growth. Annualized net new business is now anticipated to be between $725 million and $775 million, compared to our previous outlook of $650 million to $750 million and our initial outlook at the beginning of the fiscal year of $550 million to $650 million. This twice-raised outlook is being driven by strong performance year-to-date, improved close rates, and a robust sales pipeline that we expect to carry into fiscal 2023. We maintain our full-year outlook for AOI margin of at or near 5%, with a Q4 margin of mid-6% and free cash flow outlook between $300 million and $350 million, that will include a significant cash inflow in Q4, in line with the company's standard seasonality. Like John, I'm very proud of our teams as they continue to deliver great service for our clients and improving results for our stakeholders. Fueled by annualized net new business at levels never before reached at Aramark, we've now surpassed pre-COVID revenue levels and believe we are poised for fiscal 2023's top line to be approximately $18 billion. AOI margin continues to progress as our full-year outlook for this fiscal year is more than double fiscal 2021's performance of 2.4%, with ongoing improvement expected as we move toward our fiscal 2025 target of 7% to 7.5%. I'm extremely excited about where we are now and where we are heading as we work to wrap up fiscal 2022 and prepare for the new fiscal year.

Thanks, Tom. As we move into the fourth quarter with a revenue run rate that exceeds pre-COVID levels, I'm excited about the opportunities ahead. Our growth-minded culture has created a foundation for consistent net new business. The breadth and resilience of our portfolio across sectors and geographies reinforces our ability to drive results while also benefiting from heightened outsourcing and other positive industry trends. Margin has progressed since fiscal '21, and our leverage ratio continues to improve and we are making value-enhancing decisions that include strategic acquisitions and partnerships as well as the planned spin-off of Uniforms. I'm extremely proud of what we've accomplished as a global team to position Aramark for success as we execute against our strategic growth plan, working to transform our business to achieve our fiscal '25 targets. I couldn't be more confident in our people, our clients, our purpose, and our future. And operator, we'd now like to open the line for questions.

And Toni Kaplan from Morgan Stanley is on the line with a question.

Congrats on a really outstanding quarter on the organic growth front across the board. I wanted to just find out if you're seeing any sort of change in the new business environment as a result of the increased uncertainty in the macro, but just any change in client conversations. Obviously, the new business was very, very strong in the quarter. So it didn't seem like you are, but just give us an update on the most recent that you're seeing.

You bet. Thanks, Toni. Our sales pipeline is very robust going into the fourth quarter and into next fiscal year. So we don't really see any change in client-related activity as it relates to new business. And we see continued emphasis on clients that are currently self-operated, continuing outsourcing for the first time. So we believe the trajectory for next year is also going to be very, very strong. So nothing from a macro perspective, which seems to be impacting the new business results.

Terrific. And just shifting to margins. Could you give us a little detail on how much inflation is impacting you, maybe with regard to supply chain, food costs? And looking forward, with commodity prices down pretty meaningfully since May, should that be less of a headwind in future quarters? Maybe that starts to dissipate a little bit.

Yes, I believe Tom and I will both address this. We are starting to observe some easing in commodity prices, which is advantageous for us, especially concerning various commodities that we buy and use at our locations. If this trend continues, it will help alleviate the effects of inflation. Our teams have successfully managed to offset inflation so far through effective pricing strategies and operational enhancements, and we anticipate being able to maintain this, regardless of the overall inflationary landscape. During the quarter, we experienced significant new account openings across several businesses, which slightly impacted our margin. However, as we proceed with these new accounts and they mature, we expect the margins to improve as well. We are very pleased with the progress made and how well our teams are managing operations at the unit level, serving our clients, and taking necessary actions. We have excellent data regarding inflation that we provide to our teams, allowing them to manage costs in real time and recover those costs as they arise. Tom, would you like to add anything?

No. Just a reminder that the input costs are just a portion of what we experience on the product cost line. And as John said, a lot of levers in there that we continue to pull and our teams continue to work on, preproduction waste, postproduction waste, menu engineering, portion control, all those things are in addition to just the pure input cost. So a lot of levers there, and the team is doing well.

Our next question is coming from the line of Ian Zaffino from Oppenheimer.

Good quarter, everyone. I would like to hear your thoughts on the $18 billion of organic revenues projected for next year. That figure is notably higher than our previous expectations by over $1 billion, which seems to be a common sentiment across the industry as well. Can you explain where this growth is coming from and provide some insights on why it appears to be stronger than what others in the market are anticipating?

Several factors are at play here. The primary driver is our confidence in the ongoing recovery from the COVID impacts. We've mentioned that we expect to exit this year with approximately $1.6 billion unrecovered, which will carry over into next year as the business and industry sector continues its growth. Initially, conference centers, convention venues, and concerts were not performing strongly at the start of the year, but they've significantly improved recently. This recovery in our base, along with net growth and our confidence in the sales pipeline, shows promise. We are already in next year's selling season and are optimistic about what we see ahead. Additionally, pricing adjustments throughout the year are positively contributing to revenue. Altogether, these factors inspire our confidence in achieving around $18 billion in revenue. I am not entirely sure why the broader market may have overlooked this, but it seems there might be a misconception regarding our ability to sustain this record level of net growth for a third consecutive year, alongside the ongoing recovery from COVID.

Okay. Sticking with the net new business, it performed much better than we anticipated just three months ago. Would this mean that the entire increase is due to new customer additions, as there likely isn't much inflation in the figures quarter-over-quarter? I’m unsure how much inflation could impact the numbers from one quarter to the next, so is it accurate to think that this increase is primarily from new customers or renegotiations?

Well, it's all new customers. There is no inflation and there's no renegotiation component in the net new. That is a new business, new client number and those results have been exceedingly strong and continuing to get stronger throughout the year. That's the reason for the guidance raise now for the second time. We had record results last year. Our guidance for this year was to top that, and we've been able to actually exceed our expectations. The team has done a great job of delivering on the net new business side. Very strong retention numbers, roughly equivalent to last year, and terrific new business wins.

And our next question is coming from the line of Heather Balsky from Bank of America.

I realized we're a quarter away from you guys guiding next year. And your guidance for the fourth quarter this year implies a pretty healthy margin. I was hoping you could talk about next year. Just help us think about the give and take, the impact from new businesses, new businesses maturing, inflation. How should we think about margins for 2023?

We will continue to move towards our goal of 7% to 7.5% in fiscal '25. As you pointed out, there are various factors to consider as we enter fiscal '23, but we are certainly on track to build on last year's margin increase from 2.4%. There are a few uncertainties still ahead. A year ago, we believed inflation would be temporary, but that turned out to be incorrect. However, we are starting to see some relief in both availability and input costs, which is positive news and will aid our margins. The contract maturity of accounts from '21 will keep progressing, along with this year's accounts, contributing to our overall performance. The recovery of COVID-related revenue and the associated margin flow-through will also support our efforts. We are tightly managing our above-unit costs. All these elements are expected to help improve our margin and keep us aligned with our margin objective for '25.

Yes. I want to emphasize that we are only a few months away from the end of the fiscal year. We will be working hard on our fourth quarter disclosures to provide detailed information on new business wins and how they will affect the year, along with our expectations for profitability growth in those areas and their impact on margins next year. By that time, we should be able to give a clearer picture of our expectations. For this quarter, we anticipate mid-6s, which is typically our strongest quarter, and we expect to end the year positively. Given the nature of the business, we also foresee ongoing improvement. There is some uncertainty regarding the supply chain, and while we believe inflation may begin to ease in the latter half of the year, it remains uncertain how that will influence next year's outcome. Therefore, it's a bit early for us to offer guidance for next year, but we are very confident in our trajectory. This year is progressing as we had anticipated in terms of earnings, margins, and growth. Our teams are well-prepared for the business expectations, and we feel optimistic about the path ahead, as Tom mentioned, leading into 2025.

Great. I have a housekeeping question. Last quarter, you discussed your expectations for inflation, which you predicted would be in the high single-digit range. I'm curious about how the situation is currently aligning with those forecasts, especially with some easing you've mentioned.

Well, I would say, at present, it's lining up pretty close to our expectations. Really nothing yet that gives us a strong signal. One way or the other, we've had, as we said, some easing in the commodity markets on certain categories, which potentially bodes well. But as you saw in the Tyson announcement yesterday, continued impact on their supply chain with protein availability and the like. So we're still navigating and managing through that. But we expect to be able to manage the impacts on our business, which is really what I'm most concerned about. Do I have the capability of either passing through on pricing or reengineering or all those other levers that we have to pull, so that we can hit our targeted expectations? And we believe that we are fully in control of the business that we operate and that we have that ability.

Our next question is coming from the line of Harry Martin from Bernstein.

I hope we could dig into the drivers of the uplift in the net new guidance a little bit more detailed. Is it more on the gross win side? Or is retention running a little bit better than expected? And then in the sort of international business versus the U.S., I mean, last year and kind of at the start of this year, the U.S. was really the big game changer compared to the sort of the prior average. But the international business is starting to accelerate a lot faster as well. Any sort of more color we can get on that uplift in new guidance would be very helpful.

Sure. I think, broadly speaking, the gross wins are driving it a little more than the retention. Retention will probably end up being relatively consistent with last year when the dust settles on the fiscal year. But the gross wins will be, again, another record level, built on last year's record level. It's coming pretty broad-based. International certainly benefited from the Merlin win, but they've also had an extraordinary year across almost all the geographies in terms of the bread and butter wins as well, which we really like to see. As we talked about before, they take a little less time to ramp and work the inefficiencies out. The U.S. does continue to gain good traction. Fairly broad-based Facilities and Corrections have had extraordinarily good years. And then again, there's just a steady engine with Uniforms, based on the investment made in the salesforce, starting back in '19. That just continues to gain traction, and they continue to push forward on their new business wins. So again, I think it's pretty broad-based, driven primarily from the gross wins, with consistent retention levels.

Great. And then as a related follow-up, can you give us a little bit of help in thinking about the phasing of those annualized new wins turning into revenues? So the $505 million from last year, what's going to shake out around $750 million at the midpoint this year? How much of those translate into revenues for 2023? And how much really will take 2024 and beyond to get to full annualized volume?

Yes. If you go back, ordinarily, it's sort of 40% in year and 60% roll into the following year, is the typical split. Right now, it's a little off just because of the COVID ramp-up, particularly in a couple of areas, business dining being the primary one, where the ramp-up to full populations is still taking a little bit of time. But I think if you generally use sort of a 40% to 50% in year and then the balance rolling into the following year, with maybe a bit of a tail beyond that, that will work for you.

And our next question is coming from the line of Andrew Steinerman from JPMorgan.

I estimated that fourth quarter revenue will be between $3.9 billion and $4 billion, reflecting organic constant currency revenue growth of 9% to 13%. Tom, could you provide some insight, since we are well into the quarter, on how you expect the three segments to perform on an organic constant currency basis? Even if you don't have specific numbers, could you share the general direction of momentum among the three segments in the fourth quarter?

Yes, it's quite widespread and consistent across all areas, as previously mentioned. I believe that Uniforms continues to make progress, maintaining the trend observed over the last few quarters. The U.S. segment could possibly perform even better in the fourth quarter due to the launch of several significant accounts, specifically in Corrections and Facilities. Meanwhile, the international sector keeps progressing steadily. Therefore, I expect they will continue to maintain the pace and trend demonstrated in the previous quarters.

Our next question is coming from the line of Shlomo Rosenbaum with Stifel.

I want to focus a little bit on the Uniforms division. John, with the revenue returning to pre-COVID levels and the routing software implementation nearly complete, when should we expect to see the 200 to 300 basis points of margin expansion compared to what the company was achieving in that unit before COVID? It appears that the conditions are already favorable for that. How long will it take to realize this significant margin expansion?

Thank you for the question, Shlomo. Firstly, I believe the business has demonstrated impressive resilience this year. The performance in the third quarter was exceptional, showing strong growth and retention, significantly outpacing competitors in terms of top-line growth. I'm very pleased with the team's efforts. We're also beginning to see margin expansion benefiting the business. The implementation is complete, and we are currently in the optimization phase, focused on our harvesting plan. This will be discussed with investors as we move through the spin process and engage with our shareholders and the investment community. We’ll provide more details after the fourth quarter, but we have strong confidence in the business's trajectory and performance. As mentioned earlier, the business is progressing as expected given the circumstances and our investments. One of the most encouraging signs is the rising productivity of our salesforce, which is attributed to the ABS implementation and increased staffing levels, resulting in an 11% year-over-year growth. This is part of our investment in the system and the various recovery strategies we've implemented during this inflationary period. I am confident that as we proceed with the spin process and provide further disclosures about the business, it will become clearer. We will delve into more specifics as we wrap up this year and move into the first quarter of next year.

Okay. Great. And then just one question for Tom. As we see interest rates fluctuating and generally increasing, does it make it more difficult for the company to reach the targeted leverage ratios over time in preparation for the spin-off? Typically, you would have to reduce some debt to allocate some of it to the spin-off company to upstream a dividend. But if interest rates are higher, does that affect how we should consider this?

It's not ideal. We would definitely prefer a more stable market. However, we have time on our side. We've discussed the second half of the next fiscal year, and we're monitoring the markets closely. We'll look for refinancing opportunities as we transition into the fall and winter, and we'll manage the situation. A settled market would certainly be preferable.

I would add that the most important thing as we move forward with the execution of the spin strategy and the core business is the continued earnings improvement from both elements of the business. We have multiple levers to manage regarding cash flow, and we're very confident in our ability to proceed. Our debt trades very well, and we're confident in our ability to refinance appropriately. Therefore, I don't see the macro environment as a significant issue affecting our strategy moving forward or our ability to reach the 3.5x level that we've projected for 2025.

Our next question is coming from the line of Andrew Wittmann from Baird.

I was hoping you could talk a little bit about the margins in all these great new wins that you're announcing today. Maybe talk a little bit about the capital, if anything has changed on the needs there or if the mix of customers that you're winning are capital-heavier or capital-lighter customers?

Sure. On the capital, no real mix. As a matter of fact, I think it's actually probably a little lighter than normal. We've got, fortunately, a pretty robust pipeline in Sports & Entertainment going into next year and Higher Ed, which do use or tend to use a little more CapEx. So we love to use it. It generally brings higher margins and longer-term contracts when we're able to invest in clients. But I think this year, overall, it's probably been a little lighter use of CapEx than we would normally see with these wins. Margin-wise, again, nothing extraordinary. I think typical sort of start-up margins, which we continue to feel confident in the '21 wins are ramping '22, nothing out of the ordinary there. So feel good about that. And then what we're looking at, going forward, again, an overall testament to the market, in general, and the general push to outsourcing and look. I think we, as an industry, have benefited in the last couple of years coming out of the pandemic. It's certainly increased activity made people look at outsourcing more robustly, and we're all benefiting from it. So again, the idea that we're really having to chase price or to race to the bottom, so to speak, is just not in the mix. This is a good, robust process. This is a good, strong industry in terms of growth potential. We're getting more and more disciplined in what we bid. As I've said many times, I'd rather win 3 out of 5 than 2 out of 10, and we're going to continue that pace.

Yes, and I would just add, generally that our return requirements for the company have not changed. We still have very high expectations for the internal rate of return as we grow the business. And we still have very strong pro forma development practices. So the performance for these larger accounts come all the way up to Tom and I. So there is a very significant process in place to make sure that we are selling business that is profitable new growth, and our margin and return requirements have not changed. And so we have high expectations that as we sell this new business, it will help us to continue to grow the margins going forward, not deteriorate the margin. So while we have the short-term effects of new account openings and investment in the early stages of a new account, our expectation is that over the life cycle of the account, those returns are very close to or higher than company average and will contribute to expanding margins.

That's helpful context. For my follow-up question, I wanted to ask about the Uniform segment margins in a little bit more detail. I think, John, you made the comment that kind of above peers, and I think that's true here. Obviously, you had a very good growth rate here. But honestly, on the margin side, flat margins was probably a pretty good outcome for most companies, but you guys were up pretty materially. So I was wondering if you could talk about what some of the drivers were of those margins? Certainly, price has got to be one component, but I would imagine there's other factors. Maybe you could talk about merchandise cost, labor expense or maybe it's just an easy comp. But I think some color around that would be helpful.

Thank you. We are genuinely excited about the improvement in margins, which can be attributed to excellent cost discipline within the business. The team has worked hard on merchandise management and has been proactive in addressing staffing issues related to plant labor. They have focused on minimizing the reliance on contract or temporary labor to ensure the presence of full-time employees, thus reducing additional costs. Their operational execution has been commendable. As we add new accounts, especially those with average rental revenue, we see that weekly rental revenues begin contributing to margins almost immediately. Moreover, the team has successfully recovered the inflationary costs of fuel, which has also played a role in the margin improvement. There are multiple factors at play here, including the implementation of ABS, new account acquisitions, stringent cost control in operations, and significant discipline, all of which are contributing to the enhancement in margins and overall performance.

And our next question is coming from the line of Leo Carrington from Citi.

I would like to ask two follow-up questions regarding the factors driving net new business and the guidance range. First, could you elaborate on the differences in trends you're observing between Uniforms and catering? You mentioned that both were positive, but is there any significant difference in the magnitude or origin of the wins between the two areas? Secondly, it was encouraging to see the emissions reduction targets announced in June. Beyond the environmental advantages, to what degree are environmental factors being included, either informally or explicitly, in tenders now?

I'll address the second question first. There is a growing emphasis on ESG as initiatives and our company's stance on various issues are increasingly relevant in many tenders, particularly those involving government entities. Additionally, we are all anticipating the SEC's eventual decisions regarding reporting requirements. Therefore, there is significant focus and attention on both sustainability and governance. We are very aware of these issues and committed to doing what is right for our people and the planet. We have strong leadership in Ash Hanson, who is dedicated to these efforts, along with Alan Horwitz, who focuses on sustainability. This topic is receiving attention from everyone, including the Board, and it is increasingly important in bid processes. Consequently, Ash dedicates a substantial amount of her time to the sales, proposal, and presentation processes. It is a crucial aspect. Tom, would you like to add anything?

Yes, I think on your first question, the momentum between Uniforms and Food and Facilities on the gross business wins is pretty equivalent. Again, with the investment made in Uniforms a few years back, they're chugging away and delivering a result that I think is just going to continue to get better. And I know Kim intends to continue to make incremental investment in that sales team to continue to drive the business forward. And then the same on the Food side, a little bit later reinvestment in that sales team on the Food and Facility side into fiscal '20 and early stages of the pandemic, but great momentum started to be shown there as well as we move that forward, record level last year, already setting a new record this year. And the pipeline is robust, going into next year. So both sides of the business are performing well in terms of new business wins.

And our next question is coming from the line of Hamzah Mazari from Jefferies.

I just had one two-part question. Maybe if you could just talk about where you are in terms of labor optimization and tech deployment? You mentioned those aside from pricing in terms of managing inflation. How much more room is there to go on tech deployment and labor optimization? That's the first part. And then secondly, as part of that, could you walk us through how much of your pricing kind of adjusts in real-time versus what feature of the portfolio has a lag? And just remind us how long that lag is?

Sure. There are a couple of businesses that have very specific timing elements to them with respect to pricing, one of which is the Corrections business. Those contracts are with government entities. They typically have contract renewal date, pricing opportunities that we're focused on. A very significant portion of that occurs in the fourth quarter. And then there's obviously the Higher Education or the Collegiate Hospitality business that is focused on pricing that comes in the fall. Obviously, Board plan pricing is set almost a year ahead. And so the Board plan prices essentially are fixed throughout the operating year. So we have an expectation that pricing increases rather significantly in Collegiate Hospitality, starting in the fourth quarter. The rest of the business is more real-time. Again, each and every account is a client negotiation because we are guests in our customers' houses. And so when we raise prices, we do it with the approval and the negotiation with our clients. But as a general rule, we find it to be a very cooperative environment, and hence, the ability to go ahead and pass through pretty directly those prices when we need to. But as Tom has said many times, we're always focused on delivering value first. So managing the business aggressively, those other levers in terms of technology, and the other levers in terms of labor optimization are important elements of our cost containment strategy. And so pricing is important, but we manage all the levers at the same time. With respect to deployment of technology, I would say, we're in the early stages. Payment technologies are largely deployed, but there are other opportunities to look for technology deployment, in particular, on the Facilities side, that can be value-enhancing and labor-cost reducing. So I would say that we have plenty of opportunities for deployment left. We don't have what I would characterize as a significant gap or a technology debt, if you will. So any of these deployments that we decide to make are optimization decisions, not technology debt decisions. So we don't have some backed-up capital deployment requirement in order to implement these technologies. We make these decisions on an individual basis, based on what's best for the business and the client and customer, and that's how we deploy it.

Yes, I think the only thing I'd add on that last point around labor and technology deployment is, it's an evolutionary process in our business, not a revolutionary one. We continue to move at the pace of our consumers' tastes with technology. At our core, as John has said many times, we're a hospitality, people engagement experience business. And technology can add to that, but it can also subtract. And so we've got to be careful about the pace at which we move and make sure it's appropriate with what our clients want. While it's a bottom line enhancer at times, we're mostly doing it to speed queues and increase the customer experience, not just simply to drive out cost.

Our next question comes from the line of an analyst from RBC Capital.

Maybe quickly, just on Higher Education. Can you give us more color on the recent rebranding to Aramark Hospitality, especially on the fact that you have the increased emphasis on sustainability, as well as other ESG concerns? Is that helping you capture more value or drive higher pricing?

Yes, I would say, it's absolutely. As we develop our approaches in individual client locations, we are always speaking to all the audiences, in particular, students, administrations, and really understanding their unique needs and desires for their individual campuses. So we think of it as a Collegiate ecosystem that they're managing for a particular customer and set of constituents and clients and customers. So it's a very deliberative process. It's one that our frontline managers, our district managers, our RVPs are all intimately engaged in, and it has the focus of our entire leadership team. Jack Donovan and Trevor Ferguson, the people who really lead Collegiate Hospitality, really look at this business very holistically and very differently than most operators. They are constantly assessing the marketplace needs, constantly assessing the impact of the change in student behavior and client expectations and adapting their locations constantly. So it is very important. As you would expect, students are at the forefront. Young people are at the forefront of many of the desired changes in the way we operate, and we're always focused on doing what's best for serving those customers.

Great. And then maybe just a quick follow-up on the B&I sector. Can you maybe just touch on what percentage of those lost volumes you're baking in to return in '23? Or any other information around just kind of the continued recovery that would be great.

I'll park that answer to next quarter when we give guidance. We're still working through the full recovery of B&I into '23 and what our view is there, so more to come on that.

I will now turn the call back over to Mr. Zillmer for closing remarks.

Again, thank you all for joining us this morning. We're extremely excited about the performance of the quarter and the expectations for the balance of the year. We have, I think, the best team in the industry. We love what we do, and we're really excited about the future of the organization. I couldn't be more pleased with the progress we've made and the expectations for the business going forward. So thank you very much and appreciate your support of the company, and look forward to further conversations. Take care.

Ladies and gentlemen, thank you for participating. This concludes today's conference. You may now disconnect. Good day.