Aramark Q4 FY2022 Earnings Call

Good morning, and welcome to Aramark's Fourth Quarter and Full Year Fiscal 2022 Earnings Results Conference Call. My name is Luciana 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 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 point of reference, there will be accompanying slides for this call that can be viewed through the webcast. These slides will be made available following our prepared remarks for easy reference. Additionally, 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. 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. This morning, Tom and I will review our fourth quarter performance and briefly recap our progress throughout fiscal '22. We will also preview the year ahead that is anticipated to build upon the strong momentum the business has established over the past couple of years. And finally, we will provide an update on the previously announced uniformed services spin-off transaction, which is expected to occur in the second half of fiscal '23. As I think about the past year, I am incredibly proud of our teams across the globe, who have embodied the client-focused profitable growth culture we set out to establish. Despite a challenging and complex operating environment, we were able to demonstrate significant value for clients and deliver on our strategic priorities. Our ability to achieve the highest annual revenue in Aramark's history, combined with the second consecutive year of record net new business, is a testament to the exceptional talent embedded throughout our organization. Aramark's strong growth performance was broad-based, coming from multiple lines of business and geographies, as well as from clients large and small. Annualized gross new business exceeded $1.6 billion, representing 10% of pre-COVID fiscal '19 revenues, and retention rates were once again about 95% as we sustained a significant improvement in client retention. Collectively, this resulted in $790 million of net new business, which is more than 50% higher than fiscal '21 and over eight and a half times greater than the company's historical five-year average between fiscal '16 through fiscal '20. This exceptional level of net new business represents nearly 5% of our pre-COVID fiscal '19 revenues, already at the top end of the 4% to 5% range provided during our analyst day financial algorithm. Again, our growth extended across all segments during the fiscal year. Our U.S. food and facilities segment delivered over $400 million of net new business, more than 40% higher than fiscal '21 and about 20 times higher than fiscal '19, driven by strong retention and significant growth in new business wins, particularly in facilities, healthcare, and corrections. International also reached a new milestone with nearly $300 million of net new business, more than double last year. There have been significant wins across the portfolio, ranging in size from small startup operations to large multi-site accounts like Merlin, which you may recall was the largest win in the company's history awarded earlier this year. Even excluding Merlin, net new business performance reflected record results in the international segment—a testament to our growth strategies and the consistent success of our team. The uniform services segment continued strong growth momentum with net new business more than 25% higher than fiscal '21, and retention rates maintained the significant improvement from last year. Our continuous investment in the unit salesforce and an ongoing focus on customer experience have driven sustainable success in new business wins and vertical sales opportunities. Across the portfolio, we capitalized on greater first-time outsourcing opportunities, with over 45% of our wins coming from self-operation conversions, including six of our top 10 largest wins this year in the U.S. alone. With our robust pipeline and commitment to drive profitable growth, I remain confident in our ability to achieve our growth targets and drive our business to even greater heights. I would now like to review Aramark's financial performance in the fourth quarter. Despite unprecedented global inflation levels, our teams remain focused on providing high-quality service while simultaneously working closely with clients to mitigate costs and implement pricing increases. In the quarter, pricing contributed more than 6% to revenue growth. Moreover, we are leveraging our robust supply chain to gain real-time insights for effective pricing strategies tailored to specific clients, sectors, and geographies. The pricing environment is something we will continue to actively monitor and address as appropriate. Our results in the fourth quarter continued to build both on the top and bottom line, reflecting record-level net growth, pricing, and effective cost management through ongoing base recovery. Organic revenue grew 26% year-over-year, reaching 113% of pre-COVID levels, and AOI margin increased nearly 140 basis points on a constant currency basis compared to the fourth quarter last year. Within U.S. food and facilities, organic revenue rose 26% year-over-year, with contributions from all sectors. Education experienced a typical seasonal slowdown in the summer months and is now off to a strong start in the new academic year as we welcome back students and educators in both collegiate hospitality and student nutrition at the end of our fiscal fourth quarter. Our teams have introduced new concepts, including innovative culinary offerings, technological advances, and enhanced dining spaces. Where appropriate and possible, we worked closely with clients to implement additional pricing action for board plans and on-campus retail outlets. Sports, leisure, and corrections continued its positive performance trajectory. Sports and entertainment maintain high attendance levels with better than historic per capita spending across event categories. I also want to take this opportunity to congratulate our clients, the Philadelphia Phillies and Houston Astros for both reaching the World Series. Destination and greater gift activity year-over-year, despite unforeseen weather and fire challenges at certain sites, and corrections reporting growth led by record-level new business wins during the year. Our workplace experience group showed that progress has returned to the office continued across the portfolio, particularly in September. We're providing clients with solution-oriented services customized to their specific needs, with the transition back to P&L contracts occurring as volumes increase. Healthcare Plus recorded increased patient and retail activity as well as benefited from the contributions of significantly higher net growth from newly awarded client contracts, improved retention rates, and success in providing additional services to existing clients. Facilities and other drove performance through ongoing demand and core business offerings in existing client locations and had a strong level of new business wins throughout the year, largely from self-op conversions. International organic revenue grew 39% compared to the fourth quarter last year, driven by higher per capita spending at sports and entertainment venues, particularly in Europe, and increased B&I activity across the portfolio. Similar to the U.S., education internationally was largely closed in the summer and resumed activity at high levels with the start of the fall semester. And another year of consistent net growth in international continued to drive strong results, creating additional scale across geographies. Organic revenue in the uniform services segment increased 8% year-over-year, driven by both the current recurring rentals and adjacency services. The team remains focused on building upon their momentum and executing on strategic growth initiatives across the estimated $40 billion market in North America. We're making progress on the planned tax-free spin-off of this business into an independent company, and we will share further details in the New Year regarding this strategic transaction. I also want to reiterate that we expect to be able to complete the transaction under the terms of our existing debt agreements. We believe that with our prudent capital structure strategy in place, which Tom will review, both companies will be positioned for great success. Lastly, I'd like to spend a moment sharing some recent initiatives focused on one of our core goals—contributing to the greater good with our focus on people and planet. First, last month we submitted our proposed greenhouse gas reduction targets for validation by the science-based targets initiative. Next, in partnership with the Humane Society, we announced our commitment that by 2025, at least 44% of our residential dining menu offerings will be plant-based. Third, we finalized the Pacific Coast foodways commitment as an extension of our existing pledge to reduce food waste by 50% by 2030. And finally, I want to commend the passion exhibited by thousands of Aramark teams who worked around the world on a recent Aramark Building Community Day, which consisted of service projects to reduce inequity, support and grow local communities, and protect the planet. Our people truly are the cornerstone of everything we do, and this day of impact, among many, is just one example that speaks volumes of the special culture we have created. I'll turn the call over to Tom for a detailed financial review of the business.

Thanks, John. And good morning, everyone. Our results in the fourth quarter, and in fact, our performance throughout the entire fiscal year reflect the resolve of our teams across the globe to execute on our growth-driven strategy. Despite ongoing macroeconomic challenges, we continue to stay focused on delivering top and bottom line improvement and remain committed to our long-term priorities. On analyst day, we shared our plans to re-establish a growth culture. We built a hospitality field-focused mindset, built margin through scale, and deleverage through focused cash management. These strategies are yielding positive results, and it's just the beginning. John mentioned we signed a historic high of $1.6 billion of annualized gross new business in the year, and our client-focused, field-empowered approach delivered retention rates above 95% once again, resulting in record net new business levels. Revenue and profits are on the rebound. Cash flows are rebuilding and leverage is reducing, keeping us on track to achieve our fiscal '25 goals. Before reviewing our fiscal '23 outlook, I want to first provide some additional insights on our fiscal '22 financial results. In the fourth quarter, organic revenue grew 26% year-over-year to $4.5 billion and exceeded $16.3 billion for the full year, up 35% compared to the last fiscal year. Performance is driven by strong net new business, pricing pass-through, and ongoing recovery of COVID-related volumes, which is just over 90% of pre-COVID levels for the year, progressing each quarter from an estimated 85% in Q1 to about 95% in Q4. We expect this COVID-related volume recovery to continue to contribute to both revenue and AOI results in fiscal '23, most materially in the first half of the year. Adjusted operating income was $267 million in the quarter, constant currency increased 62% compared to the fourth quarter last year, resulting in an AOI margin of 6.2%. Constant currency AOI margin was 6.1% due to an approximate 10 basis point impact from FX. This performance reflects continued AOI margin recovery, with the fourth quarter closing in on 80% of the same quarter pre-COVID margins, compared to 60% in the fourth quarter last year. AOI for the full year was $780 million, resulting in an AOI margin of 4.9%, nearly 250 basis points better than last year's AOI margin on a constant currency basis. This progression was driven by our ability to contain above unit operational costs, leverage SG&A support across higher sales volume, and benefits from a stabilizing supply chain and tight unit cost management. Our teams, in partnership with our clients, have been and continue to be actively working to mitigate inflation through various actions available to us across food, labor, and direct cost categories, ultimately passing through price as needed and where appropriate. Over the course of the year, we've been gradually able to transition back to preferred suppliers and products as fill rates improved. While there's still much more to go, this year was an important step towards a return to normal supply chain operations. Additionally, as the supply chain settles and our net new business growth significantly increases, our management team works to renegotiate current deals to achieve next-generation savings. We're encouraged by the opportunities in this area. As we've mentioned before, the significantly higher levels of new business we've delivered over the past two years tend to have a short-term drag on margins due to related startup costs and natural account profitability ramp. In the interim, these new accounts accelerate our top line growth and add to the dollar profit today, and will benefit margin as they mature over time, giving us confidence when combined with the supply chain opportunity and our ability to ultimately exceed pre-COVID AOI margin levels and stay on track to deliver our analysts' margin target. Our results in the quarter led to adjusted EPS of $0.49 on a constant currency basis, versus $0.22 in the fourth quarter last year. For the full year, adjusted EPS was $1.20 on a constant currency basis, compared to a loss of $0.29 in fiscal '21. FX impacted adjusted earnings per share by one penny in the fourth quarter and by $0.04 for the year. On a GAAP basis, Aramark reported consolidated revenue of $4.4 billion, operating income of $198 million, and diluted earnings per share of $0.29 for the fourth quarter. For the full fiscal year, consolidated revenue was $16.3 billion, operating income was $628 million, and diluted earnings per share was $0.75. Now turning to cash flow. Consistent with the typical seasonality of our business, the fourth quarter generated a significant cash inflow. Net cash provided by operating activities was $836 million, and free cash flow was $717 million. For the full year, net cash provided by operating activities was $694 million and free cash flow was $330 million, compared to $282 million in fiscal '21. The year-over-year increase was the result of improved profit performance and slightly lower capital expenditures, partially offset by higher working capital related to net new business growth and recovering base account activity. Our strong cash flow performance combined with significantly higher earnings resulted in an improved leverage ratio of 5.3 times compared to 7.4 times at year-end fiscal '21. We remain on track to reduce leverage below 3.5 times as mentioned at analyst day, and we believe we are well positioned to navigate the current environment with a net debt portfolio of more than 80% fixed-rate instruments inclusive of swaps, no significant maturities until 2025, and over $1.8 billion in cash availability at fiscal year-end. The planned uniform spin-off will also create some degree of flexibility related to our balance sheet. There are a number of different paths to execute the transaction; we will be strategic in managing the capital structure, particularly in the current environment, in a way that we expect will maximize value for shareholders and best position each independent company for sustaining the same success. We're confident in our ability to complete the spin under our existing debt agreement and that we will not be required to fully or partially replace the existing capital structure other than what we choose to do. We continue to make progress in completing the essential tasks necessary for the separation and look forward to sharing additional details, including distinct financial targets and leverage profiles for each company as we get closer to completing the transaction. Let me wrap up by sharing our outlook for fiscal 2023. Based on our current expectations, we project the following full-year total company performance. Organic revenue growth between 11% and 13%, reflecting slightly higher results than the approximately $18 billion mentioned during the last earnings call. We expect components of growth to include 4.5% to 5% net new business, 3% to 4% from the recovery of COVID-related volumes weighted to the first half of the year, and 3.5% to 4% pricing if any inflationary environment remains constant, as we partner with our clients to balance operating costs with quality service. Adjusted operating income growth of 34% to 39%. With this target, we expect to achieve 97% to 100% of our fiscal '19 pre-COVID AOI dollar levels, inclusive of the contributions of unions and fibers, a portion of which will remain excluded from our AOI until we hit the acquisition date in June. Following a nearly 250 basis point improvement in AOI margin in fiscal '22, organic revenue and AOI outlook at the midpoint anticipate another roughly 100 basis point margin improvement this coming year. Finally, we expect free cash flow to be in the range of $475 million to $525 million for payment of the following items. First, we will make the last two deferred FICA payments associated with the CARES Act. Like last year, we expect to make this payment of approximately $65 million in the first quarter. Second, we anticipate a cash flow impact of approximately $100 million to $120 million related to restructuring charges, public company costs, and transaction fees associated with a uniform spin. After these specific items, we expect free cash flow to be in the range of $300 million to $350 million. With the benefit of this strong cash flow generation combined with expected higher operating income, we anticipate our leverage ratio to be between 4 and 4.5 times by the end of fiscal '23. This year is the next significant step on our journey to achieve the fiscal '25 goals we established on analyst day. Our strategy is producing results, and we're excited to keep building on this momentum. Thanks for your time this morning.

Thank you, Tom. As a company, we've moved from recovery mode to growth mode very quickly, including our fiscal year on substantially stronger footing, and believe we are well poised to continue the strategic transformation we set out to achieve back at the beginning of fiscal '20. This year, we achieved the highest annual revenue results in company history, more than doubled our AOI margin compared to last year, and realized the second consecutive year of record net new business performance, exceeding the midpoint of our original targets by nearly $200 million. I'm extremely proud of the performance milestones we've accomplished this past year as a global team. Fiscal '23 is just underway with new client wins already occurring, as well as a strong pipeline of opportunities ahead. With our plans and strategic initiatives in place, we have big goals for this year and beyond. We expect the exceptional momentum across the company will enable us to achieve them. Thank you, everyone. And operator, we would now like to open the call for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Our first question comes from the line of Heather Balsky from Bank of America. Your line is open.

Hi, thank you. Two questions on revenue. The first is, when you look at your outlook for next year in terms of growth, can you help us appreciate sort of the macro dynamics you're thinking about? And if there is a tougher environment, kind of where you think you can, I guess the give and take in your outlook? Thanks.

Yes. I think a couple of things there. We feel like one of the tailwinds continues to be the outsourcing trend, and the net new business wins. We have an incredibly strong pipeline at the moment as we enter into fiscal '23. So we feel confident about that. The teams are really starting to get stability and a pace to their processes that have been built over the last couple of years. So we feel good about that. Retention rates are within our control, and so that feels solid. We actually have probably a lower level of rebate activity issues than we've had in '23 than we've had in '22. So that's helpful as well. Pricing is a big variable. Depending on what happens with inflation, as I mentioned, certainly, we will continue to keep pace between pricing pass-through and mitigation activities. That pricing really did accelerate for us in the second half as it needed to this year. As inflation continues to rise, we will go ahead and keep pace if it mitigates the debts and then that might take some pressure off. And lastly, to COVID recovery is getting harder and harder to track that as we get further and further away from early 2020, and with some effects of recessionary pressures, particularly within business dining, kicking in, it's really hard to segregate those. So those would be the overall comments. I think it helps, John.

I think that characterizes it well. We're very excited about the revenue achievements that the company has been able to establish. Our teams are very focused on the operating side of the business. We've got great momentum on the new account sales side and very good retention activity. So we're confident in the revenue number, but there are a couple of macroeconomic factors that could impact that next year, and we'll respond aggressively as we always do.

Thank you. And as a follow-up, when you think about pricing, on a longer-term basis, if it turns out that we're in a higher than normal inflationary environment for multiple years, rather than sort of this one or two years, what does that mean for your business, your ability to take price consistently in that type of environment and your ability to manage that on the margin line, as well as taking into account that you did a pretty good job this year?

Yes, that is absolutely the economic model that we've been operating in for decades, and we've seen different inflationary environments. Both Tom and I have seen it both with high inflationary environments and low inflationary environments over the years. So we expect the business to be able to adjust. Our operators in the field will be able to adapt, and the pricing activity will be a significant component of that. We've got very strong disciplines around it, very strong technology to support and tools to support the pricing initiatives. We give our frontline managers data on a monthly basis regarding supply chain activity and food costs inflation. So they have the tools in place in order to manage this. And as you know, we run the business with literally weekly P&Ls. Our frontline managers are constantly adjusting to the realities that they're operating in. We expect to be able to continue to mitigate those inflationary pressures, whether through pricing, menu adjustments, or supply chain changes; we've got a number of tools to address it. It's just the nature of the business, and I'm confident our people will be able to manage through it.

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

Hi. Great. Thank you very much. Very strong results here. So congratulations on that. It was a clean sweep on the IR side, and Tom, John, and Felice, also IR says that's a big accomplishment. So congratulations to you guys. John, I know when you joined, you mentioned enhancing the sales force, and that would be the driver of new business, but new business is clearly coming in better than expected. What's going on there as far as is this just the sales force? Are you putting in any other measures to get the growth that you have? Can you comment on how much is market share versus industry growth like a post-COVID environment? Thanks.

Certainly. Well, there have been a number of actions taken over the last couple of years to drive this step change in terms of new business growth. The first of which was, as you described, working on the sales organization, adding resources, adding sales management expertise, and really giving the sales organization and the operating organization the freedom to respond to customers and develop proposals that are highly customized to meet their particular needs. So I think it's both the tools as well as the resources in order to accelerate that increase in sales activity. It's also, frankly, cultural. It is the objective of the entire organization to grow. We believe that our best pathway to improved earnings over time is to grow the business. So we've implemented incentive programs for both the operators and the sales team that are aligned with that. So 40% of the incentive compensation for the entire leadership team is focused on growth. So it's cultural, it's resources, it's individual tactical decisions made inside the business, and it's just focus. We wake up every day thinking about how we are going to grow the organization, what accounts we are working on, and how we are going to achieve higher growth rates as well as higher retention rates. So it's more cultural than anything else, and we're very, very excited about the results over the last two years. We have high expectations, not only for this coming year but for the entire future of the organization. It is the way that we will do business going forward.

I think just picking up Ian on the market share point too because it's an important one. We're in an industry that's got tremendous opportunity, a lot of insourced opportunity that, as we've seen over the last couple of years, has started to move and consider outsourcing. That's been a big tailwind for us overall as an industry. We don't focus that much on market shares; it really just depends on the line of business in the country that we are in, and it varies. We believe the opportunity for the industry is to grow, and it's just a matter of taking advantage of it and having the right tools, processes, and people in place to capture it.

Okay, thanks for that. Tom, I know you touched upon P&L and the transition back to the P&L from cost plus. Where are you in that transition and can you touch upon the margin implications as you do that, and then maybe touch upon inflation as well as you think about P&L? Thanks.

Sure. We're not quite back to where we were in '19, where we had, particularly in the business side, about two-thirds P&L, maybe a little bit more. We're not back there yet, but we are moving back purposefully to the P&L. We do like that model better in the long run. It can be more profitable as we control the entire P&L and a lot of the decisions around it. But we're doing it very paced, making sure that it's driven by the volumes and the economics of the account before we make that transition, so that we can really manage that margin effectively. If we do it too quickly, we would take a hit, and so we want to ensure that it's an account-by-account, case-by-case basis to transition in conjunction with conversations with the client. So the margin implications should not be noticeable at all if we do it at the right time.

That's right. I would add that we're driven first by the service requirements of our clients and customers. Contractual modifications back to P&L will take place as revenues continue to increase as customers return to their work sites. And again, this is predominantly a B&I phenomenon. In other businesses, they have pretty much transitioned back to P&L. As businesses execute their return-to-work strategies and the COVID pandemic continues to move into the past, we will transition accounts as it makes sense and as our clients need or want us to based on their service expectations.

Thank you. One moment for the next question. Our next question comes from the line of Andrew Steinerman with JPMorgan. Your line is open.

Hi, I just want to get the exact margin in the guide. So you said nearly 100 basis points margin expense for fiscal '23. I assume you're using a 4.9 fiscal '22 base. When you say nearly 100 basis points, is there a notable difference between constant currency and reported, and what should we think of in terms of a target fiscal '23 operating margin on a reported basis?

Well, if it were to sort of stick with that 11% to 13%, top-line growth and 34%, 39% AOI dollar growth, you can work with those variables to come up with a margin that at a margin range. That's really the focus for us is to continue to grow those dollars. Again, we think that at the midpoint, that's going to drive about 100 basis points margin improvement year-over-year.

And is the 100 basis points reported or constant currency?

It would be reported.

Thank you. One moment for our next question. Our next question comes from the line of Toni Kaplan from Morgan Stanley. Your line is open.

Hi. I wanted to ask about competition. So on the slide where you broke out this source of new wins. It looks like you're getting additional wins from the regional players. Anything to call out on that front? Are the sort of smaller players having more trouble competing because of the higher cost environment, or would you attribute it to something else? Thanks.

I think that's probably a good assessment. The big step change continues to be the self-op conversion activity that's increased over the norm and continues to run at a pace of probably 10% to 15% higher than the industry norm over the last 10 to 15 years. The other areas are very, kind of typical. There are areas where we compete against the other big three, other excellent companies based on what they have, and the type of rebid activity that exists in their contract base. This year, we had a higher level of rebid activity based on the analyzation of certain contracts and their expiration dates. So it just cycles. I don't think there's any real change in the competitive dynamic between the big three or the regionals. I think additional cost pressures probably do have an impact on the smaller players. Our supply chain is much more robust, and we're much more able to respond to those kinds of cost pressures than the smaller competitors are. The big tailwind for us is really in the self-op conversion mode, and that looks like it's going to continue.

Yes, understood. I wanted to ask about the 2025 margin target of 7% to 7.5%. It sounds like from the prepared remarks, and this is consistent with prior quarters, you're still confident about being able to achieve that. You had put out that target before we started to see inflation really escalate. I know there were probably some supply chain issues at the time. It sounds like supply chain is moderating now. Just wanted to understand, given that inflation has become a bigger factor. Are there some offsets? What are the offsets needed to get to that level? Is it the negotiations that you mentioned, Tom, in the prepared remarks, or are there other factors that we should be thinking about? Thanks.

Sure, I do. Certainly inflation has been a headwind to that target from a year ago. All things being equal, it probably be towards the lower end of the range, given the inflation impact than the higher end of the range. That said, there are, to your point, some offsets. Supply chain will continue to mitigate; we're confident of that and settle in over the course of the next three years as we move towards that period, as we talked about with fiscal '25. We also continue with the new business wins and the ability to leverage those wins, both through our supply chain negotiations, as well as our above-unit overhead costs are going to be a tailwind to the margin. We're growing, and we're actually probably a year ahead of pace in terms of trying to get to that 4.5% to 5% net new business growth number, we talked about it on analyst day. John and I were very pleasantly surprised with the way the teams gelled and delivered those results a little quicker than anticipated. That again benefits us as we build margin through scale going forward over the next three years. So I think inflation is a headwind, but I think some of the offsets are the pace of growth and supply chain.

Thank you. One moment for our next question. Our next question comes from the line of Shlomo Rosenbaum with Stifel. Your line is open.

Hi, good morning. Thank you for taking my questions. Hey Tom, there's been a very strong gross new business wins. Maybe you could give us a little more detail on what does that represent in terms of like a margin headwind in fiscal year '23? Just in terms of you have the ramp up; they're not mature yet. I'm not sure where you are yet with the fiscal year '21 new deals. Is there some way to think about the underlying margin improving by X amount, but there is a headwind from these new deals that are coming in faster than expected that is limiting it a little bit? I have one follow-up.

Yes. It's a great question. And I understand from the outside looking in that it can be a little tough to dig into this area, and it is an important one. But, I hate to give you the answer, but it does depend. It just depends on the size of the account. Smaller accounts ramp to natural margin relative very quickly, typically in the first six months to 12 months at the most. The longer bigger ones, particularly in the higher ed or healthcare space, tend to take three years or so to ramp to that. Then you've got the offsets of retention and proactive retention and what happens to the margin there. So, there's a lot of moving pieces to it. But, typically, if you just work with that one to three-year basis of margin maturity, that will probably put you in the right direction.

Sorry, didn't mean to interrupt there. Keep in mind, when you have these accelerating net new business wins, last year was 500, this year it has reached 800, so you'd have an accelerating growth in those new account wins. The opening costs that are anticipated, the ramp and maturity costs that are anticipated are accelerating during that timeframe. As you get to a more steady state, that normalizes and it becomes much more predictable. As we continue this acceleration process, it's a little more difficult to predict exactly how that ramp will unfold based on the size of the accounts, the location, the geography, the type of operation it is, but we are highly confident in our ability to deliver on our analyst day targets. We've weighed that growth into those targets as we've established that program. Everything that's unfolded here with respect to the performance of the company is very much as Tom and I predicted and as we established the plan, so we're confident in our ability to hit those targets.

Thank you. One moment for our next question. Our next question comes from the line of Neil Tyler with Redburn. Your line is open.

Good morning. Thank you. I have a couple of questions remaining. First, regarding the conversion rate and the speed of converting some of the longer-term pipeline of new opportunities, you mentioned that the U.S. is about a year ahead of the original plan. Is the overall market size the same, but you've captured a larger share, or has the market itself expanded? That’s my first question. Secondly, you noted that facilities played a significant role in new wins. Can you clarify whether this was due to cross-selling to existing clients or if it helped in acquiring new clients? Lastly, I’d like to ask about margins. Could you provide insights into the sequential uplift you mentioned, about 100 basis points, specifically how pricing versus costs, especially with the elimination of some ramping startup costs, contribute to that 100 basis point figure for 2023 compared to 2022?

That's a lot to unpack. Good questions on all of them. Let me start with the margin. As John just talked about the ramp, and we've had some serious acceleration of net growth, obviously, from year Zero in '19 into 20 to this year. If you look at the guidance, '23 is going to be north of 800. But we're sort of hitting cruising speed to a degree and getting to that 4.5% to 5% annualized net growth. The first half of the year to your question is going to be where I have more of the startup costs that are new or incremental to the prior year, and then that will wane as the year goes on. In '24 and '25, we're healing cruising speed and staying at cruising speed. To John's point, we're lapping prior year startup costs, and those won't become as much of a factor over those next couple of years, so I think the pace of it is going to be more so in the first half than the second half if you're just looking at '23. In terms of pie size, fortunately we are benefitting right now from both taking share and self-ops. That has continued to be a primary source for us, a little bit higher than the historical norm. The regional players, of course, the other big players in certain markets. But the pie size has also increased a bit here over the last couple of years. We're benefitting in an industry from both phenomena. We continue, we don't feel as though we need the outsourcing to continue to stay at those mid-single-digit rates that we reached this year, and expect into '23. We're just very pleased to be in a position to capture this opportunity based on the investments we made throughout the pandemic and the results that our teams are showing. In response to your question about facilities, it hasn't particularly been cross-selling opportunities; they've been standalone beachhead opportunities, and we do like that because getting into an account, no matter with either service, food or facilities is a good starting point for us and ultimately can build from there and lead to that cross-sell opportunity.

Yes, and I would add that the facilities wins have been brought based across multiple industries, multiple geographies, and both standalone and existing customers. It's a very significant year for them. It's a business we operate in a couple of different forms. We've got the standalone facilities business, but we also serve facilities customers in the healthcare space managed by healthcare. So it's a great segment for us, one that we will continue to focus on growing, and their wins this year have been both self-authoring conversions as well as existing account conversions. So it's a really nice year for facilities as a business unit.

Thank you. One moment for our next question. Our next question comes from the line of Andrew Wittmann with Baird. Your line is open.

Great. Good morning. Thanks for taking my questions, everyone. I guess question on the capital structure; you mentioned that you've got the flexibility and you don't have to do anything that you choose to do. Just hoping you could explain a little bit more about what that means. I guess, with the uniform business representing probably just over $40 million of EBITDA, the company's leverage being at the end of the year around four times. It feels like there's at least a billion and a half of new debt that's going to have to get reformulated somewhere. Do you have the ability to pay off your existing series of debt and partially without having to redeem them in full or anytime you could just give us a little bit more detail as to how you planned to effectuate the new capital structure over there at least?

Yes, still prefer not to give out or go into too much detail at this point because the markets move. We're continuing to evaluate what's best. I think the key point is there's really nothing we're in our hands being forced to do with the transaction, Andrew it's going to put us in a position that we really don't want to be in. So how we ultimately finalize the details, what we pay off, and what we refinance is all being determined and we will again, give you more details on that as we move forward and get a little closer to the transaction.

Okay, we'll stay tuned for that. I guess my follow-up question I wanted to ask about the international segment a little bit more. I was hoping you could just comment on the margins in that business in particular; this business has got a lot more of a dynamic economy. Certainly, that's happening there. I want to understand how that's affecting your profit margins in that segment specifically and how much more you have on variable costs to potentially manage those margins, if needed, recognizing that you're coming out of COVID where you actually probably did a lot of those activities already. Maybe if you could just kind of boil it down to help us understand what the margins could be in 2023 for that swing; it would be helpful. Thank you.

Yes, margins in international have moved forward quite nicely. They have a model that's been more stable. We talked about that before. Their sales growth has been more consistent. It really is a bit of a proof source as to what's happening in the U.S. as we rebuild the growth engine and margin through scale models. The international business has been doing that for a number of years. They were able to move the margin north of 4%, and I think this year we will continue and reach pre-COVID levels in '23 or very close to that. They have the same levers as the U.S. in terms of accounts on a case-by-case basis, in terms of what they do to drive margin. Again, they've been able to scale through their growth, benefiting from the supply chain and managing unit overheads quite nicely this past year. We're expecting the same for '23 and then, from an inflation standpoint, this is part of their DNA in many of their countries. Their ability to price was part of the mix for them and part of the challenges they face again in many parts of the international business for some time.

Thank you. One moment for our next question. Our next question comes from the line of Faiza Alwy from Deutsche Bank.

Yes, hi, good morning. I was hoping to get an update on the labor environment?

Labor environment continues to be challenging pretty much everywhere around the world. However, we have been able to, through the use of both technology and a number of tools and resources we've established for people in the businesses, we've been able to meet the staffing challenges that our units face. We have a very strong talent acquisition organization that's been in place for a number of years and is very adept at meeting the recruiting needs of the business. As you know, we have a couple of businesses that have very strong seasonal ramp-up activities. So we've built the processes for the organization in order to meet those ramp-up demands for sports, entertainment, higher education, and other businesses. We've been able to go ahead and meet the needs of the business. One of the tools that we put in place over the past year was daily pay; that was a very strong incentive for lower-wage earners to join Aramark as they were able to access their pay on a daily basis with very little cost to them. That's been very successful in terms of driving recruitment activity. All in all, though the pressures exist, we do see a softening in the labor market as you've seen announced layoffs and others, we're beginning to see more people return to work and a higher level of concern. Our turnover numbers are normalizing, and our recruitment activities are in very good shape.

Thank you. Now our next question comes from the line of Manav Patnaik from Barclays. Your line is open.

Morning, thank you. This is actually on for Manav. May I just reconfirm for the 11% to 13% organic contributions from each of net gross price volume, COVID recovery? And I'd be particularly mindful of timing; I think you'd said most of the COVID recovery should come in the first half. Lastly, any insights for organic constant currency revenue expectations by segment?

Yes. The COVID recovery, we expect to be weighted more to the first half as we lapped; we got to 85% here in the fourth quarter, a little better than that actually. So by the next fourth quarter, that should be weighing on the previous conditions compared to year one recovery. So it will be front-loaded. Beyond that, we have no real comment on the split by geography.

Okay. Can I ask you just to repeat the contributions from net growth price and COVID recovery?

Sure, it's on the slides attached to it. No problem. 4.5% to 5% for net growth; 3% to 4% from COVID recovery; and 3.5% to 4% pricing, again assuming constant inflationary environments.

Thank you. And our last question comes from the line of Stephanie Moore from Jefferies. Your line is open.

Hi, good morning. I wanted to touch on the business and industry continuing to see a nice recovery there. Could you maybe speak to areas where you've seen or areas where they might be lagging just versus those pre-COVID levels and where you've seen some improvement here during the quarter and throughout the year? I also wanted to get your high-level thoughts as you think about this business returning to pre-COVID levels, and what that means, just given hybrid work schedules at companies that have reduced office space, at the same time, the opportunity to gain new business, and how all of those triangulate together. Thank you.

Yes. That business has continued to experience net new business growth year-over-year and is performing very nicely. We do have varying states of recovery among the clients that we serve. Some are back to 100%. Obviously, the blue-collar operations back at 100%, and still some white-collar operations lagging, particularly in the coastal environments, if you will, such as the financial sector or the high-tech sector. However, even those have begun to improve dramatically over the past couple of months. Based on our results, there is a significant transition observed in September. We continue to see an acceleration of that return to work throughout the first quarter of the new year, which I won't comment on. We do see that rapid pace of change accelerating. We believe that this business will be highly profitable going forward. There is plenty of growth opportunity in this segment, and while individual client locations may be different than they were pre-COVID, overall, the business will be a very good, fundamentally sound business to be in. It may look a little bit different in terms of the customers we serve and the type of services they want and the individual locations, yet we expect this to be a core business for the company with strong growth dynamics. We have a very capable leadership team in place to continue that growth. Thank you very much, everybody, for joining us this morning. We're obviously very excited about the performance of the company in the fourth quarter and our prospects for fiscal '23. We're excited about the growth the company has been able to achieve in net new business wins. We have a strong commitment to those goals we've established as an organization during our analyst day for both growth and margin, and we will be back together again here at the end of the first quarter to talk more about the spin and implications for both sides of the business going forward. We will update you then at that time. Thank you again for your time this morning, and I look forward to continuing our conversations in the near future.

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