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

Thank you, and welcome to Aramark's second quarter fiscal '23 earnings conference call and webcast. 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 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. I will now turn the call over to John.

Thanks, Felise, and thanks to all of you for joining us today. Now halfway through the fiscal year, we continue to make progress on our strategic priorities, which have resulted in: one, strong business performance; two, positioning the Uniform services spin-off for success; and three, additional balance sheet optimization. This morning, Tom and I will share an update on each of these priorities, as well as a detailed outlook for the full-year before opening the line for questions. But first, I want to acknowledge our teams around the globe, who embody Aramark's service culture every day. Just over a week ago, we held our Aramark Building Community Day during which thousands of employees across the company volunteered their time, energy, and expertise to over 150 service projects around the world in areas where they live and work. This is just one example of our commitment to reach for remarkable as we continue to deliver on that promise. Aramark's performance starts with our people, and I'm proud of the powerful impact in partnership that we've created with our teams, our clients, and our communities. Now let me comment on our second quarter business performance. After record results last year, new business growth remains strong, and the pipeline is robust. This, combined with retention rates that remain above 95% and keeps us on pace to deliver annualized net new business in fiscal '23 of 4.5% or more of last year's revenue, is creating solid top line momentum going into fiscal '24. Net new business in the U.S. segment was broad-based, driven by new wins in health care, corrections, and facilities, including the University of Chicago Medical Center, the Missouri DOC, and an expanded relationship with Boeing, as well as strong retention results in Collegiate Hospitality that reflect the recent proactive extension of Mississippi State University as an example. With the selling season for Education well underway, we anticipate continued momentum with numerous opportunities already in the pipeline. The International segment experienced ongoing success winning consistent accounts across the portfolio, particularly in the U.K., Canada, Ireland, and South America. Our sales funnel continues to grow across all geographies, and retention remains strong. The phased rollout of Merlin is now complete in all locations, and we're looking forward to the upcoming busy season. Uniform Services generated increased new business compared to last year, a sign that the strategic growth plan for the business is being executed. The sales pipeline remains solid, and we expect new business to accelerate as we move into fiscal '24 under the sales leadership of industry veterans, Andy Panos, who recently joined AUS, and has nearly 30 years of experience. Many of you know Andy's reputation in the marketplace, and we're thrilled to have him on board for the next phase of this business. In the quarter, the company's organic revenue grew 19% compared to the same period last year, with pricing contributing approximately 6%. Within the U.S. segment, all sectors contributed to organic revenue growth of 19%, led by continued strong per capita spending and concert scheduling activity in our Sports & Entertainment business, Retail & Catering in our Collegiate Hospitality business, as well as a quarter-over-quarter increase of return-to-work practices within Business & Industry. International organic revenue grew 31% compared to the second quarter last year, driven by solid net new business, pricing initiatives, and base business growth across all geographies. Like the U.S., Sports & Entertainment and Business & Industry continued to demonstrate strength, driven by greater in-person activity levels. Our teams are also gearing up for a busy summer concert and event season ahead. Organic revenue in the Uniform Services segment increased 6% year-over-year with solid performance in both the U.S. and Canada. Adjacency services grew double-digits and while currently a relatively small portion of the business revenue mix continues to be a focal point for growth within AUS. On the Uniform spin-off, we've continued to make significant progress with respect to the transaction and are excited about the opportunities ahead for Uniform services as an independent standalone company. We continue to monitor macroeconomic and capital market conditions, as well as the business's momentum, while remaining diligent in completing the operational, regulatory, and financial logistics in order to be in a position to complete the separation by the end of the fiscal year, all with an eye on doing what is right for the business and Aramark shareholders. Lastly, we continue to strengthen our balance sheet. In early April, we completed the sale of our noncontrolling 50% equity stake in AIM Services for $535 million. We also recently signed an agreement to sell a portion of our ownership stake in the San Antonio Spurs NBA franchise for approximately $100 million. We expect that deal will close imminently, subject to certain closing documentation, and we'll continue to work closely with the Spurs as a valued client in the future. Before turning it over to Tom, I would also like to highlight some of our new partnerships as we strive to be one of the most admired employers and trusted hospitality partners. We partnered with the Thurgood Marshall College Fund to launch the Aramark HBCU Emerging Leaders program, focused on career exploration and professional development for students at historically Black Colleges and Universities. We also formed an equitable alliance with BBB Hospitality Group, a minority leader in human-centric hospitality to bring new avenues of value to our Workplace Experience Group clients, who want to empower their people and communities to overcome labor challenges and to drive more equitable impact from their businesses. And just last week, we were once again selected as a top 50 employer by Diversity, Inc., even moving up in the rankings and for the first time, also named as a top company for supplier diversity. I'm extremely proud of the hard work and significant impact that Aramark is making as a unified community to drive inclusion.

Thanks, John, and good morning, everyone. Our performance in the second quarter showed ongoing momentum in achieving profitable growth, supported by actions that have enhanced the business's current state and set the company up for future success. As John noted, our total organic revenue reached $4.6 billion, growing 19% year-over-year, with adjusted operating income at $213 million, reflecting a 30% increase on a constant currency basis compared to the same quarter last year. The AOI margin for the company raised by 40 basis points to 4.7% during the quarter. In the first half of the fiscal year, the total company AOI improved 39% on a constant currency basis, and the AOI margin increased over 70 basis points to 5%. In the U.S. segment, AOI rose 43% on a constant currency basis compared to the second quarter last year, driven by the maturation of previous year's new business, compliance in supply chain purchasing, and efficient cost management, along with operating leverage from growth due to return to work in the B&I sector and increased spending in the Sports & Entertainment segment. The inflation pricing lag in our Education sector and Corrections business was still a challenge this quarter, but we expect this to improve as client-approved pricing changes take effect in the second half of the fiscal year. In Collegiate Hospitality, the reliance on agency labor remains above historical levels, although it is gradually becoming better. AOI in the International segment grew 3% year-over-year on a constant currency basis. As previously mentioned, last year's second quarter included $21 million in government reimbursements. Excluding this benefit, the segment's AOI increased by 113% and its AOI margin expanded by 140 basis points during this period, each on a constant currency basis. The year-over-year AOI growth in International was fueled by the maturation of new business contracts from the previous year, operating leverage from increased base business volumes due to return to work, compliance in supply chain purchasing, and reduced above-unit costs from a restructuring initiative, which outweighed the impacts of COVID lockdowns in China in January and the end of the government reimbursement programs. Uniform's AOI rose 7% year-over-year on a constant currency basis, achieving an AOI margin of 9.8%, compared to 9.6% in the second quarter last year. This improvement was mainly due to operating leverage from new business acquisitions, tight control of administrative expenses, and early savings from efficiency initiatives, which balanced out higher labor and merchandise costs. We anticipate that this AOI margin growth will persist into the second half of the year, laying the groundwork for its public company debut. Across our portfolio, the supply chain remains crucial to AOI performance. We've seen supplier fill rates improve, nearing pre-COVID levels, allowing us to fully leverage our current negotiated contracts. Additionally, as supplier inventories recover, we are witnessing a return of opportunity buys within the supply chain, providing another means to counterbalance cost pressures. While product costs remain universally higher than they were one or two years ago and are more than 100 basis points above our initial projections for the year, we are beginning to see a slowdown in the rate of inflation. If this trend continues, the business is likely to benefit over time from ongoing pricing strategies, including recovery actions from previously implemented pricing and pricing adjustments already agreed with clients set to take effect in the latter half of this fiscal year. Our net interest expense was $114 million, and our adjusted tax rate was approximately 25%. Our strong performance this quarter resulted in an adjusted EPS of $0.28. On a constant currency basis, adjusted EPS stood at $0.29 this quarter, growing from $0.21 in the second quarter last year, marking a year-over-year increase of 38%. On a GAAP basis, Aramark reported consolidated revenue of $4.6 billion, operating income of $182 million, and diluted earnings per share of $0.21 for the quarter, compared to $3.9 billion in revenue, $142 million in operating income, and diluted earnings per share of $0.14 in the same quarter last year. Now regarding cash flow, in this quarter, net cash provided by operating activities was $314 million, and free cash flow generated was $229 million, consistent with the historical seasonality of the business. Cash generated from operations was better than the same quarter last year, slightly tempered by increased working capital needs and higher capital expenditures, which remained at 3.3% of revenue, still below historical averages. At the end of the quarter, Aramark had approximately $1.2 billion in cash available. Since then, we have repaid $530 million in total debt and remain committed to reducing our leverage ratio. We will continue to monitor overall capital market conditions and remain open to opportunities to strengthen our balance sheet through debt repayment and strategic refinancing. To wrap up, I want to share our outlook for fiscal '23, which includes our expectations for the entire company and some details on global FSS and Uniforms. For clarity, global FSS encompasses FSS U.S., FSS International, and the Corporate Reportable segments, covering everything except the Uniform Services segment. The Uniform Services outlook pertains only to that segment and excludes any additional public company costs or efficiency gains. Currently, we project for the full fiscal year '23 organic revenue growth to exceed 13% year-over-year, with global FSS around 15% and Uniform Services approximately 5.5%. AOI growth is estimated to be about 32% compared to last year, with global FSS projected at around 45% and Uniform Services around 7%. Free cash flow is expected to be approximately $475 million before accounting for the $64 million FICA payment made last quarter and the expected cash flow impact of roughly $100 million to $125 million related to restructuring costs and transaction fees associated with the Uniform spin-off. After factoring in these items, we expect our reported free cash flow to be around $300 million and aim for our leverage ratio to decrease to below four times by the end of the fiscal year. We remain dedicated to maintaining a balanced capital structure at the time of the spin, with no intentions to overburden either company. We are confident in the ongoing momentum in both global FSS and Uniform Services to achieve sustainable, profitable growth in the long term. A robust pipeline of new business opportunities, the positive effects of our pricing initiatives against moderating inflation, a stabilizing supply chain, and the benefits from actions taken in the first half to enhance organizational efficiency and effectiveness strengthen our confidence as we move into the second half of the year and establish a foundation for fiscal '24 and beyond. Thank you for your time this morning. John?

Thank you, Tom. As we move into the second half of the year, I'm excited about what lies ahead for Aramark as we finish this year and build into fiscal '24. As Tom mentioned, revenue growth is strong, driven by continued solid net new business growth, continued client pricing and the ongoing base business recovery and growth. Following an expected 45% increase in AOI this fiscal year, we anticipate the momentum to continue within global food and facilities next year, driven by ongoing supply chain normalization and optimization, continued profit recovery through pricing in all segments, most notably in Collegiate Hospitality, student nutrition and corrections. The profitability ramp of record new business wins from the past two years through operational maturity and efficiencies. The benefit of previously announced and completed organizational restructuring initiatives in FSS International and Uniform services and tight control and leverage of above unit overhead across higher revenues. Uniforms remains focused on a strategic agenda and increasing route density with new business wins and successful cross-selling as well as route optimization from investments already implemented across the portfolio. Additionally, the team has identified incremental opportunities as it prepares to operate as a stand-alone company related to restructuring the organization and adding experienced leadership talent with a history of value creation. This is just the start of what's to come for the business. The work ahead is not easy. We've continued to set a very high bar for ourselves, and we're working hard every day to deliver for our stakeholders. Tom and I feel the incredible momentum across our business each day and believe deeply in the ability of our teams around the globe to reach this level of performance and well beyond. Operator, we'll now open the line for questions.

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

Thanks so much. Very nice quarter with regard to top line growth, and you raised your organic growth guidance. I was hoping you could talk more about what's driving the acceleration and particularly any additional color on new business trends, how you see the trajectory on new business through the year and outsourcing trends? Anything like that would be helpful. Thanks.

Sure. Thanks for the question, Toni. First of all, we have very strong momentum and a very strong new business pipeline. So a lot of activity, and I would say we're very pleased and very excited about the prospects for the balance of the year. As you know, it's early in the selling season for Education. So we still anticipate a lot of decisions through the back half of this year and are very excited about the opportunities that we have in front of us. I would say we had a record performance for the last two years running, and we're on a very similar trajectory for this year, very excited about the overall prospects. We see continued outsourcing as a trend that will support the business going forward and believe that the company is well-positioned to take advantage of those opportunities. With respect to the business momentum and recovery in the base business, we are seeing an accelerated activity and return to work, which is helping to create momentum in business and industry, not only domestically, but internationally as well. And we expect that trend will continue through the balance of this year.

Great. And then for a follow-up, I did want to ask about the margins, just a clarification maybe. It looks like similar to what you were providing in March at conferences in terms of the expectation for AOI margin this year. I know that was a little bit lower than what you had expected in 1Q, but it sounds like similar to March. And so just maybe talk about either upside to the margin guide and have you sort of stabilized here? And can that go up? Thanks.

Yes. We're talking about the mid-5s, I think, for the year, really concentrating on both the progression on the top and the bottom line as we move forward with balance. I think the variable continues to be the persistence of inflation. We're getting pricing, as John just mentioned, very strong pricing. We have a lot of client-agreed pricing already set to be implemented in the second half. So that's obviously countering that, sort of, persistence that we're seeing as we get into the second half this year. I'm not sure, Toni, there's a lot that is going to change that to the upside as we move through the balance of the year. Time is running short, and we're already doing a lot of things, including the new business planning for fiscal '24. But certainly, we'll continue to be very aggressive on the pricing and appropriate to offset that. And I think if we can get a little bit of mitigation towards the fourth quarter, that might help a little bit. But by and large, we're staying focused on it. We don't see any real downside, but a lot of the upside would be in '24.

Perfect. Thank you.

Hi, thank you. I would like to hear more about the Uniforms business. You mentioned adding new team members focused on value creation. However, it seems that the organic sales in that sector might be slowing down in the latter half of the year to meet your guidance. I'm interested in understanding what is currently happening in the business and what opportunities you anticipate moving forward. Thank you.

Yes, I'll take that. First of all, we see continued sales momentum in the business and growth in terms of net new we are anniversarying last year's fuel recovery fees, it would have been in the third and fourth quarters. So on a comparative basis year-over-year, it has the appearance of slowing, but the actual sales activity we think is running at levels that are consistent with our expectations. So we're highly confident in the team that's in place there. And as we've built the team to create a public company environment, we're very confident in the leadership that we have focused on it. So we're very pleased to have Andy join the organization. He has very strong established leadership in the industry, and I think we'll lead that business to even greater heights from a new business perspective going forward as we implement some of Kim's new strategies, with respect to targeted marketing and implementation. So I think our expectations are that the business will continue to perform based on its plan for the balance of the year.

Great. I'm curious if you can share any insights regarding your monitoring of the macro and capital markets in relation to the spin. If the environment were to weaken, would you consider being more flexible with the timing of the spin, or are you set on proceeding in the second half of the year?

Well. We're fully committed to the spin. The timing will be the Board's decision, but we are monitoring, as you indicated, those macroeconomic conditions and the capital markets conditions. Obviously, we want to be very cognizant of what kind of leverage the new company will be equipped with and want to make sure that that comes at a cost and in a rate that is something that's appropriate for the business going forward. As Tom said, we don't plan to over-lever either side of the organization. So we're just going to be very diligent about monitoring the conditions and looking for the right opportunity and timing.

Great. Appreciate the color. Thank you.

You know, really impressive top line here, kind of better than some of the comps out there. What is driving that as far as culture, growth teams process, also the same thing on AOI on the global food business as well. So that's also outpacing kind of comps. So can you tell us maybe what you're doing differently or kind of what's giving you that edge? Thanks.

You can observe the acceleration and realization of the new business acquired over the past few years, which has significantly contributed to top line growth as those accounts develop and generate revenue. As these accounts mature, you will also notice ongoing improvements in AOI and margins as they progress up the profitability curve. These factors are driving the results you've mentioned. The culture within the organization is now completely centered on growth. We have established incentive systems and alignment throughout the organization, leading to a great deal of enthusiasm about the company's future. This is a strong contributing factor to the results. We anticipate continued performance improvement throughout this year. The performance over the last two years was not an anomaly; it represents the new culture and approach to running the business. We expect to sustain this success moving forward.

Okay. Thank you. And then as a follow-up, can you maybe talk about how the business works in periods of moderating food costs, because food costs have been coming down? I'm curious, is there a point where your costs are coming down and then your prices are coming up? Is there going to be a price give back? How are we thinking about those two dynamics? Thanks.

Yes, certainly. Price recovery is influenced by both food cost inflation and labor inflation. Typically, we do not reduce prices for food products as they decrease because we have established pricing structures to recover the overall operational costs, not just the food expenses. However, when inflation rates start to slow down, we will eventually see some benefits from the better pricing and lower food costs. Currently, some commodity prices are declining, which we hope will positively affect profitability and overall food costs in the long run. It's still early to say definitively; while inflation continues, it is now at a lower rate compared to recent quarters. We are starting to see some moderation, but inflation remains persistent. We will be careful to continue pricing strategies to recover these costs and will also address pricing in areas where delays occurred due to contracts. At some point, there will indeed be a boost from this transition.

The one technical exception I'd add to John's comment, Ian, is with cost-plus contracts, we would see in a declining food cost environment or pass-through to the customer drop. So in essence, our revenue dropped a bit as those costs came down, but that would help margin. That's going to be a tailwind to margin as we move into a deflationary environment, because our fees are typically fixed and the pass-through to the revenue would fall.

Okay, thank you.

Yes, thank you. Good morning, John, Tom. Two questions, please. Firstly, you talked about the continued momentum in the growth of the business. Could you perhaps share some insight into any changes in the size or shape or origin of new wins, bear in mind or different lead times in different industries, whether that's altered at all compared to six months or a year ago, please?

Sure. I would say that this year's results don't include what we would characterize as a whale. Merlin, obviously, last year was a very significant new account win much larger than we would normally sell in any given year. This year's sales results are the result of a lot of wins across the enterprise, broad-based new account activity. I described it as bread and butter for the international segment. Those accounts that are a couple of million dollars or less, so not constructed of a lot of large whale accounts, but a lot of wins across the enterprise. So that's actually a very good thing. And if we happen to hit on another large opportunity, that's terrific, but we are expecting to be able to achieve our results across the organization and for the full year by selling a lot of new business around the world across the portfolio.

That's great. And then, Tom, I think you mentioned in your comments around the ongoing cost actions. And I wonder with regard to recovering, or other price actions with regard to recovering costs. Have there been any structural changes or permanent changes in either the structure of contracts or the timing of renegotiations, because you seem to suggest that it wasn't just a case of catching up, but the business might be set up better to cope with cost volatility in the future?

Well, I think two things with that. One is off-cycle pricing that over the course of the past year would become more diligent, I guess, is the best word in approaching our clients, working with our clients to get off-cycle pricing just given the volatility that we've experienced and been more proactive with it as the year has gone on, and some of that is already set for the second half, as I referred to, and so is in place, which is good news. But I also think as we're moving forward with our new contracts. We've been more focused on the indices keeping them more open to be able to renegotiate based on variability in the environment. We had such a low inflationary environment for so many years, a couple of decades that I think contracts became fairly routine in the way they were written with indices and caps and whatnot. And so being much more proactive as we get into the new business to not have those sort of constraints anticipating this environment either continuing or continuing to be volatile going forward. So I think we are positioned better over the coming years based on the way we're structuring our contracts today.

That’s very helpful. Thank you very much.

Hey, I wanted to kind of maybe pull together a few concepts here. My question is, do you feel like Aramark has entered a juncture as a company where you could just more readily balance strong revenue growth with margin expansion at the same time? Like, for example, if the company started reporting stronger revenue growth over the next few quarters, do you feel like there's going to be a healthy margin flow through? Or do you feel like perhaps sometimes the stronger revenue growth will still constrain margins to some extent?

Yes, I would take that, Andrew. I think as the company continues to post sustained revenue growth, we should also post a sustained margin expansion on a going forward basis. And it's really a result of a couple of different dynamics, one of which is continued supply chain economics, improvement in supply chain economics, and adding additional spend to our existing deals, which puts us in a position of earning at higher levels at growth levels, if you will, on those agreements. As you know, many of those agreements with either manufacturers or suppliers are tied to total spend or case counts. And as you grow the business, you get accelerated returns. And then there's also the phenomenon of just increased leverage with respect to the SG&A and the cost structure. We're very diligent about keeping the organization as flat and as focused and as efficient as possible. And so you end up with both of those dynamics contributing to margin expansion in a growth environment, and that's the way we've constructed the business model and it's the way we have our incentives aligned focused on continuing to stimulate that growth in top line by adding profitable new business and then managing the middle of the P&L, if you will.

And I'll add, it's a great question. It's one we're really excited about, because it's the fundamental point and strategy that John and I have been talking about that we're two years in now, back half of '21, all of '22, first-half of '23 on this growth journey and really changing the trajectory of the underlying growth of the business. So we're getting there. We've got to stay resolved to this sort of virtuous circle and really then get to that balanced top line, bottom line growth. But we in the works and margin will follow growth as we continue to move forward. And like John said, leverage the supply chain and leverage the overall above unit infrastructure.

Hi, thank you. I have two questions this morning. I want to follow up on Andrew's question. In this quarter, you've experienced strong growth and are increasing the revenue guidance, but it seems that margin guidance remains unchanged and is consistent with what you mentioned in conferences or at the lower end of last quarter's projections. Can you discuss the factors affecting that margin? Are you facing increased inflation that is impacting this, or are there more start-up costs due to the better-than-expected revenue? If you could elaborate on that, I would appreciate it. I also have a follow-up question.

Yes. The main issue is inflation. At the start of the year, back in November, we projected AOI growth of 32% to 37% adjusted for AIM. The difference between the midpoint and the lower end is about $20 million to $25 million, similar to the high end. Our assumptions were based on an expected decrease in the inflation rate early in the second half of the year; we anticipated some relief from steady pricing coming in and a favorable impact in the latter part of the year. However, inflation has persisted longer and more intensely than we expected at the beginning of the year, which has adjusted our AOI outlook. On the other hand, pricing strategies to address this situation have performed better than we anticipated, and net growth from new account wins has remained robust, pushing revenue to the higher end of expectations. Overall, this has created a dynamic situation for the year primarily driven by inflation and some additional net growth in start-up costs.

Yes. I would add that we are very pleased with the level of pricing activity we have as we move into the second half of the year, which is already approved and contractually agreed to, particularly impacting the corrections business. This pricing adjustment will take effect on the anniversary dates of contracts, many of which are set for July 1st according to federal, state, and local calendars. Significant pricing will be implemented in July, leading to improvements in margin profiles. Additionally, we have already agreed on pricing for the Collegiate Hospitality team that will come into effect in September for the new board plan year. We are confident that this pricing will offset the higher-than-expected rate of inflation, positioning us well for a strong start in 2024.

Thank you. My second question is about the sale of part of the ownership of the San Antonio Spurs. It seems you're receiving $100 million for it. Why are you choosing to sell part rather than all of it? Do you feel that owning a stake is necessary to maintain your commercial relationship with them? Are you looking for potential future gains from depreciation and price appreciation? Is the proceeds just going toward paying down debt, or is there anything else we should consider?

Sure. I'll take that. First of all, we sold approximately half of our interest because there was a buyer, who was working with the team to establish an ownership position, and that's what that buyer wanted to buy with respect to that chunk of ownership, if you will. It is not our intention to hold on to the other part of our ownership; we'll work in partnership with the team ownership structure to go ahead and continue to market the balance of that ownership. And no, there's no requirement in our commercial relationship. In fact, we just recently signed an extension agreement with the Spurs moving forward, which was part of the condition of the sale of that stake. So we will use the proceeds to pay down debt. We anticipate that we'll continue to market the other half. And when we sell that, that would probably generate a similar amount in terms of the proceeds.

I just want to add in here too that the action we took with AIM, the Spurs, and a couple of other joint venture minority interest that we do have, the purpose here is really just to simplify the business and get focused, and that's really been the driver for it. So we look at the balance sheet, look at some of these assets, and again, really just trying to focus on simplifying the business.

Yes. And it creates the opportunity for us to take the leverage level down and open the opportunity for other organizations that have looked at our leverage historically and felt that they couldn't invest in Aramark, because of that leverage. And we recognize that, that's a pool of capital we'd like to have access to. And ultimately, it's all about creating the right balance sheet for future growth and investment. And we're very committed to getting the leverage level down. And I think these actions help to accelerate that effort.

Hi, good morning, everyone. And first question, I just wanted to come back on organic growth. Apologies if I missed the other components. But I only heard you mention pricing contributing plus 6% in Q2. Could you maybe break down the whole of the plus 19% organic growth? So if pricing is plus 6% and how much did like-for-like volumes contribute? And how much did new business contribute in the quarter, please?

Yes, we're going to shy away from that a bit, Jaafar, just because it does tend to bounce around quarter-to-quarter and tends to create a little more angst than it should. But the COVID recovery base continues to be in the mid-90s. So I think that's easy math from where we were last year to get you that component on the base. And then there's negligible acquisition activity. So the balance would be the realized net growth. So all three components tracking on top of that pricing at 6% and the base business and net growth being strong.

Okay. And thanks I understand that. And so I guess separately on the new business, more forward-looking maybe. I'm sure you'll share the full details of new wins at the full-year. And you said year-to-date so far, you were on a similar trajectory to the last two years. And I appreciate each of '21 and '22 was much better than the history of the company. So it's tempting to just say, similar. But from our perspective, 2021, you signed $1.2 billion of new business and '22, you signed $1.6 billion. So it is quite different. And I just wanted to see if you could be a bit more specific. Do you think you can maintain $1.6 billion? Do you think you can maintain $1.2 billion? Or is your best guess at this stage as you end up somewhere in between?

Yes. I don't think we're going to give a specific number with respect to that. We did say, I think, in our dialogue that we expect to maintain 4.5% or better of the prior year's revenues as net new. And so we're expecting another strong performance, and it's very difficult to actually call the decision time frames. As you know, we're not in control of the decision timing. So some of these opportunities that we're working on now may well close by end of year, and some may leak into next year based on the client's decision time frame. So I would just say, based on what we sold to date based on what we've already had in terms of verbal commitments from clients that have not yet contracted, we expect another very strong performance year-over-year.

Super. Education is very big for you. So just maybe to further illustrate that, in a normal year, how much of your signings come in the second half? How much would you not have signed at all as of today, early May, please?

Yes. I would say we typically have about 50% of our business signed in the second half of the year, with a significant portion coming from higher education and K-12 during that period. However, international sales usually have an earlier selling season compared to domestic sales, which see more activity in the third and fourth quarters. This variability is why we report on an annual basis instead of quarter-over-quarter, as we are not in control of the decision time frame.

Hi, good morning. I thought I could ask a question on the ramp-up of the new wins. You mentioned Merlin is now fully operational, so that should have a nice in-year benefit in the second half. Overall, is the ramp-up of the new wins from last year and the year before happening as expected? And then should we expect for this year and next year, the in-year revenue contribution could be slightly higher than the annualized level of revenue signed because of that ramp-up?

I didn't quite catch the second part of your question, but we are indeed experiencing the ramp-up I mentioned earlier. The maturity of the contracts won, particularly from the second half of fiscal '21 and into last year, is taking effect. Some contracts, like Merlin, take two to three years to fully optimize, while others have a shorter timeframe. We're seeing that support driving a 70 basis points improvement in margin year-to-date. We also expect this trend to continue into '24 and '25 as the contracts we've secured so far ramp up.

Okay, thanks. And on the free cash flow guidance, I thought I'd ask a question specifically on the client payments contract line. I know it can be a bit lumpy, but at $85 million in the first half, it probably looks like it could be a very high year. So is there anything structural we need to be aware of here on capital intensity and demand from clients? Or is that just one or two contracts where the payments are kind of unexpectedly high?

Yes. It can vary quarter by quarter; that's what I did mention that it's running still below historical average. I don't think we'll see anything in particular. There was some investment with Merlin that came through higher ed as we invest into those businesses. But nothing out of the ordinary or that's going to take us off, sort of, that 3.5% historical norm on the gross spend as I look forward, either to what we're potentially winning this year or even what we're starting to look at for fiscal '24.

Thank you. Good morning. I wonder if you could build on your previous comments on the pricing dynamics, specifically around consumers' behavior at your clients. I think some of your comments about probably at pricing mechanisms were clear, but are you seeing any signs of changed behavior in terms of participation rates or mix in the face of these price rises as they begin to filter through to your consumers? Thank you.

Yes. I would say we haven't really seen a change in consumer behavior driven by pricing. And we do see evolving consumer behavior as the return to work changes that we're seeing companies that have changed and modified their programs from full subsidy back to the customer paying for their meals. But I would say participation rates are actually running higher than they were pre-COVID particularly in the B&I environment, which is terrific. We think that's a function of the fact that some people are still working on limited calendars, so three or four days per week. So they tend to use the facilities more often and not go out. So we're actually very encouraged by the participation rate dynamics going on inside Business & Industry and otherwise, not seeing a change in consumer behavior related to overall pricing strategy.

I think there's been a benefit a bit from the retail environment, the high street, main street environment that prices have escalated so fast that within the contract environment, there's even a perception of an increased value equation there. So again, we're very mindful when we do pricing of what the retail environment is doing and what the consumer sees outside the workplace or school or whatnot. And the escalation of retail pricing has been so fast and so high. And I think it's really not an issue for us in terms of the client perception or the consumer perception.

Okay, thank you. That's clear, and as a brief follow-up. In Education, do you think that your comments still stand even with the renegotiation interval?

Yes. I would say the pricing for board plans continues to elevate based on the total cost recovery required in those environments. And what we try to do when we're designing those board plans is to create value opportunities for students in a bunch of different ways. We designed those plans to provide flexibility to give them the opportunity to use some of those dollars in the retail environment. So we're always cognizant of trying to create plans that drive consumer acceptance and drive student satisfaction. So it's not always just about price, it's about driving the behaviors as well. So we expect that we'll continue to have elevated pricing going into the new year in board plans to continue to recover the cost increases both from a food perspective, as well as a labor perspective, but certainly, within a range that we'll have high consumer and customer acceptability.

Thank you, good morning. I wanted to follow up on pricing. It seems that this has been a positive surprise compared to the last three to six months. I'm curious if corrections are where you experienced the most positive surprise, or if there are other areas in the business where pricing has been more successful.

We have achieved success in all our businesses regarding pricing activity and recovery. When I mentioned corrections, I was referring to the delay in pricing in the corrections environment. Pricing tends to come in significant portions at contract anniversary dates. The overall 6% pricing impact we accomplished in the second quarter was widespread across the company, both in the domestic and international markets. All our businesses are dedicated to this approach, which is integral to our operations. We have established significant discipline to ensure that our front-line managers can raise prices or recover costs. We provide them with detailed inflation data and supply chain information that aids in decision-making and negotiations with customers when they request pricing increases or service changes to offset costs. The success has been quite broad-based.

Understood. And then just a big picture question. As you look ahead to the next sort of three to four quarters. Like where do you feel there's more uncertainty? Or where do you feel most confident versus least confident as it relates to whether it's pricing, whether it's new business, whether it's inflation, whether it's the uniform spend? So talk holistically about what are some of the things that you're thinking about?

I think the uncertainty we face is primarily related to inflation. Over the past year and perhaps a bit earlier, we've adapted our approach to pricing in response to inflationary pressures. This has become a regular part of our operations. Our operators feel confident, and we have the information necessary to navigate these challenges. We are uncertain about what the future holds, whether inflation will continue as a persistent issue or if it will provide us with a favorable shift. Overall, we feel strong about our growth prospects and the trends in outsourcing. While we've experienced some fluctuations since COVID, we believe that we've fundamentally changed our culture and can sustain our current trajectory. Looking into 2024 and beyond, we feel equipped to handle whatever comes our way as we adjust to the changing environment.

Yes. I would say we're very confident in the discipline that's been built into the organization in terms of evaluating and problem-solving and taking actions to go ahead and mitigate any concerns that may arise. And we're very confident in the overall strategy of the organization, the focus on growth, the focus on customer satisfaction, the focus on hospitality and the cultural change that's taken place. So we have a very dynamic team that's fully engaged. We're very confident in their ability to execute regardless of what exogenous events may occur or what macroeconomic conditions may occur. We have the operating discipline and the resources and the team built to respond to those potential challenges. So we're very confident in the path, particularly that we laid out in our Investor Day, and we are very confident that we're along the trajectory that we established when we met with our investors, and we think we're in a very good position to execute on that strategy.

Oh, great. Thanks. I wanted to ask about interest expense given that rates have been rising from the Fed. With the capital transactions, including the already closed AIM deal and the upcoming Spurs sale, could you provide insights on the timing for the proceeds from the Spurs sale? Additionally, could you clarify the interest expense for the second half of the year, considering all the variables? This information would be helpful for understanding not just these two quarters, but also establishing a future run rate.

Sure. I mean the proceeds, I think we expect in the quarter in the third quarter. So that will be here. In terms of run rate for interest, we ran about 2, 2.15 the first half total interest, of which $114 million was in the second quarter. Probably expect about the same for the second half, but falling off as we exit the year a little bit. So sort of ramped first to second quarter, probably should decrease third to fourth. But in total, first half, second-half should be about equivalent.

Got it. And then just trying to understand the updated, kind of, revenue outlook here is a little bit better than people expected. Sounds like the net new outlook hasn't really changed. It sounds like pricing is pretty good. I guess I'm trying to just understand what drove a little bit of upside to your revenue outlook? Was there some benefit from FX in there? Is it really just the pricing that's coming through to what do you attribute the slightly better-than-expected revenue performance?

I believe we have seen improvements overall. Specifically, we've noted better pricing as we have adapted to ongoing inflation, which we anticipate will persist for the remainder of the year. Our net growth continues to remain strong on a historical scale, and the return to work has been on par or even slightly better than our initial expectations for the year. While pricing is a significant factor driving these results, the other two elements are also performing at or above our earlier projections.

Hi, good morning. Thank you.

Good morning.

Maybe, and I don't want to repeat myself here, but I have another question about pricing. I'm looking to clarify some of the responses that have emerged during this Q&A as we consider the opportunities in fiscal '24. Could you provide some insight into the first half of '24 regarding what pricing will be locked in based on the negotiations from fiscal '23? I'm concerned that there might be a significant delay in price changes if inflation continues to decline. I'm trying to understand what percentage of your business will still rely on the pricing levels from 2023. Thank you.

Well, I think generally, all of it because we don't expect any of it, as John said earlier, to revert or there to be a give back. The only exception is with cost-plus contracts where our pass-throughs based on cost. And so those revenues are associated with cost plus contracts would drop as our input costs drop. But again, that would be a boost to margin as our fees are fixed. So I think everything that's in place or being put into place and implemented in the second half will, to your point, carry into '24. And that's part of what is exciting for us and back to Andrew's earlier question, as things move forward, as you bundle up, the continued consistent net growth maturity of those contracts, leveraging the above-unit overheads, supply chain compliance with this pricing impact thing in place, it all moves forward into '24, and we're excited about that.

Yes, I would just add that we have negotiated pricing that will go into effect in the second half of the year for a couple of key businesses, and this will carry over into next year. Currently, pricing is contributing about 6%. If the inflationary environment remains consistent year-over-year, I would expect to see similar pricing next year, with possibly slightly higher pricing in a couple of businesses that have a time lag. Overall, they should average at similar rates. We will respond from a pricing perspective to the macro environment, and if significant deflation occurs, we'll seek to recover costs incurred due to labor, as we see continued strength in the labor market. It's difficult to pinpoint the exact percentage, but we believe we can effectively manage the business as needed.

I'm actually on for Ashish Sabadra. I just had a quick question on new business wins. I believe you mentioned it would be around 4.5% for the year. Are you able to quantify the year-to-date new business wins?

No, we typically don't just because they become so lumpy. Last year, we would have had Merlin reported, and it just becomes a complicated and not very useful comparison. So we really just think it's most appropriate to report it on an annual basis.

The 4.5% figure pertains to net new business, not gross new business wins, which are actually much higher as a percentage of revenue. Therefore, the 4.5% reflects net new business contribution based on last year's revenues.

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

Terrific. Thanks again, everybody for joining us this morning. Really pleased with the results for the second quarter. We're excited about the opportunities facing the organization and feel confident in our approach and our strategy in the business. We're excited about the prospects for AUS as an independent public company in the future and remain committed to growing the organization profitably and to achieving those targets we've established for ourselves in the Investor Day, again, very confident in our execution and our strategy behind it. So thank you all very much for joining us, and look forward to talking to you soon. Take care.

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