Earnings Call Transcript - ARMK Q3 2023

Operator, Operator

Good morning, and welcome to Aramark's Third Quarter Fiscal 2023 Earnings Results Conference Call. My name is Kevin and I'll be your operator for today. At this time, I would like to inform you that 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.

Felise Kissell, Vice President of Investor Relations and Corporate Development

Thank you, and welcome to Aramark's third quarter fiscal 2023 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-K and our other SEC filings. Also, we will be discussing certain non-GAAP financial measures. A reconciliation of these items to US GAAP can be found in this morning's press release, as well as on our website. With that, I will now turn the call over to John.

John Zillmer, CEO

Thanks, Felise, and thanks to all of you for joining us today. This morning Tom and I will review our third quarter results, which reflect a strong focus on growth across the organization and momentum in our return to normalized margins. We will also share an update on the significant progress we've made on the Uniform Services spin-off transaction. We will then turn to our raised financial expectations for this fiscal year with just one quarter to go before opening the line for questions. We believe that our performance-driven culture and all that it represents has created substantial opportunities that we expect to capitalize on in the months and quarters ahead. Before I get into the results, I want to acknowledge a tremendous loss the Aramark family had a few weeks ago. John Orobono, our Senior Vice President of Supply Chain, lost his hard-fought battle with cancer. As many of you know, John returned to Aramark in October of 2019 and was with the company for almost 40 years in total. He was a true inspiration, a dear friend to so many of us and a visionary who changed the way supply chain is managed first for Aramark and then throughout the food service industry, establishing a true gold standard. Truth to his focus on doing everything he could for Aramark, he left a strong capable team and a solid succession plan. Our hearts are heavy, but we have full confidence in those who learned from all John so generously shared. I will now turn to the quarter. Aramark's organic revenue grew over 14% compared to the same period last year. Global Food & Support Services consisting of the FSS US, FSS International and corporate reportable segments contributed year-over-year growth of more than 16% and Uniform Services increased by approximately 5%. Within Global FSS, the US segment grew organic revenue nearly 15% year-over-year led by continued momentum from net new business, strong per capita spending and increased attendance in Sports & Entertainment and continued favorable trends across the business and industry sector as a result of greater return-to-work activity at client locations. International organic revenue increased more than 20% versus the comparable period last year. Performance was driven by robust net new business performance of busy sports and concerts in Europe, particularly in Germany and Spain, as well as strong mining activity in South America. Global FSS continues to add broad-based new business contributions from all sectors and geographies with retention rates maintained above 95%. Since last quarter, just to name a few, our student nutrition team won DC Public Schools. And within B&I, we expanded our relationship with Walmart to serve their new headquarters and add micro markets and vending locations across the country. Collegiate Hospitality has been active during its typical selling season and was recently awarded Towson University and the College of William and Mary, among others. The International segment also gained new clients in higher education including Kingston University in the UK and Ridley College in Canada, and had ongoing success with other bread-and-butter wins across the portfolio. One of the most important developments of the quarter, that Tom will review more in detail, was our work with customers in the Education sector and Corrections business. As we have said in the past, the margins in these businesses have been artificially compressed due to the sudden and significant inflation not seen in this country for decades. We're very pleased to report that our clients have recognized our strong service levels and the cumulative effect of many quarters of outsized inflation. And they've recently agreed to meaningful price adjustments that will bring us a big step closer to normalized margins. The benefit from this will occur partially in the fourth quarter and more fully in the first quarter of fiscal '24 and beyond. The progress and spirit of partnership we've seen in this quarter makes us more confident than ever that our return to normalized margins is proceeding at pace, and we fully expect will inevitably be achieved. The meaningful progress this quarter is a gratifying proof point of the strength of our bond with our clients and their satisfaction with our service to them. Organic revenue growth in Uniform Services was driven primarily by pricing actions and growth in adjacency sales, partially offset by the rollback of an energy surcharge that was implemented in the third quarter last year that represented approximately 80 basis points. We're pleased to have Uniform Services leadership well in place and the strategic growth plan is underway with early signs of success coming from improved analytics, portfolio targeting analysis and adjacency sales. We expect this underlying momentum to build into next year and well beyond. Regarding the spin-off, our collective teams have made significant progress related to the operational regulatory and financial logistics. We expect to complete the spin-off at the end of our fiscal year, subject to customary closing conditions and based on the current macroeconomic and capital market environment. A few key milestones as we work towards execution of the transaction. Just this morning, we announced the future Board of Directors for Uniform as an independent public company, composed of a strong mix of industry expertise, public company experience and diverse perspectives. This impressive and highly qualified group will provide helpful strategic insight to the Uniform's leadership team and their mission to drive significant value. The Board will be chaired by Uniform's industry veteran, Phillip Holloman, former President and Chief Operating Officer of Cintas, with over two decades of experience in the industry. The Uniform's Board will also include our seasoned leaders who have strong relevant backgrounds in uniform and similar route-based businesses. AUS is finalizing terms on approximately $1.8 billion in financing through banking partners, consisting of $1.5 billion in term loan and a $300 million revolving credit facility. Given the attractive cash flow attributes of the Uniform business, the interest rates are anticipated to be comparable to Aramark's most recent refinancing. With these proceeds, SpinCo is expected to transfer approximately $1.5 billion to Aramark, maintaining neutral net leverage for the total company, all with an eye to continue a path of delevering for both Aramark and AUS. Finally, Kim and her team will host an Analyst Day in New York City in the morning of September 13, which will also be available via webcast to review the strategic plan for Uniforms and the next phase of value creation. This will be a great opportunity for you to meet the strong team of executives, including exceptional new hires from leaders within the industry, and we'll share more details with you soon. We're excited about the potential and strategic benefits of both businesses operating as independent companies. Before turning the call to Tom, I'd like to highlight a few key accomplishments related to our ESG and DEI initiatives, reflecting our ongoing commitment to positively impact people and the planet through our Be Well. Do Well plan. These initiatives remain highly important to us as well as our clients, partners, and shareholders across the globe. First, we've taken another step forward in our sustainability efforts. Just last month, we received confirmation from the Science-Based Targets Initiative of our goals to reduce our carbon footprint according to their net zero standard. These targets follow and complement our existing ESG commitments. Also, I'm proud of our recent recognition as the Best Place to Work for Disability Inclusion, and a perfect 100% score on the Disability Equality Index once again. We continue to be focused on creating a welcoming and inclusive culture across the organization. And diversity equity and inclusion will continue to be a top priority for us. We believe that our focus on our people has become a key differentiator for the company that has led to tremendous outcomes. I could not be more proud of what our team has been able to achieve. Tom?

Tom Ondrof, CFO

Thanks, John, and good morning everyone. Our performance in the third quarter showed strong momentum both at the top and bottom lines across the portfolio. Aramark reported consolidated revenue exceeding $4.7 billion for the period, reflecting more than 14% year-over-year organic growth supported by 6% pricing and strong contributions from new business as well as ongoing recovery of the base business. In Q3, operating income was $203 million, while adjusted operating income was $240 million, 34% higher on a constant currency basis compared to the same quarter last year. AOI margin increased by 75 basis points year-over-year to 5.1%, which is also over 40 basis points higher than the second quarter, typically a comparable period for margin levels. AIM Services, which previously added 15 to 20 basis points to the total company AOI margin, is not included in this report due to the sale of our non-controlling stake at the start of April. Throughout all segments, improved year-over-year profitability in the quarter resulted from operating leverage gained from increased revenue, the maturation of new business from past years, enhanced supply chain economics, and disciplined unit cost management. Organic revenue and AOI in Global FSS grew by 16% and 47% year-over-year on a constant currency basis, respectively. This organic revenue growth was primarily driven by contributions from robust new business and pricing strategies, along with growth in the base business, especially from increased spending in the Sports & Entertainment sector and return-to-work activities in the business and industry segment. Additionally, the Global FSS AOI margin rose by 86 basis points compared to last year’s third quarter and by 27 basis points sequentially against the second quarter. For Uniform Services, organic revenue grew 5% while AOI increased nearly 13% compared to Q3 last year on a constant currency basis, with AOI margin improving about 80 basis points to 11.1%, marking a sequential improvement of almost 140 basis points versus the second quarter. Revenue growth during the period was negatively affected by an 80 basis point impact due to the reversal of an energy surcharge from the previous year's third quarter. The considerable margin expansion in this segment compared to the prior year stemmed from initial advantages linked to a revised sales strategy that aims for a balanced revenue mix, including adjacency and add-on services, along with early benefits from efficiency initiatives tied to organizational restructuring executed earlier this year. Supply chain normalization across the portfolio remains a vital contributor to growing profitability this year and we are optimistic about the substantial opportunities it presents for the business moving forward. As previously mentioned, some of our food services businesses have faced delays in recovering inflation due to their periodic pricing structure, typically conducted once a year, specifically affecting the Collegiate Hospitality Meal Plan, Student Nutrition, and Corrections, which together account for about 25% of our total revenues. Over recent quarters, we have worked diligently with our customers to implement significant pricing actions across various business lines, most of which will take effect in Q4. Concurrently, we've observed a moderation in inflation over the quarter. While we cannot predict the exact trajectory of inflation moving forward, we are confident in our ability to recover from this price-cost lag, which, combined with our usual year-end seasonality, gives us assurance in an anticipated upward margin shift in Q4, with further advantages extending into next year. Regarding the rest of the income statement, net interest expense for the quarter was $113 million, reflecting $630 million in debt repayment, with the adjusted tax rate around 27%. Our quarterly results led to earnings per share of $1.29, which included a net gain from the sale of equity investments, and adjusted EPS of $0.36. On a constant currency basis, adjusted EPS reached $0.37 for the quarter, compared to $0.25 for the same period last year, marking a year-over-year increase of 48%. In terms of cash flow, net cash from operating activities was $23 million, while free cash flow recorded a use of $80 million for the quarter, consistent with typical business seasonality. A $16 million year-over-year improvement in free cash flow resulted from stronger net income and favorable working capital, partially offset by increased capital expenditures, which remain lower than historical levels at 3% of revenues year-to-date. At the end of the quarter, Aramark had over $1 billion available in cash. Net cash from investing activities included around $635 million in proceeds from the sale of our 50% equity stake in AIM Services and a portion of our ownership interest in the San Antonio Spurs NBA franchise. We also made significant progress in strengthening our balance sheet through a proactive $1.1 billion refinancing of the company's 2025 term loan B, extending debt maturity by over five years to June 2030. We are satisfied with the transaction's outcome, achieving favorable terms that add only $2 million quarterly in interest expense and maintain a net leverage neutral position while keeping a balanced fixed to floating debt ratio. We will keep pursuing opportunities to enhance our capital structure and financial flexibility. To conclude with our outlook for fiscal 2023, we are raising our expected organic revenue growth to nearly 15%, up from previously anticipated growth of greater than 13%. This growth is expected to be composed of Global FSS growing at near 17%, compared to about 15% in our last update, and Uniform Services maintaining at roughly 5.5%. We are also increasing our projected AOI growth to around 33%, up from approximately 32% previously. This growth is forecasted to comprise Global FSS at 46%, up from about 45% prior, and Uniform Services raised to 8% from roughly 7% previously. We continue to expect free cash flow to be about $475 million before accounting for the $64 million FICA payment made in the first quarter and the anticipated cash flow effect of about $100 million to $120 million tied to restructuring charges and transaction fees relevant to the Uniform spin-off. After accounting for these specific items, we predict our free cash flow to be around $300 million. Finally, the leverage ratio at the end of the fiscal year is still projected to be below four times. I am pleased with our quarterly performance and the momentum we are achieving. The spin-off transaction remains on track, and we strongly believe in the numerous opportunities ahead for both entities. Our global teams continue to focus on what can be controlled, delivering exceptional service to our clients and driving business profit. Thank you for your time. John?

John Zillmer, CEO

Thank you, Tom. I'm extremely pleased with our performance this quarter and remain confident in our ability to close the year strong. The fourth quarter is historically our highest margin and free cash flow period, and we're laser-focused on delivering strong results. As I said last quarter, we set a high bar for ourselves as a company and have a lot to accomplish in the coming months. And I'm confident in the Aramark team to get the job done with a focus on being the most admired employer and trusted hospitality partner. I'm excited about the opportunities ahead to further our success and drive top and bottom line growth into the fourth quarter fiscal 2024 and well beyond. Operator, we will now open the line for questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Harry Martin with Bernstein. Your line is open.

Harry Martin, Analyst

Hi. Good morning, everyone. Hope you’re well. Three questions from me. The first one, I think on the international organic growth that acceleration, certainly sequentially if you look versus 2019 over 30% organically. I think there has been some acceleration in inflation in those markets. But can you dimension how much of that is from new wins and market share gains, and what's driving that continued success in the international business? The second question I have is you made quite a few comments about the ramp-up of new business wins contributing to margins. So I wondered if you could give a little bit more specific commentary on some of the vintage contract wins from 2020 and 2021 that are starting to hit that two to three-year maturity level that you spoke about at the Investor Day. Are margins in those contracts ramping and starting to be accretive to the group level even with some of the accelerated cost inflation? And is there a lot more to come in terms of inflection in the next six to 12 months? And then the final question is, just on the disclosure of your major shareholders that they're looking to reduce the stake in Aramark and give up the Board seat. I wondered if you have any sort of early comments on the relationship with Mantle Ridge and where you see that going in the future? Thanks very much.

John Zillmer, CEO

This is John. I'll answer the question on the 13D first. First of all, I think the form speaks for itself. I think they were very explicit with respect to what their intentions were or are. Paul and his team at Mantle Ridge have been great thought partners, as I think the 13D described. The Mantle Ridge general partner will continue to be invested for the long term, but the 13D also does indicate the fact that the fund will be winding down. So I think the form speaks for itself and they would have to comment any further on that. But with respect to international growth, we're very pleased with the performance in the international group. We've had a lot of bread-and-butter wins and new account sales over the course of the last couple of years. And most of those accounts have been what I would characterize as midsized accounts. They ramp to profitability more rapidly and they've grown very nicely. So retention rates remain high in international as well as domestic. So we're seeing that really impact the growth line. Plus we've had strong performance in the Sports & Entertainment sector year-over-year and in the concert season. That has contributed significantly to that year-over-year growth as well. So Tom, I'll leave it to you to answer on the individual account ramp-up.

Tom Ondrof, CFO

The maturity of our new business is progressing as anticipated. We are seeing successful outcomes from some of the larger accounts we secured in 2021, like Purdue. Merlin, too, is continuing to improve its efficiency and maturity. Overall, this growth pattern appears fairly linear, and we do not foresee any significant changes ahead. Our primary focus is to maintain a consistent net growth rate so we don't experience fluctuations with some years being stagnant while others are robust. We are pleased with how maturity is advancing as expected.

Harry Martin, Analyst

Okay. Thanks very much.

John Zillmer, CEO

Thanks, Harry.

Operator, Operator

Our next question comes from Andrew Steinerman with JPMorgan. Your line is open.

Andrew Steinerman, Analyst

Hi. It's Andrew with two questions. Sorry about the static. The first one is Tom, I did my math, and I see the implied middle of the range AOI margins are about 6.9% for the fourth quarter. Is that correct? Then 6.9% for the fourth quarter is what I got in the implied fourth quarter? And then secondly, with the price increases that you talked about in the areas of Education into the fourth quarter, does Aramark feel caught up with underlying input cost inflation at this point?

Tom Ondrof, CFO

I trust your calculations on the margin, Andrew. They are typically more accurate than mine. Regarding the price increases, I don't believe we are completely aligned yet. It's an ongoing process. As John mentioned, inflation is significant and in our three sectors—K-12, higher education, and corrections—it has taken us 18 months to navigate this effectively. The teams are making progress, especially around July 1 and then in September for higher education. They've made significant strides, but I believe there is still more to address moving into next year.

Operator, Operator

Thank you. Our next question comes from Heather Balsky with Bank of America. Your line is open.

Heather Balsky, Analyst

Hi. Thank you for taking my question. Two questions for you. First can you talk about the underlying leverage that's planned for the Uniforms business? You talked about the $1.8 billion, but I think we're all kind of backing into what EBITDA may be for Uniform. So can you help us there in terms of what the leverage ratio is? And then separately just on the margin topic with regards to your sort of midterm goal with what you're seeing with pricing this inflationary environment are you still thinking that you'll end up at the low end, or is there a change in view there? Thanks.

Tom Ondrof, CFO

The plan for leverage is to aim for approximately four times, with the companies ideally splitting at parity. This provides a basis for estimating the underlying EBITDA for AUS. Regarding margins in the mid-term, we are monitoring our progress. There have been two adjustments affecting margin flow over the past two years. First, the divestiture of AIM, which impacted the total company margin by about 20 basis points. Second, when combining the two companies in FY 2025, the public company costs for AUS will be a consideration. Although inflation has been increasing, which we discussed previously, we have been trending toward the lower end of the projected range. With the two adjustments mentioned, we remain confident about our trajectory and believe we will recover and surpass the margins we achieved in 2019, and we are optimistic about reaching the range we outlined on Analyst Day.

Heather Balsky, Analyst

Great. Thank you.

Operator, Operator

The next question comes from Ian Zaffino with Oppenheimer. Your line is open.

Ian Zaffino, Analyst

Congratulations on the quarter, firstly, and great to see a great guide. As far as what that guide now means how should we be thinking about your return or at least the pathway of your return to pre-COVID margins? Does this now accelerate when you thought you were going to get back? And as buy-side and sell-side how should we think about the cadence on the return back to pre-COVID? Thanks.

Tom Ondrof, CFO

Yes, the margin will improve, and we believe we will reach and surpass the 2019 margin. We are confident in this outcome. However, we cannot predict the pace of inflation and its potential impact. This quarter, we have seen significant margin progress, with an increase of 75 basis points for the year. We anticipate further improvements in 2024 and will provide an update on that in November. While we are making steady progress on margin growth, I am hesitant to provide specific guidance given the uncertainties surrounding inflation. Nevertheless, we remain optimistic about the overall business, the progress we've made, and the future advancements we expect in margin over the coming quarters.

Ian Zaffino, Analyst

Okay. Understood. And then also on the spend, it seems that the Board is pretty stacked here. You've had some really great additions or appointments. Can you tell us maybe what's driving that? What are some of these members seeing that's really attracting them there? Thanks.

John Zillmer, CEO

Sure. I think we have assembled a very dynamic Board for AUS and it was work over many months between me and Art Winkleblack, our Nom and Gov Chair, who began the selection process more than a year ago to build what we wanted to be a very dynamic and high-energy Board that could add significant value to the SpinCo. And so we frankly targeted very significantly several individuals who we thought would be great. And we were able to attract all of them based on the opportunity that exists at AUS and what they see as the future potential of the business and a strong management team that we have in place. I think all of them were very eager to work with Kim and to move forward in the business and saw it as a great opportunity for value creation for the shareholders, for the employees and just an opportunity to participate in what would be a terrific Board. So, yeah, we're very excited by all of the appointments. We've got a great group of people, seasoned executives with very relevant experience, very diverse viewpoints and perspectives. And so we are very excited about it.

Ian Zaffino, Analyst

Okay. Thank you very much.

John Zillmer, CEO

Thank you.

Operator, Operator

Our next question comes from Toni Kaplan with Morgan Stanley. Your line is open.

Toni Kaplan, Analyst

Thanks very much. I was hoping you could give some additional color on the new business wins from the quarter or on the pipeline. Anything incrementally different versus last quarter in terms of the strength of the pipeline? Also, I know you've given the gross new business in past quarters and maybe also just focus on Education as well?

John Zillmer, CEO

Yeah. I think it's been a very active selling season and still underway in all the businesses. We have a very robust pipeline with lots of opportunities both domestically and internationally. So we feel very good about another strong year of net new performance. And so I think the specific accounts individually many of them have been awarded yet contracts haven't yet quite been signed and we're not operating them. So we'll be a little bit more hesitant about naming names yet at this stage, while we're working through some of those processes. But yes, we feel very good about another third year of very strong net new and solid business performance. So, Walmart is a great addition in terms of their corporate headquarters and we've also had significant wins in higher education both domestically and internationally. And so I'm very pleased with the results and very pleased with the level of pipeline activity. As you know, as a senior leadership team, we review these results on a monthly basis with each of the business units. So the momentum is there. The focus is there and we feel very good about the overall results for the organization.

Toni Kaplan, Analyst

Great. And hoping you could talk maybe a little bit about, international, very strong quarter there. I guess maybe thinking about the different regions, how is the UK faring? Any strength to call out across the different geographies or challenge areas? Thanks.

John Zillmer, CEO

We've observed solid strength across all sectors and geographies, contributing to notable year-over-year performance. Specifically, the Sports & Entertainment season in Europe has been particularly strong, especially in Spain and Germany. The concert season has been excellent, and we've seen strong mining performance in Chile, along with positive results in Canada. Overall, the results are widespread, and I wouldn't label any region as underperforming. We are very pleased with the international results.

Toni Kaplan, Analyst

Thanks a lot.

Operator, Operator

Thanks. Our next question comes from Shlomo Rosenbaum with Stifel. Your line is open.

Shlomo Rosenbaum, Analyst

Thank you for taking my questions. I'd like to discuss the factors affecting inflation and deflation. Many food staple items have seen actual deflation rather than just a slowdown in inflation. How is this impacting the current gross margin? Are you finding this to be more beneficial than you anticipated at this point? Should we expect a strong margin moving forward if this trend continues? Additionally, how is wage inflation trending? Is it slowing down as well, or is it still offsetting some of the deflation in food staples?

John Zillmer, CEO

Yes. First of all, certain commodities have significantly decreased year-over-year, which is helping our supply chain. However, while it's moderating, prices are still higher compared to last year. We're addressing the impact of inflation through pricing strategies. The food away from home index is still running higher than we initially expected. Even though some commodities are declining, we are still working to offset the overall inflationary pressures in the food sector. We are making considerable progress, and if this trend continues, we expect to see a positive impact on our margins. It's difficult to predict the exact timing of when these changes will fully materialize. Additionally, the recent rise in energy prices, with oil costs climbing again, could impact transportation and contribute to food cost inflation. We are seeing a moderating trend, which we are pleased with, and we expect it to continue improving, though we can't specify the exact path it will take. In terms of labor, we are noticing a moderation in inflation and pressures as labor availability is gradually improving. Overall, we feel confident in our ability to manage wage and food cost inflation in the next 12 months as it stabilizes. As Tom mentioned, we're actively managing pricing and optimizing for our customer locations and client expectations, achieving significant success. We look forward to the results in the fourth quarter and the growth heading into next year.

Operator, Operator

Our next question comes from Neil Tyler with Redburn. Your line is open.

Neil Tyler, Analyst

Yes. Thank you. Good morning, John and Tom. I have a couple of questions. First, regarding the price adjustments you've made in Education and Corrections during negotiations, have there been any changes in the structure of those contracts that might allow for more immediate price adjustments if costs were to decline significantly? That's the first part of my question. Secondly, could these negotiations potentially impact retention in any way? I'm considering the situation more positively than negatively, but I would appreciate your insights on either possibility. Lastly, in relation to your comments about the strength of international entertainment activities, should we view that as a slightly unusually high base? I understand it's not a large figure overall, but with the concert season in Germany and Spain being particularly strong, I'd like to ensure I'm not misjudging the numbers for next year. Thank you.

John Zillmer, CEO

Yes. No, I'll take the last part first. First of all, I wouldn't say it's abnormally strong. I would say that it's stronger than the prior year based on improved overall customer opportunities and improved attendance. So you still had last year somewhat of a lag from COVID that was impacting some of the sporting events and some of the concert season. So, it's really more back to normal would be the way I would characterize the both the concert and soccer seasons in Europe. So I wouldn't call it out as being abnormally high just higher than prior year due to that circumstance. Yes, so I think that's right. And Tom, do you want to take that?

Tom Ondrof, CFO

Yes, I want to add to that comment, Neil. It's similar to playoff baseball or weather; we aren't going to highlight it specifically. These situations fluctuate, and we take both the good and the bad each year and build on them. I wouldn't describe it as exceptional. Pricing negotiations can alter contracts, but we're not really making changes for existing clients during their terms. We're using our experience from the past year and a half to modify new contracts, as past contract terms and escalators don't align with current inflation trends. Where we can, particularly with new contracts and renewal efforts, we've aimed to adjust the language for more flexibility. However, for mid-term contracts just accessing a pricing exception, I don't believe it has significantly changed the contract language. Regarding retention, if I'm interpreting the question correctly, there isn't really anything notable to mention there.

John Zillmer, CEO

I would add that we have taken the opportunity to extend and utilize the negotiation process not only to recover costs for the near term, but as I have mentioned before, we view these contracts as annuities. This is why, in many instances, we were willing to wait for appropriate pricing; we didn’t want to jeopardize the contract by putting it out for bid during a challenging profit situation. We see these as long-term deals and relationships, with an average contract life close to 20 years. As we have navigated these negotiations, we have done so very carefully, focusing on retaining the customer for the long term while also addressing cost recovery. I would say that there has been no negative impact on retention; rather, proactive extensions are included in many of those renegotiations.

Neil Tyler, Analyst

That's great. Very helpful. Thank you very much.

John Zillmer, CEO

Thank you.

Operator, Operator

Our next question comes from Leo Carrington with Citi. Your line is open.

Leo Carrington, Analyst

Thank you. Good morning. I have two questions. First, regarding the organic growth bridge towards the end of the year, can you provide insights on the pricing levels for Q3? Additionally, as we look toward the end of the year and into fiscal year 2024, do you anticipate the importance of pricing to diminish as it aligns with the Consumer Price Index, or do you believe price recovery will continue to support growth and margin improvements into 2024? Secondly, I’d like to follow up on the Uniform margin; Q3 was notably strong, potentially matching the best quarter from 2019. Is this performance entirely due to underlying factors, or were there specific favorable impacts, or is it mainly a result of the actions you've taken along with the fading effects of energy costs?

Tom Ondrof, CFO

Yeah. No, on the AUS question, I think it's underlying. I mean, it's the impact of the management team. Kim has been in place coming on two years, the focus, the ability of the team to drive the performance of the business forward. The revenue line is shifting, if you will. As they look at the client base more emphasis on adjacencies and add-on services, continue to build the selling machine. Andy Panos has come in to lead the sales group here in the last couple of quarters. So I think that will start to shift and move forward. And as we lap this energy surcharge that's artificially holding down the year-on-year growth optics, I think they'll deliver good momentum as we move into 2024 and beyond on the top line. Bottom line, again, Kim and Rick and the team have really focused in on making the business more efficient this past year in anticipation of the spin. I think they'll talk more about what the opportunities that they have ahead of them on a profit perspective, as they speak next month and then post the spin. So, I know they're excited about both the top and bottom line opportunities that they have going forward. In terms of pricing, I mentioned it was 6% in the quarter. So, that's where we're at roughly where we were last quarter as well. Those benefits will carry into next year. We typically have not been able to price for margin, but just for cost recovery. But as the inflation cost dynamic trends downward and that pricing stays in place, and we're quite confident that it will, I think that that recovery or that price inflation lag will become more apparent as we move into '24 and beyond. How important a piece of the puzzle it is to our revenue growth going forward totally depends on inflation. I mean, if we revert back to the sort of 2% norm that we had for 20 years, it becomes much less of an impact. If it stays elevated, it will be more prominent in the revenue numbers.

Leo Carrington, Analyst

Okay. Thanks, Tom. Appreciate it.

Operator, Operator

Our next question comes from Ashish Sabadra with RBC Capital Markets. Your line is open.

Ashish Sabadra, Analyst

Thanks for taking my question. Maybe just a couple of quick clarifying questions. One was just on the surcharge. In the Uniform business, the 80 basis point headwind, is that the right level that we should think about for the next three quarters? And then on the pricing side, how should we think about the pricing in the Uniform business going forward? How is it trending? And how should the trend going forward? Any color on those fronts would be helpful. Thanks.

John Zillmer, CEO

Yes. First of all, the impact this quarter was approximately 80 basis points. The impact in the fourth quarter is actually a bit higher year-over-year regarding the fuel recovery fee that has been eliminated, nearly 2% in the fourth quarter. This will normalize starting in the first quarter of next year. There is still a slight lag as they reach the anniversary of those eliminated fuel recovery fees. However, pricing in the rest of the business has been strong, and they have managed to recover their costs, as evidenced by their improving margin performance, which comes from both better pricing recapture and improved cost leverage. I expect that pricing leverage to continue moving forward, and the comparisons will improve as they hit the anniversary of the fuel recovery fee that is no longer in place.

Operator, Operator

Our next question comes from Josh Chan with UBS. Your line is open.

Josh Chan, Analyst

Congrats on another good quarter.

John Zillmer, CEO

Thank you.

Josh Chan, Analyst

So Tom, when you mentioned the pricing dynamics for next year and the moderating inflation, how should we perceive your margin seasonality in 2024 compared to normal, considering those two favorable dynamics at the beginning of the year?

Tom Ondrof, CFO

Again, we'll give you sort of more of a look or a little bit more granular when we get to November around 2024. But by and large it's not going to change the shape. We'll still have the U-shaped margin dynamic as we move into next year. Any dynamic on pricing outpacing inflation as we go through the year next year would be around the edges, but the true shape is still going to hold and not be materially affected.

Josh Chan, Analyst

Okay. That's fair. And then on the retention side, you mentioned that retention continues to be very strong. I guess underneath that are you seeing any more desires from customers to kind of shop around now that we're past the supply-constrained environment? Just anything there, recognizing that you continue to maintain very strong retention rates. Thank you.

John Zillmer, CEO

Yes. No I would say it's a pretty normal level of activity from a rebid perspective. I mean some years are higher than others based on kind of structural impacts to the business. As you know, the USDA has very strong requirements with respect to rebid activity in the K-12 sector. So there is kind of years where you have heavier retention and some years where it's lighter just dependent upon where school districts are in the cycle. But by and large, I think the activity level is very consistent year-over-year and the pipeline is very, very strong. So I don't see a higher degree of propensity for change across the industry. I think it's just kind of at its normal level. And so we always are pursuing new opportunities and we're always working aggressively against a targeted list of prospects. And some are scheduled rebids and some are unscheduled. We just work aggressively against that target list of prospects and work to grow the business. So I would say not a change in customer behavior that I would – that I could identify.

Josh Chan, Analyst

Great. And thank you for the color and thanks for your time.

Operator, Operator

Our next question comes from Manav Patnaik with Barclays. Your line is open.

Ronan Kennedy, Analyst

Hi, good morning. This is Ronan Kennedy standing in for Manav. I would like to express my condolences on the loss of your colleague. Thank you for allowing me to ask a question. As a follow-up to Leo's inquiry about pricing and your confidence in its stability, could you provide some insights on how and why you believe prices will hold? This could be related to contract structures, the value and high-level services offered to clients, and so on. Additionally, could you remind us of the current percentages of contracts that are P&L cost plus or management fee, and how you foresee benefits from each amid the anticipated moderation of inflation?

John Zillmer, CEO

Yes. First of all, our expectation that pricing remains steady is based on the history of the business and how the industry has operated. It’s quite rare for us to lower prices, except perhaps for a specific commodity that has experienced an unusual price spike due to artificial pricing factors. For instance, during times when coffee was scarce and prices were high, they eventually decreased once that commodity's influence waned. That is not how pricing operates in our business anymore. We set prices across a range of products, making it uncommon to reduce a price after consumers have started paying that amount. Pricing is very stable. Additionally, we are pricing for consumers, not just clients, meaning these are consumer-facing prices rather than contractual agreements between us and our clients. Therefore, we believe pricing will remain very stable and that we will be able to continue pricing to cover costs in the future as discussed.

Tom Ondrof, CFO

Contract types.

John Zillmer, CEO

Oh yes. Go ahead.

Tom Ondrof, CFO

Yes. We continue to move back towards P&L. I mean the changes still reside primarily in B&I, where the volumes aren't fully recovered. And that's really the driver of converting to a P&L or running a P&L as having adequate volume. So, not quite back to where we were in 2019 but continuing to move towards that. The inflation dynamic and pricing dynamic with each contract, it does have its plus and minuses. No pun intended on that. The cost plus is obviously, an immediate pass-through to the client but does have a margin headwind. Again, if we were billing them $100 previously, now we're going to $120 but we're still getting our $10 fee on both. So it depresses the margin even though it increases the revenue. When prices fall, you lose the revenue on a cost-plus contract but your margin goes up. So that dynamic is cost plus typically are a lower risk scenario for us. And it ebbs and flows on the top line as pricing moves up and down. P&L is the dynamic we really like, because we control the cost component, pricing and inflationary environment accrues to us. And as John just mentioned, we believe it will stay in place and be sticky. And then we can also manage through the cost components, so that we don't have that headwind against the margin, typically that we might have with a cost-plus contract that limits our profitability in most cases. So we like the P&L format. And in an inflationary environment, we'd be happy to continue to move back to that P&L cost plus mix that we had prior to the pandemic to take advantage of that.

Ronan Kennedy, Analyst

Thank you. Appreciate it.

Operator, Operator

Our last question comes from Harold Antor with Jefferies. Your line is open.

Harold Antor, Analyst

Good morning. This is Harlan on for Stephanie Moore. So just on the new business wins, could you provide us an idea what it represented in the quarter? And then just give us an understanding on the size and shape of the new business wins in the industries that you won them in and then provide any insight on where you win in this business from regionals or some of your competitors?

Tom Ondrof, CFO

Yes. We'll give you more update at the year end on it as we typically do on net growth on all those factors on the contribution to the year where we're winning it from. But suffice it to say that it's moving along as John said very solid year for us continues to be a third year of significant growth versus where we were prior to the pandemic. And the source of wins continues to be pretty broad-based both where it's coming from and where we're winning it geographically. So overall, we continue to be pleased with the growth engine within the business and give you further updates when we get to year-end.

Harold Antor, Analyst

Got it. Given that you have secured many contracts and maintain high confidence in pricing, what factors could contribute to achieving or exceeding your revenue and operating income guidance for the quarter and the year? Thank you.

John Zillmer, CEO

Got it. Yes. I would just add that I think if inflation continues to moderate and we don't see any unexpected economic consequences we see continued improvement going into the fourth quarter as we've discussed. We see continued improvement going into next year. That really is an exciting time inside the company. We feel very good about the results for the quarter and feel good about the trajectory for the fourth quarter and for the year. And we're very resolved in terms of delivering very strong results. So I would say the inflation outlook is improving and that has a potential impact opportunity going forward. So I will summarize the call basically by saying thank you very much for your support of the organization. We're excited about what's going on inside the business. We feel good about the third quarter. We feel very good about the opportunity to go ahead and get the spin completed at the end of the fiscal year. We've made very significant progress around a range of activities the balance sheet improving profit performance improving margin performance and solid growth. So we're pleased with where we are. We have a lot of work to do and we are committed to delivering for our shareholders. So thank you very much, everybody.

Operator, Operator

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