Earnings Call Transcript - ARMK Q1 2023

Operator, Operator

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

Felise Kissell, Vice President, Investor Relations and Corporate Development

Thank you, and welcome to Aramark's first quarter fiscal 2023 earnings conference call and webcast. I hope you all are doing well. This morning, we will be hearing from our Chief Executive Officer, John Zillmer; as well as our Chief Financial Officer, Tom Ondrof. As a reminder, our notice regarding forward-looking statements is included in our press release this morning, which can be found on our website. During this call, we will be making comments that are forward-looking. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties, and important factors, including those discussed in the Risk Factors, MD&A and other sections of our Annual Report on Form 10-K and our other SEC filings. Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found in this morning's press release as well as on our website. So with that, I will now turn the call over to John.

John Zillmer, CEO

Thanks, Felise. Thank you all for joining us today, and I hope your year is off to a great start. I'm pleased to share that Aramark began fiscal 2023 with strong performance driven by a continued commitment to provide exceptional service to clients. I am incredibly proud of our teams across the globe who demonstrate each and every day what makes Aramark so remarkable. This morning, Tom and I will review our fiscal first quarter results as well as the key initiatives currently underway that we believe will drive continued success. As announced, just last week, we reached an agreement to sell our non-controlling 50% equity stake in AIM Services for $535 million. The proceeds are intended to be used for accelerated debt repayment and we expect that monetizing this interest will further enhance operating focus, strengthen our balance sheet, and be accretive to EPS. The sale to Mitsui, our partner in the joint venture since it was established decades ago, to provide food services in Japan, is expected to close at the beginning of our fiscal third quarter subject to customary closing conditions and approvals. We will continue to identify these types of opportunities specifically in areas where we have a non-controlling interest to enhance our ongoing focus on delivering profitable growth and shareholder value. Operationally, we remain focused on managing our cost structure and maximizing unit efficiencies coupled with pricing to counter persistent inflation. We continue to work closely with clients to tailor solutions that meet their needs, leveraging our extensive supply chain network and are constantly monitoring evolving market conditions for opportunities to benefit from improving pricing and product availability trends. Our results in the quarter built on both the top and bottom line momentum we've established over the past couple of years. Organic revenue grew 18% and adjusted operating income increased 47% on a constant currency basis, resulting in more than 100 basis points of improvement to AOI margin. Within the U.S. Food and Facilities segment, organic revenue also increased 18% compared to the first quarter last year, driven by strong performance from all sectors. Education experienced increased student enrollments and improved presence of staff and more events on campuses in collegiate hospitality, partially offset by the end of universal government-sponsored programs in K-12 student nutrition. Sports, Leisure & Corrections continued its strong growth trajectory again this quarter, primarily from increased event pricing and per capita spending, as well as a more robust event calendar. Corrections particularly benefited from a significant level of new business growth. Workplace experience group growth levels led the way with a year-over-year increase of more than 40%, driven by client pricing, higher meal participation rates and greater in-person activity in addition to solid new business openings. Healthcare+ continued its exceptional performance driven by ongoing base business growth from vertical sales and greater visitor presence that was complemented by a substantial step up in net new business compared to historical levels. And Facilities & Other grew as a result of expanded services and frequency, particularly from large client accounts, along with a strong level of new business start-ups. International organic revenue is higher by 28% year-over-year, driven by consistent net new business performance, pricing and ongoing base business volume recovery, particularly within the B&I portfolio where we experienced greater lunchtime participation rates and a return of catering activity for special events, including holiday celebrations and networking gatherings. Organic revenue in our Uniform Services segment increased 7% compared to the first quarter last year, due to solid new business sales and retention rates, as well as the implementation of additional pricing strategies. Our U.S. and Canadian operations experienced strong recurring rentals and double-digit growth in adjacency services. We continue to make progress on the uniform spin and still expect completion in the second half of this fiscal year. Within the last few weeks, Kim added the final pieces to our executive team, complementing the leaders already in place, including a Chief Technology Officer. We have identified the individuals who we expect to serve as the Board of Directors for Uniform Services after the spin is complete and who will be available to act in an advisory capacity throughout the separation process. We are extremely pleased with the skillset and industry expertise that we believe will make a significant strategic impact on the business. Last week, we released a comprehensive update on our ESG platform. The Be Well. Do Well. Progress Report is the latest chapter documenting our ESG journey. In it, we highlight our ongoing commitment to diversity initiatives, community building, climate-related actions, crude and worker safety, and the progress we've made in responsible sourcing and waste reduction. MSCI recently gave us an A rating and Newsweek recognized us as one of America's most responsible companies. We continue to drive the importance of ESG metrics reflected by the inclusion of an ESG scorecard in our fiscal 2023 annual incentive plan for our senior leadership team. I'm proud of those significant measures we've taken to make a positive impact on people and the planet and the efforts underway focused on making a lasting impact. Before turning it over to Tom, I would like to highlight the recent election of Kevin Wills to Aramark's Board of Directors at our annual meeting on Friday. Kevin's impressive background and accomplishments are an excellent addition to our Board and align with the company's strategic vision. I also want to thank Board member, Dan Heinrich, for his numerous contributions and partnership. It is our intent that Dan will move over to serve on the Board of Directors for Uniform Services upon the spin. I will now pass it over to Tom for a detailed financial review of the business.

Tom Ondrof, CFO

Thanks, John, and good morning, everyone. Our performance in the first quarter reflected continued momentum across the Aramark portfolio, as we delivered revenue and AOI results that demonstrated the team’s growth mindset and commitment to deliver great service to our clients and increasing profitability for our shareholders. For the total company, organic revenue of $4.7 billion was 18% higher year-over-year, and consisted of more than 4% from net new business, roughly 6% of pricing and approximately 8% related to higher base business volume. Adjusted operating income was $242 million, a constant currency increase of 47% compared to the first quarter last year. AOI margin increased just over 100 basis points to 5.3%. Improved profitability during the quarter compared to prior year was due to leveraging higher sales volume from broad-based net new business growth, pricing and base business recovery, primarily within the B&I sector and sports and entertainment business, as well as disciplined operational and administrative cost management, all of which more than offset inflation, a tight labor market, and new account start-up costs. Generally, we've experienced an increase in the use of agency labor to support the rapidly growing level of operations, particularly in collegiate hospitality, which we expect to manage down over time. In addition, we are encouraged by the continued signs of stabilization within the global supply chain that have allowed us to begin to gradually transition back to preferred sourcing programs where possible and appropriate. This has helped partially mitigate rising food costs due to persistent inflation that we continue to experience during the quarter. Over the medium-term, we continue to see four key opportunities to drive improved profitability despite a tough economic backdrop: continued supply chain stability, ever-increasing purchasing power from growing our managed spend and GPO business; the improving profit profile of past new business wins as they mature over the coming years; continued tight management of above-unit costs; and lastly, the potential to benefit from pricing actions already implemented as inflation mitigates. These opportunities, together with the ongoing option to create value through actions such as the AIM Services sale, give us confidence in our ability to continue to grow our bottom line over time. Our results in the quarter led to adjusted EPS of $0.44 on a constant currency basis, nearly double the $0.23 reported in the first quarter fiscal 2022. FX impacted adjusted earnings per share by $0.03 due to the stronger dollar relative to this time last year. On a GAAP basis, Aramark reported consolidated revenue of $4.6 billion, operating income of $200 million and diluted earnings per share of $0.28 for the first quarter. Now, turning to cash flow. In the quarter, net cash used in operating activities was $607 million, and free cash flow was a use of $706 million. As expected, the first quarter experienced a cash outflow associated with Aramark's normal seasonal business cadence specifically in the collegiate hospitality business. In addition, accounts receivable increased due to strong year-over-year revenue growth in the quarter and accounts payable was a higher use of cash in the quarter largely from the timing of supplier disbursements. Cash flow results also reflected the scheduled remaining deferred FICA payment of $64 million granted under the CARES Act that we highlighted during our last earnings call. At quarter end, Aramark had approximately $1.1 billion in cash availability. As John mentioned, and as you saw in our announcement last week, we reached an agreement to sell our equity stake in AIM Services and we plan to use the proceeds for debt repayment. Let me make a few quick comments on the P&L impact from the transaction. As a non-controlling interest, revenue from AIM Services was not historically recorded as a part of our financials, so there will be no impact to future revenue. We did record our share of income, which contributed approximately $30 million to pre-COVID AOI in fiscal 2019 and was not expected to be fully recovered until next year. But the planned debt repayment associated with the sale, we expect annualized interest savings of more than $30 million making it immediately accretive to EPS. So let me conclude with our outlook for fiscal 2023. We maintain our previously stated full-year outlook while updating certain measures associated with the sale of our interest in AIM Services. With that, we currently expect organic revenue growth between 11% and 13%, adjusted operating income growth of 32% to 37%, reflecting the effect of the AIM transaction. Free cash flow in the range of $475 million to $525 million before payment for the $64 million FICA payment just completed this quarter and the anticipated cash flow of approximately $100 million to $120 million related to restructuring charges and transaction fees associated with the uniform spend. After these specific items, we expect our reported free cash flow to be in the range of $300 million to $350 million. And finally, as I just mentioned, we plan to use the proceeds from the AIM Services transaction toward debt repayment that is expected to bring our leverage ratio to approximately 4x by the end of this fiscal year. We begin the New Year as we finished the last, resolute in our commitment to drive profitable growth. The new fiscal year is off to a solid start, and as we manage the business in the midst of the current ongoing macroeconomic challenges, we will continue to work to balance delivering short-term results without sacrificing our ability to sustainably grow the top and bottom line over the long term. Thanks for your time this morning. John?

John Zillmer, CEO

Thank you, Tom. We believe there are numerous opportunities for the business and that we are well on our way toward achieving them. We will continue to manage our portfolio to drive significant and sustained value through organic growth, margin progression, and a strengthened balance sheet. Our new business pipeline is strong and we're highly motivated to continue winning. I'm immensely grateful for our teams across the globe who are the driving force behind our success now and in the future serving our clients, employees, and the communities we live in. I also want to take this opportunity to congratulate our clients, the Philadelphia Eagles and Kansas City Chiefs, will be competing in the Super Bowl this upcoming weekend. And operator, we'll now open the line for questions.

Operator, Operator

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

Toni Kaplan, Analyst

Hi, thanks so much. I was hoping you could talk about the new business trends this quarter versus last quarter and areas of notable strengths and core weaknesses and particularly maybe within education as well. Thanks.

John Zillmer, CEO

Sure. The first quarter is usually our slowest period for new business development, especially in education. Most sales activity takes place in the second half of the year when accounts go out for bid and are typically awarded in the spring. However, this performance aligns well with last year's results. Our pipeline is very strong, and while we have many verbal commitments for new wins, we count these only when we have signed contracts. We are satisfied with the current results and expect to meet our projections for net new business, with nothing more to add at this time.

Toni Kaplan, Analyst

Great. And we've gotten a couple of questions this morning on basically the understanding the impact of the divestiture on AOI for next year. Any sort of clarification that you can give on that, just so that I think people can understand it a little bit better? Thanks.

Tom Ondrof, CFO

Sure. Are you referring to fiscal 2024?

Toni Kaplan, Analyst

Oh, sorry. Yes. Within 2023 and?

Tom Ondrof, CFO

Sure. As I mentioned earlier, the baseline pre-COVID AOI level was about $30 million, and we have not fully recovered to that point yet. Therefore, the AOI impact will be less than that for the entire fiscal year. By the time we finalize, we'll likely be missing about half of that amount. So, if we take a figure slightly below $30 million and roughly divide it by two, that represents the AOI impact, correlating to about a 2% decrease in the AOI guidance we've provided. Additionally, our savings on the interest side should exceed $30 million. Thus, the combination of these two factors highlights the net accretion between the AOI loss and the interest savings.

Operator, Operator

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

Ian Zaffino, Analyst

Hi, thanks. It was a very small quarter. I wanted to follow up on this AIM. Can you discuss the multiple, as I’m calculating it to be about 18 times? What factors contributed to that? Also, could you mention any other opportunities that you may not have discussed yet? I have a follow-up question as well. Thanks.

John Zillmer, CEO

Sure. We've talked in the past about monetizing our potential sports teams' ownership in the San Antonio Spurs. There’s nothing to report on that front currently, but that's obviously a non-controlling interest that we wouldn't historically continue to own. We have a couple of other joint venture opportunities that we're always evaluating in various parts of the world as well. So nothing specific to report currently, but as we said, we're always evaluating those for potential value creation opportunities for our shareholders.

Tom Ondrof, CFO

I think the driver, Ian, was the ability to grow those businesses and a lot of times when we don't have a controlling interest; it's a little tougher to have the impact that we'd like to have. So that's where we're really evaluating these. And if they're just meandering along, so to speak, we'll monetize and use that elsewhere.

John Zillmer, CEO

Yes. I would follow-up that comment with AIM Services has obviously been a terrific joint venture for us over multiple decades. We've enjoyed a wonderful relationship with Mitsui, and we expect to continue to enjoy our relationship with them, helping to build other businesses in other parts of the world and are working to develop a memo of understanding to that effect going forward. So we expect to continue these kinds of relationships and look for opportunities to grow strategically. But ultimately in the end with AIM Services, clearly, it required a significant amount of energy for the company. Yet, we didn't book the revenues and we had a little impact in terms of the management of the business itself. So this allows our international team to really focus on driving growth in those companies and those countries where we're fully baked, if you will, and really allows us to focus from a development perspective and a management perspective more effectively going forward.

Ian Zaffino, Analyst

Okay. Thanks. And then just on the inflation front, can you maybe give us an outlook on sort of I know you touched upon it, maybe a little bit more of a detailed outlook? And then also remind us your ability to hold onto some of the pricing, especially on the P&L side as maybe inflation rolls over. Thanks.

Tom Ondrof, CFO

Yes. I mean, persistent is the word, I think John and I both used it that that's especially on the food side. So if you look under some of the headlines that you're seeing recently where inflation is slowing, it's certainly not reducing, but its rate of increase is slowing. Underneath that headline, food is persistently high. So we're experiencing that and our units are hanging onto that. We're having to communicate that fact to our clients because sometimes the headlines do change opinions without looking underneath it. So we're in that mode right now where we're really continuing to keep up, keep the pricing mindset going within our units. I don't think that for the balance of the year, we really are going to be looking at much of a softening of the inflation, the food inflation. We certainly hope it's coming, and our ability to hold onto the pricing and the P&L contract environment, I think should be strong. I think we'll be able to hold onto it and keep that impact in place. I mentioned that as one of our abilities to drive profitability as we go forward into the future.

Operator, Operator

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

Andrew Steinerman, Analyst

Hi, Tom. If you could believe it, I'm going to ask my two questions about FX. So the FX drag in the just reported quarter was $0.03. And you said, of course, the stronger dollar than a year ago. Could you just tell us how much FX drag on EPS was expected by management in the just reported quarter, kind of like back in November when you started to guide? And I might as well just give you a second question about FX. So also now looking at that full-year guide on Slide 13, your model assumptions, I see this line that says FX will be a 2% drag on fiscal 2023 guide at current FX rates. I assume that's a revenue figure. So if you could, what is the assumed FX drag on EPS? And of course, you can imagine I'm talking about at current FX rates.

Tom Ondrof, CFO

Yes. The answer for both is about 2% for what we anticipated and what we expect for the full year. This also impacts revenue and the bottom line equally.

Andrew Steinerman, Analyst

You said, I just to make sure I heard you said you were expecting about $0.03 of FX drag in the quarter?

Tom Ondrof, CFO

Yes, $0.03 in the quarter. We were expecting that.

Andrew Steinerman, Analyst

Yes, $0.03. Yes.

Tom Ondrof, CFO

It's probably a little bit more than we expected.

Andrew Steinerman, Analyst

Okay. That makes sense.

Operator, Operator

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

Neil Tyler, Analyst

Yes. Thank you. Good morning, John. Good morning, Tom. I have a quick question about the revenue guidance and its components. You mentioned that pricing is around 6%. I realize that the base effect will likely slow that down. However, when you factor in net new growth along with a mid-single-digit pricing impact, it seems there's not much room left in the middle of your revenue guidance for additional organic growth recovery based on your current trajectory. Are you noticing any signs of declining participation rates or other trends that might make you cautious about the recovery of the base business?

Operator, Operator

One moment, please stand by. Ladies and gentlemen, please stand by. Your call will resume momentarily. Ladies and gentlemen, please continue to stand by. One moment, please.

John Zillmer, CEO

Okay. Can you hear us now?

Operator, Operator

Yes. I can hear you now. Thank you. Our next question comes from Neil Tyler with Redburn. Your line is now open.

Neil Tyler, Analyst

Yes, hello everyone. My question is about the revenue guidance, specifically the mid-point of the organic revenue guidance. If I take out the pricing, which seems to be about 6% and is expected to ease due to base effects, and also remove the net new contribution from the mid-point, there doesn’t seem to be much left for the recovery of the base business. So, I’m wondering if you see anything in the business that might indicate a significant slowdown in the rate of recovery, such as declining participation rates or any long-term concerns regarding the performance of your businesses? Thank you.

Tom Ondrof, CFO

No, really don't. It's just really a gradual lapping of last year's recovery because we started the year in the mid-1980s, finished the year in the mid-1990s. And so the recovery is going to ease, the base recovery is going to ease as we go throughout the year with net growth staying in that sort of 4% to 5% range that we've talked about. And then pricing obviously will ease a bit too as we lap what was very strong pricing this past Q4 as we get to the next this year's Q4. So I think all those things will naturally ease the net growth will stay constant.

Neil Tyler, Analyst

In that context, when you previously mentioned the bridge to your revenue targets and trajectory, you talked about $1.6 billion to $1.9 billion at the beginning of last fiscal year, and it seems you may have overshot that a bit, leaving approximately $0.5 billion. Can you provide some updated insights on how much of that you believe may not return?

Tom Ondrof, CFO

The majority of this is from B&I, potentially around 80% of that total. We have surpassed the 2019 figures significantly, making any discussion of recovery largely irrelevant now. Additionally, we're facing challenges that aren't linked to COVID recovery, but rather the initial impacts of a recession, including layoffs and similar issues, particularly in B&I and the tech sector. It's challenging to separate the effects of layoffs, COVID recovery, participation rates, and pricing as we approach or have exceeded three years since the onset. Therefore, in relation to your question, these distinctions are becoming increasingly insignificant, especially as we continue to move well past our pre-COVID revenue levels.

John Zillmer, CEO

Yes. I would just add that all the other businesses have surpassed the COVID recovery index and are experiencing solid growth without significant impairments. The only area still affected is B&I, which is seeing some return-to-work activities. However, those trends are accelerating, making it difficult to predict how the rest of that business will integrate, especially regarding whether companies will maintain four-day work weeks or extend their schedules. It's challenging to foresee. Nonetheless, we anticipate that B&I will be highly profitable and will continue to grow. Our focus is no longer on the recovery numbers, but rather on business growth driving baseline revenues and acquiring new accounts. I also want to apologize for the technical difficulties earlier. I'm sorry that the call dropped and we couldn't reconnect, and I apologize to the listeners for that brief interruption.

Operator, Operator

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

Heather Balsky, Analyst

Hi, thank you for taking my question. My first question is just with regards to your long-term outlook and the business exit and how to think about margins? And is there an impact there? And also taking into account what you're seeing in FX and inflation, it would be great to just touch on that again.

Tom Ondrof, CFO

Yes. Are you referring to the effect of AIM specifically on the margins?

Heather Balsky, Analyst

Yes, yes.

Tom Ondrof, CFO

Math-wise, I think it was about 20 basis points for the company. So that would probably be the impact as we move into the 2024/2025. In terms of inflation outlook, John?

John Zillmer, CEO

Yes, I think we have an expectation that inflation will continue to moderate over the balance of this year, but still running at fairly high levels from both the food and labor rate perspective. So our units are working very hard to continue to recover those cost increases, looking at opportunities for service changes, menu changes, and the like, just managing actively the P&L. Our expectation is that it will be here for the next couple of quarters. We're going to work very hard to offset it. And so far, we've been able to minimize the impact from a P&L perspective. You see things like the price of eggs and everybody responds to those headlines. If you can imagine, eggs are a big component of collegiate education, and it's a significantly higher cost than expected, but our units are finding a way to work around it. That's the expectation we have. We'll find the appropriate mechanisms to go ahead and offset those cost increases as we move forward.

Heather Balsky, Analyst

Thank you.

Tom Ondrof, CFO

Heather, you inquired about it.

Heather Balsky, Analyst

Go ahead. Sorry.

Tom Ondrof, CFO

FX, Heather, you asked about that. I think we expect it to soften a little bit as the year goes on, the first quarter being a heavier impact than the second half of the year is the current expectation.

Heather Balsky, Analyst

Okay. You mentioned earlier during the Q&A about inflation, noting that there is some need for education regarding the differences between food costs and food inflation, as well as the overall Consumer Price Index. Could you elaborate on how those discussions are progressing? Are you experiencing more resistance? Have you been able to achieve the price increases you were targeting?

John Zillmer, CEO

Yes, generally we are obtaining the necessary price increases. However, there are timing issues that impact various businesses regarding when they can implement pricing, some of which are due to regulations and state-specific purchasing contracts that dictate pricing on certain dates, especially in the Corrections sector. This is also evident in the K-12 sector. Additionally, there has been delayed pricing in collegiate hospitality because Board rates were negotiated the previous year. These timing factors influence when we can achieve the necessary pricing. To assist our frontline managers, we provide them with detailed tools they can use as talking points with customers and clients regarding the actual costs of food in the away-from-home market. They receive these tools monthly to aid in pricing discussions and negotiations. They also use these resources to help manage the menu mix moving forward. There are ongoing active discussions, and pricing remains a consistent focus for us. We refer to it as hand-to-hand combat, as it involves continuous negotiation to achieve the desired outcomes.

Operator, Operator

Thank you. And our next question comes from Leo Carrington with Citi. Your line is now open.

Leo Carrington, Analyst

Good morning. Thank you for taking my questions, John and Tom. I'd like to start with a follow-up on AIM Services. The guidance for underlying operating income was lowered due to the disposal, but the guidance for free cash flow has remained the same. Can you help clarify this difference? Additionally, regarding the guidance for the year, Q1 margins, especially for FSS United States and to some extent Uniforms, saw a decline in Q1 2023 compared to Q4 2022 when looking at the figures from 2019. Can you explain the reasons for this, aside from the timing of contract openings? Also, what gives you the confidence to keep the guidance unchanged for the rest of the year? Thank you.

Tom Ondrof, CFO

Leo, just to be clear, that last part of that question, you were comparing it sequentially, right, Q4 of 2022 to Q1 of 2023?

Leo Carrington, Analyst

Yes. But the progress, if you like in basis points versus 2019 as a base.

Tom Ondrof, CFO

Got you. If that's okay. On AIM Services cash flow, because it was a non-controlling interest, we would receive a dividend from them. We really didn't have the cash crossing borders, and that that dividend was de minimis, to be honest. I'm not particularly material and not certainly material enough to change our free cash flow guidance for the year. So that's why you don't see a change in that; it just wasn't big enough for us to call out.

Operator, Operator

Thank you. And our next question comes from Faiza Alwy with Deutsche Bank. Your line is now open.

Faiza Alwy, Analyst

Great. Thank you. Good morning. I wanted to ask about the Uniform business. I know you mentioned that you're still on track for a spin in the second half of the year. Can you provide some details on when we should expect carve-out financials and give us a better sense of what's been happening with this business? Since the announcement, has its performance in terms of revenue and margin been in line with your expectations?

John Zillmer, CEO

Yes, the business has generally been performing as we anticipated and according to our established plans as we navigate the separation process. We are adding public company costs and resources to prepare for the separation, and this process is progressing steadily. We expect to finalize everything by the end of this fiscal year or in the second half of the fiscal year. At this time, that is all we can share regarding guidance. The separation audits are mostly complete, and we have established a Board, with an announcement about its members coming in the future as we transition to an independent public company. In the coming months, we will also take several other steps. We are considering the timing for a potential debt raise and looking for optimal conditions in the capital markets. Many variables will ultimately influence the timing. Overall, the business is performing as expected and in line with our plans.

Operator, Operator

Thank you. Our next question comes from Andrew Wittmann with RW Baird. Your line is open.

Andrew Wittmann, Analyst

Great. Thanks. I guess, Tom, my question for you. The cash flow from ops section of your report shows a $30 million reduction to a contingent liability. I was hoping you could talk about what that is and how it affected, if at all, your adjusted earnings. It's not specifically called out in your reconciliation, and so I guess that's the genesis of my question. You have this other line here gains loss in settlements, but I don't know if it's in there or not. So hoping you could just talk about what that was and how it affected your adjusted results.

Tom Ondrof, CFO

It is included in the net 12 that you're referring to and is related to the next level earn-out. To summarize, in order to complete the deal, there was a price discrepancy between what the buyers expected and what we were willing to accept. Their expectations were higher, while ours were somewhat lower. To bridge that gap, we established an earn-out arrangement, which means they will work to meet our expectations rather than their initially ambitious goals. Therefore, this is just a reversal of part of that earn-out.

Andrew Wittmann, Analyst

Okay. That's helpful. And then I was just wondering, secondarily, with, I guess, 6% price in there. Are you able to understand how the elasticity of demand is either affecting your customers or the end market consumers of your product? I mean, you've got the COVID, kind of ramp, you've got the layoff trends. There's a lot of different things that are affecting volume today. But I was just wondering specifically if the end market consumer is reacting to these and changing behavior at all that you can see.

John Zillmer, CEO

Yes. Great question, Andrew. I would say that consumer behavior continues to remain very consistent. Our participation rates are rising, which would indicate that customers are satisfied, and our understanding of the pricing needs, if you will, so participation rates increasing in the core business. And so really no change to real consumer behavior over the last several quarters related to what I would characterize as related to pricing dynamics. So that's the only way I can answer it. I think so far no impact.

Operator, Operator

Thank you. And our next question comes from Stephanie Moore. Your line is now open.

Stephanie Moore, Analyst

Good morning. I would like to ask about your perspective on customer interest in outsourcing and how that might evolve in a challenging macroeconomic environment. I understand that this is a long-term positive trend for the business, so I would appreciate your insight as we manage through potential macro challenges.

John Zillmer, CEO

Yes, I think it's a very good question. We continue to observe a growing trend towards outsourcing in several of our businesses, initially prompted by the COVID environment and subsequent transition. We are now seeing ongoing improvement in the outsourcing landscape due to cost pressures that self-operators are facing, particularly regarding inflation and labor staffing. This trend remains a positive factor for us. Our pipeline is still filled with opportunities for converting self-operations, and I believe this presents a significant source of new business potential across various sectors we operate in, not just food but also facilities.

Stephanie Moore, Analyst

Great. And that's really helpful. And then switching gears to B&I. Curious if you can call out maybe any specific markets where you've seen a more acute increase in activity as of late?

John Zillmer, CEO

Well, we are seeing B&I business in Europe has been increasing at a rapid rate. It was more depressed last year. The rate of recovery in the international was slower. This year, it's accelerating. We're seeing continued B&I business improvement in Continental Europe. And so we're very pleased with that and continue to see that business growing nicely.

Stephanie Moore, Analyst

Okay. And then, lastly for me, and I apologize if I missed it, but did you touch on the P&L transition and the back to P&L and cost plus and is where you are in that transition for the end of the last quarter? Thank you.

John Zillmer, CEO

Yes. I would say it's really unchanged. There is no significant pressure from client organizations to transition back to P&L. And I would say it's relatively consistent with prior quarters. We continue to be predominantly management fee in the B&I sector except in the very large operations that have P&L capability. If you continue to have companies struggling with their return-to-work strategies, the three-day work week, four-day work week. And so there has not been significant pressure to transition back to P&L. And frankly, in this inflationary environment, when you've got both food cost inflation and labor rate inflation that actually works to our advantage to continue to stay on a management fee or cost plus basis, as we grapple with the challenges in those segments, particularly if you're not fully up to speed or fully back operational in a particular customer or client location.

Operator, Operator

Thank you. Our next question comes from Jaafar Mestari with Exane BNP Paribas. Your line is now open.

Jaafar Mestari, Analyst

Good morning, everyone. I have a question regarding the comments you've made on inflation trends throughout the year, new business trends, and the recovery in like-for-like volumes. As we approach the end of the year, inflation is expected to normalize. Now that the year has begun and you have reiterated the full-year guidance for 11% to 13% organic growth, I am curious about the Q4 performance as these factors normalize or slow down. This will be an interesting data point, as the exit rate of organic growth is likely indicative of your medium-term potential. Can you discuss the quarterly sequencing and whether the organic growth sequence will be 18%, 14%, 10%, 6%, or potentially stronger? Alternatively, might there be more content loaded in the volumes recovering alongside the above-trend inflation in the first half?

Tom Ondrof, CFO

Yes, I believe you're correct in your assessment. At Analyst Day, we stated that our medium-term expectation is for top-line growth to be between 5% and 7%. This is what we anticipate for the business on an ongoing basis, following the recovery from COVID and the return to base volume levels, which also factors in 1% to 2% pricing. If we focus on the net growth number, we anticipate seeing that anchor around 4% to 5% as we close out the year and move into 2024 and 2025. The variables to consider are pricing and any remaining impacts from COVID as we distance ourselves from that situation. Thus, our guidance for the Q4 year-end exit rate transitioning into 2024 and 2025 will likely align with the four to five range plus pricing.

Jaafar Mestari, Analyst

All right. Super. And then are there any specific breakpoints in the year that you flagged? Or is the volume recovery and inflation subsiding? Is that going to be very progressive throughout the year?

John Zillmer, CEO

Yes. I would say it's very hard to predict exactly when inflation will abate. We are continuing to move price to offset the cost of food and labor rates throughout the year. So I would expect pricing to remain relatively high going into the close of the year and call it, the second, third, and fourth quarters. So unless we see something drastically change in terms of the overall environment, I would expect pricing to continue to be at a relatively high level compared to prior years, but we do anticipate that at some point it will transition and normalize. So what we're really focused on is selling the net new business and growing accounts and the core growth of the company and just using the inflation impact or using pricing to offset the impact of inflation and to generally grow the company through those new account acquisition opportunities. So hard to say exactly when those breakpoints will be. But we're focused on delivering net new and ultimately growing the company in that way.

Tom Ondrof, CFO

I'd just add one more comment that it's coming off of 1% to 2% growth for a number of years pre-COVID to then exit this as we get into 2024, 2025 and beyond at mid-single digits. It's maybe easy to lose perspective on how good an improvement, how fundamentally different that is pre-COVID to sort of going into next year and beyond from 1% to 2% to mid-single digits or upper single digits. So we're proud of what the business has accomplished and changed throughout the last few years to be able to get us to that incrementally new level of growth as we go forward.

Operator, Operator

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

Ronan Kennedy, Analyst

Hi, good morning. It's Ronan Kennedy on for Manav. Thank you for taking my questions. May I ask, can you just recap the sources of new wins and also your current assessment and outlook for competitive dynamics within the industry?

John Zillmer, CEO

We haven't really disclosed the sources of new wins. If you look at the historical trends, we typically sell about 35% of self-op conversions, around 35% from our core competitors, and the rest from small to regional competitors. This aligns with the historical trends, with possibly a slightly higher rate of self-op conversions over the last couple of years, and we expect that trend may continue throughout this year. That's our anticipated source. I'm sorry, what was the second part of your question?

Ronan Kennedy, Analyst

Competitive dynamics?

John Zillmer, CEO

I think nothing has really changed. It's a very competitive marketplace, and we're all competing aggressively for new business, but our win rates are going up. We've achieved record new account wins in the last two years, and we expect to achieve, again, another great result this year, and we're very focused on that net new perspective, if you will, in growing the business dramatically. Achieving what Tom just highlighted in that mid-single-digit net growth number is truly an extraordinary result that we've been able to achieve over the last couple of years and have expectations for continuing that trend going forward.

Operator, Operator

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

Ashish Sabadra, Analyst

Thank you for taking my question. I wanted to explore more about the Uniform business, especially regarding pricing. Could you discuss how pricing realization is trending in comparison to last year and the levels before the pandemic? Additionally, I'm curious about the growth in demand and if concerns about employment could impact that business. Could you address these points and share insights about the strength from ancillary services? Thank you.

John Zillmer, CEO

Sure. I believe we will see ongoing demand improvement in the Uniform sector, with plenty of opportunities to convert non-users and non-wearers into weekly rental uniform customers. We continue to experience strong demand for ancillary services in both the U.S. and Canada. Both of these businesses saw double-digit growth last year in the ancillary services area last quarter. Therefore, we expect demand to remain robust, allowing us to achieve significant growth in that sector. I think further details will be shared by Kim as she prepares to spin the business. There will be an opportunity for an Investor Day and Roadshow later this year, where she can discuss the plans for the business moving forward in the competitive landscape.

Tom Ondrof, CFO

The one thing I'd add is on pricing. You asked about that is through the ABS system and just sort of the leadership and Kim's approach to pricing, I think they have been more equipped and more aggressive with pricing than historical and have on the back of the energy increases over the last year or so really worked very hard to get pricing into their clients, both appropriate through the energy surcharges but also just the base pricing, and they feel like that is becoming fairly sticky. Again, with the ABS capability, they're able to target that within their client base a little bit more calculated in specific.

Operator, Operator

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

John Zillmer, CEO

Again, thank you very much for joining us this morning. We really appreciate the support of the company and its operations. Again, thanks to the Aramark team around the world for all the hard work that they do. And again, my apologies for the technical difficulty in the middle of the call. Thank you very much, everybody.

Operator, Operator

Thank you for participating. This concludes today's conference. You may now disconnect. Everyone, have a wonderful day.