Earnings Call Transcript - ARMK Q4 2021

Operator, Operator

Good morning and welcome to Aramark's Fourth Quarter and Full Year Fiscal 2021 Earnings Results Conference Call. My name is Paul 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 Affairs. Ms. Kissell, please proceed.

Felise Kissell, Vice President, Investor Relations and Corporate Affairs

Thank you and welcome to Aramark's earnings conference call and webcast. I hope all of you are doing well. This morning, we will be hearing from our Chief Executive Officer, John Zillmer; as well as our Chief Financial Officer, Tom Ondrof. As a point of reference, there are accompanying slides for this call that will be viewed through the webcast. These specific slides collectively will be made available following our prepared remarks for easy access. Additionally, our notice regarding forward-looking statements is included in our press release this morning which can be found on our website. During this call, we will be making comments that are forward-looking. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties and important factors, including those discussed in the risk factors, MD&A and other sections of our annual report on Form 10-K and our other SEC filings. We will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found in this morning's press release as well as our website. So with that, I will now turn the call over to John.

John Zillmer, CEO

Thanks, Felise, and it's good to be with all of you. Today, I'll provide a strategic overview of our fourth quarter performance, recap our progress throughout fiscal '21 that included record levels of net new business and share an initial view of the year ahead that we expect will build on the strong foundation for growth we've experienced this year. Our teams across the globe are committed to reaching for remarkable outcomes for our stakeholders, driven by service, innovation, and growth. Over the course of the year, we executed on our strategic initiatives despite a challenging and complex operating environment. The cultural transformation in the business, combined with our renewed close partnerships with clients and suppliers, not only allowed us to navigate this unprecedented period but also put us in a position to win and further increase performance levels across the business. In every one of our segments, we have made great progress. Among the highlights I'm most proud of, this year, we meaningfully accelerated Aramark's growth trajectory by adding senior leadership talent and making organizational changes that significantly bolstered our industry and line of business expertise, including sales leadership in many key roles by investing in growth-oriented areas of the business; by enhancing sales training and development programs; by further aligning our compensation approach with Aramark's strategic objectives, including net new business which now represents 40% of the company's bonus incentive plan across the organization; by strengthening client and supplier relationships and enhancing our operating infrastructure. I'd like to take a moment to discuss our strong fiscal '21 net new business performance which we attribute to the ownership mindset we've been cultivating, our ongoing focus on innovation, and the scale of our platform. Our annualized gross new business wins totaled nearly $1.25 billion, the highest in company history, representing 7.7% of pre-COVID revenue. This performance was broad-based across segments with particularly strong contributions from the education and facilities in other sectors within FSS U.S. In Higher Education business, specifically, we added a record number of new clients that further strengthens the portfolio of our largest business. Our new business wins extended across lines of business, geographies, and client size. In the United States, average annualized revenue for our new business wins was $3.4 million, emphasizing the breadth and depth of our ability to source clients, large to small. Our International segment continued to experience a broad-based steady growth trajectory across all countries, specifically led by industries such as mining, education, health care, and B&I. Uniforms added to this performance, reflective of the investments we've made in growing this business. Our teams across the company are hard at work onboarding these new clients. We continue to benefit from greater first-time outsourcing activity, representing approximately 40% of wins globally and nearly half of all wins within the FSS U.S. segment derived from self-op conversions. Our strength and talent and new capabilities provide further differentiation in the marketplace and reflect how well we've adapted to the new normal. In fiscal '21, we also improved retention rates to 95.5%, 150 basis points better than our historical five-year average. We are targeting retention rates to ultimately reach 97%. Accordingly, the magnitude of new business wins, combined with significantly improved retention rates, allowed us to achieve record annualized net new business performance. As examples of our progress, the annualized revenue of our net new business was over $500 million, five times higher than the average of the previous five years. The FSS U.S. segment reported a notable improvement with record high net new business of nearly $300 million, following negative net new results in three of the prior five years. And international increased net new business to approximately $150 million, over 30% higher than its historical average. Each segment reached important milestones by increasing retention rates more than 100 basis points, led by Uniforms with an improvement of 180 basis points. Collectively, this level of annualized net new business represents 3.1% of our pre-COVID level of revenue. Together, with our typical base business growth typically 1% to 2%, we are well on our way to our mid-single-digit growth goals. I'd now like to review Aramark's organic revenue performance by reportable segment in the fourth quarter, which in total, increased 37% year-over-year and reached 87% of pre-COVID levels. FSS U.S. reported an organic revenue increase of 58% compared to the fourth quarter last year, as we implemented many of our newly-created programs across sectors. We welcomed students and educators back to in-person learning at the start of the school year in both K-12 and Higher Education. Fans largely returned to stadiums at full capacity for Major League Baseball, and the National Football League season is underway. Our Leisure business benefited from ongoing activity at National Parks, and corrections have already returned to pre-COVID levels. B&I clients began to implement greater in-person return-to-work activity, although at a measured pace. At Aramark, we are fully back in our offices here in Philadelphia as of October 18. Facilities continued serving clients with in-demand services, ensuring locations were ready and safe for increased in-person activity. Health care gradually improved as patient care began to normalize with a higher level of voluntary procedures, routine medical appointments, and hospital visitation. International organic revenue grew 21% year-over-year, driven by stronger performance in Canada and Europe. Sports & Entertainment and Education in our international geographies reported improved business activity with the pace of reopenings behind the U.S. Organic revenue in the Uniform segment grew 5% in the quarter, driven by rentals and adjacency services, with hospitality clients experiencing increased levels of activity. Key areas of focus in Uniforms include higher growth rates in recurring business, customer-route density optimization, merchandise management, and enhanced back-office utilization. As you saw from our announcement a few weeks ago, we're extremely excited to have Kim Scott join as President and CEO of Aramark Uniform Services. I am confident that Kim's leadership and extensive commercial experience positions her well to accelerate profitable growth in this segment while simultaneously enhancing our employee and customer experiences. I look forward to Kim's meaningful contributions to the business as a member of our executive leadership team reporting to me. I also want to take this opportunity to thank Brad Drummond for his many years of service as he retires from Aramark. Now, I'd like to provide some perspective on a few relevant and broader topics important to our business that have been top of mind in capturing the headlines for what seems like months, namely navigating a dynamic global supply chain and tight labor market. While we have seen supply chain disruption in the food service industry, our scale, proactive management, deep bench of suppliers, and menu flexibility has helped us mitigate much of this for our clients. Our overall focus remains on leveraging spend, optimizing supplier relationships, ensuring the availability of in-demand products, and honoring our commitments to sustainability and local diverse suppliers, all of which will position us to continue to effectively weather this storm. We are also actively monitoring the markets for inflationary pressures and buying opportunities, relying on our use of fixed contract pricing and the ability to pass on market-driven pricing to moderate any near-term impact on the business. We are currently in active deployment of our new field ordering technology for our managed services business which will streamline our operators' buying activities and ensure alignment with optimized supply chain programs. On the labor side, we continue to effectively adapt to the environment. We've been implementing strategies to mitigate labor costs, led by disciplined scheduling protocols and efficient resource management aligned with demand, as well as leveraging technology in this area. We're also able to benefit from our scale by utilizing our flexible operating model, full employee base, and leveraging client locations in adjacent geographies. Additionally, I'm pleased to announce that we've taken a big step in our goal of reducing our environmental impact and carbon footprint by committing to establish a definitive target for our greenhouse gas emissions. When we finalize our goal, it will be a science-based target submitted through the Science-Based Targets Initiative or SBTI. As you likely know, SBTI is a joint effort between the UN Global Compact, the World Wildlife Federation, and other international environmental auditing groups. This is important news for Aramark as we deepen our commitment to transparency in our environmental stewardship. I would also like to take this opportunity to commend the community service and passion exhibited by the Aramark teams globally. Our most recent Building Community Day consisted of thousands of team members leading nearly 80 virtual and in-person projects taking place in six different countries. I am extremely proud of our commitment to making a positive impact on people and the planet. And now, Tom will provide a detailed financial review of the business.

Tom Ondrof, CFO

Thanks, John, and thank you, everyone, for joining us today. Over the next few minutes, I will discuss our financial results in the quarter, including detailed insight into the business as we frame the ongoing recovery and share our outlook as we enter fiscal '22. In the fourth quarter, and really since the start of COVID's impact on the business, we've continued to control what we could control, whether that was effectively leveraging our variable cost-based operating model at the onset of the pandemic, implementing disciplined strategies to strengthen our balance sheet, or taking action to invest and transform the culture of the organization. We are extremely proud of the progress we've made and recognize that this is just the beginning. Our performance in the quarter reflected our team's focus and resolve. Adjusted operating income was $165 million, resulting in a constant currency AOI margin of 4.8%, improving 120 basis points from the third quarter. Improved profitability was driven by strong unit-based cost management and the ability to leverage above-unit operating costs in SG&A across higher sales volumes. These drivers resulted in adjusted EPS that was $0.21 compared to an adjusted loss per share of $0.35 in the fourth quarter last year. We also took action over the course of the year to manage our balance sheet, resulting in interest expense savings of over $10 million versus fourth quarter fiscal '20, which also contributed to the adjusted EPS improvement. In fiscal '21, the company delivered $480 million of year-over-year improvement in net cash provided by operating activities. This strong result was achieved through improved unit profitability and better-than-expected working capital management, as well as from federal tax refunds and deferred payroll taxes related to the CARES Act. Note that we continue to participate in the appropriate country-specific government assistance programs from which we received approximately $159 million in labor credits that were mentioned previously throughout the year. The improved net cash provided by operating activities, combined with the measured use of capital expenditures, helped the company generate $282 million in free cash flow, better than our previously stated outlook. At year-end, we maintained strong liquidity with over $2 billion in cash availability. Now, let me briefly review our GAAP results. In the fourth quarter, consolidated revenue was $3.6 billion, operating income was $132 million, and diluted earnings per share was $0.14. These results include $86 million in revenue from Next Level Hospitality and continue to be excluded from our organic revenue metric until we lap the acquisition in the third quarter of fiscal '22. As John mentioned, we are encouraged by the rebounding base revenues with organic revenue reaching 87% of pre-COVID levels in the fourth quarter, slightly better than anticipated due to the acceleration of new account openings and higher-than-expected pricing pass-through. The performance in the quarter was driven by many areas of the business that have already approached or exceeded pre-COVID organic revenue levels through the result of initial contributions from fiscal '21 net new business, pricing, and base volume recovery. In other selected areas, we are seeing some revenue streams within our portfolio continue to be impacted by COVID-19, such as retail and catering in the U.S., Higher Education and health care sectors; conference and convention centers, concerts, and certain events in U.S. sports, leisure and corrections sector; higher education in Canada and Continental Europe; Sports & Entertainment in Continental Europe; as well as hospitality clients and Canadian operations in our Uniform segment. In addition, White Tower B&I, both in the U.S. and international, have had a longer recovery as companies have delayed the full return to the office. Collectively, we anticipate these revenue streams that we've grouped into a COVID Index will show continued improvement in fiscal '22. As you can see on the slide, the non-COVID-impacted areas of certain sectors, particularly within facilities and other health care and education as well as the Uniform segment, are operating at or above pre-COVID revenue levels. Finally, let me share our fiscal '22 outlook. Based on our current expectations for fiscal '22, we project the following full-year performance, organic revenue growth between 23% and 27% over the prior year, with revenue expected to approach pre-COVID levels by year-end. The revenue outlook reflects a continued impact from COVID-19 in fiscal '22 of approximately $1.6 billion to $1.9 billion or 10% to 12% of pre-COVID revenue, partially offset by net new business wins and pricing pass-through. Adjusted operating income margin in a range of 5% to 5.5%, with the second half of the year reaching 6% to 6.5%. AOI margin outlook considers the $1.6 billion to $1.9 billion revenue impact of COVID-19. In many cases, the company has brought back operating and above-unit cost in advance of full revenue recovery. As COVID impacted volumes' recovery, we expect this transitional impact on AOI margin to unwind, allowing us to leverage the existing cost in the business, resulting in an incremental margin on the remaining COVID-19 volume recovery of 15% to 20%. AOI margin will be temporarily affected by the start-up of new accounts which typically have lower margins in the first year of operation, with an acceleration thereafter. The magnitude of new account start-ups in fiscal '22 has grown meaningfully following recent new business wins. As we continue to deliver on our net new results in future years, those start-up costs will be absorbed by the accelerating margin cadence of new client wins from prior years. At the moment, net new business is translating to approximately a 10 to 15 basis point headwind on fiscal '22 margins. Lastly, with global supply chain shortages that we're all managing through, we have been providing exceptional solutions for our clients to meet their needs. In some cases, this has resulted in utilizing secondary suppliers where our negotiated pricing is not always as favorable as with our preferred partners. While we are diligently managing this dynamic period, these off-program supply chain actions have resulted in what we believe is a temporary cost increase in certain areas of the business as we work with clients to help them innovatively address this. Through pricing, supply chain initiatives, and operating efficiencies, we expect to offset inflation: free cash flow between $300 million and $400 million which includes the upcoming December repayment of approximately $65 million of deferred payroll taxes associated with the CARES Act; an annualized net new business in the range of $550 million to $650 million which would represent 3.5% to 4% of pre-COVID revenue and an increase relative to the record performance achieved in fiscal '21 when we had over $500 million of net new business or 3.1% of pre-COVID revenue. Together with the typical price and volume-based business growth of 1% to 2% that is currently shrouded by the impact of COVID, as John mentioned, we are well on our way to our mid-single-digit growth goal. Ultimately, we expect to achieve mid-single-digit organic revenue growth with ongoing margin progression that reaches pre-COVID levels and beyond. We look forward to sharing more on our operational and financial framework that we expect to deliver new levels of performing success at Aramark's upcoming Analyst Day in a few weeks. Thanks for your time this morning.

John Zillmer, CEO

Thank you, Tom. Fiscal '22 is just underway with new client wins already occurring as well as a robust pipeline of opportunity ahead. We're confident in our ability to build upon the momentum that we're creating. And finally, for those of you able to participate in our Analyst Day next month, Tom, myself, and the rest of the leadership team look forward to our time together. Thank you, everyone. And operator, we'll now open the call for questions.

Operator, Operator

Kevin McVeigh from Credit Suisse is on the line with a question.

Kevin McVeigh, Analyst

Great, thanks so much, and congratulations on the results, and really, on the AOI outcome as well. I think just that recognition really underscores some of the incremental disclosures you folks have been able to demonstrate since you've transitioned in; so congrats on that. Hey John or Tom, just really exceptional new business bookings. Could we maybe talk about that a little bit? How much of it was competitive takeaways or new logos? And any thoughts as to just post-COVID, is there a structurally higher level of outsourcing that you're starting to see as a result of just the increased challenges of kind of maybe folks that had been maintaining facilities internally? Just wanted to start there because just really exceptional numbers around that.

John Zillmer, CEO

Thank you very much. We are definitely observing a higher level of outsourcing. As we've mentioned, 50% of our wins in the United States were from self-operation conversions, and globally, more than 40% involved first-time outsourcing events from self-operations. This represents a significant increase compared to the historical average. The marketplace remains very competitive, and we are diligently working in every sales scenario to not only retain our existing customers but also to capture customers from our competitors when they enter the market. While the industry itself hasn't fundamentally changed, we are witnessing an increase in outsourcing activity that will benefit all organizations involved. This trend looks promising for the next year and possibly beyond. We are seeing interest from customers in both our traditional markets and some nontraditional opportunities. Overall, we are enthusiastic about our prospects. We are particularly pleased with the performance of our businesses and how they have revitalized the growth culture of the company, implementing leadership that understands our various lines of business and is dedicated to the growth narrative. Another crucial factor for us, aside from market trends, is the focus on cultural change and adjustments in compensation that influence behavior. We are optimistic about our results, expect ongoing performance improvements, and will continue to incentivize our team to make that happen.

Kevin McVeigh, Analyst

And just a quick follow-up, because I think the culture is so critical to Aramark, just any thoughts on that? Because in addition to the wins, you're really seeing a dramatic improvement in retention. Just what's driving that? And if I heard you right, I think 40% of the bonus is tied to new business. Is that right? And then what's that been historically?

John Zillmer, CEO

That is correct. Historically, the senior leadership bonus element has not included this component. It has mainly focused on EPS and margin growth or EBIT or EBITDA. Last year, the Board and management team recommended this change, and the results have been significant. We plan to incorporate this into our bonus programs moving forward. The cultural transformation has been remarkable. We have revitalized both the hospitality culture and the growth culture. We have placed people in roles they understand and are passionate about, in businesses they love, with established customer relationships. This is driving business improvement as well. We are excited; we believe we are just at the beginning of this journey. We have seen great results this year and have strong expectations for the future.

Tom Ondrof, CFO

Kevin, this is Tom. If I can just clarify one point, too. I think you meant this, but just to make sure, the bonus, the 40% target is based on net new business. So it factors in retention which I think is much focused for people as well. So if you win $100 and you lose $100, that gets you nowhere on your bonus.

John Zillmer, CEO

That's right.

Kevin McVeigh, Analyst

Very helpful. Thanks, again.

Neil Tyler, Analyst

Yes, good morning, thank you. Two questions, please. First of all, in your outlook guidance, it seems that the operating leverage figures that you've offered point to around about $300 million headwind at AOI against the 2019 base. If I take the drop-through that you've presented to us, if that's correct, can you perhaps, Tom, talk us through the other puts and takes that get us to maybe the midpoint of where you're guiding to this year. And then secondly, you mentioned the 10 to 15 basis point headwind on the margins of net new. But on a sort of normalized and gross margin basis, are you confident that the new business you're winning is of a sort of sustainably higher margin than that is being lost?

Tom Ondrof, CFO

Yes. I'll start with the second piece with the new business that we're winning because it's fundamental to the algorithm, if you will, over the coming years. We've got a very robust pro forma process from the ground up, regardless of the size of the contract. And John mentioned the average contract win this year was about $3.5 million. So that ranges from quite a bit smaller to bigger. And there's a lot of bread-and-butter accounts in there that may not rise to the level and usually don't rise to the level of, say, John and I reviewing it because the investment is very small and whatnot. So, we need this rigorous process because all these little wins accumulate to a lot. And so the operators, sales folks, and finance folks with each lines of businesses and countries work through these pro formas together. It's not just the sales team or just the operators doing it. It's reviewed. It does progress up to change if there is certain levels of capital investment or the annual revenues get large. So again, very rigorous process to ensure that we're getting a return, that we're getting a margin that will be up at least around the company average over time. The bigger the accounts we've talked about, the longer ramp-up. And then obviously, the cost-plus versus P&L dictates sort of that margin progression over the lifespan of the contract. So a long way of saying that we feel confident that this startup, because we're coming off really at a zero growth base, as we start to get into years two and three of this year and start to lap what we're going to be winning going forward, this headwind disappears and starts to build on itself. So hopefully, that will make sense. But again, we feel good about the type of business we're winning and that will ultimately be margin enhancing for us as we go forward. In terms of the build, the schedule and what you referred to, it is roughly the COVID Index headwind that, I think your math's right, around $300 million, really trying to show on the one schedule in the deck, how you would build back to pre-COVID level margins and how that factors into it based on what our current outlook is. So, if you take that $300 million and add it on top of this fiscal '22 outlook, plus factor in some of the supply chain and new business headwinds we're dealing with at the moment, you work yourself back to the high 6%-plus margin, just to show that we're progressing as we have. And there's a lot of noise in the system, but that we're managing through it. And ultimately, we think back to and beyond those '19 margin levels.

John Zillmer, CEO

I would like to add a general comment that we have not altered our return expectations or profit expectations to boost this growth recovery or secure new business wins. Our return requirements on net assets remain unchanged, as do our return on invested capital requirements. This situation is not a result of reducing our prices; it stems from improved performance, increased activity levels, and effective salesmanship.

Neil Tyler, Analyst

Thank you. Very clear.

Toni Kaplan, Analyst

Thanks so much. I wanted to ask about the long-term algorithm that you set out in the release. Just how to think about the pieces. Is it 3% new business, 2% price? You mentioned that this year, new business was a little bit over at 3%. I think next year at 3.5% to 4%. So just trying to gauge what you think normal is long term for new business and price and any other factors that we should be thinking about?

Tom Ondrof, CFO

Yes, I'll start with that, John, if you want to follow up.

John Zillmer, CEO

Sure.

Tom Ondrof, CFO

Yes. I think that's sort of shaping it up. We'll talk a little bit more about it in a few weeks at the Analyst Day. But I think getting into that 4% to 5% net growth and then pricing volume being on top of that, we're really trying to deemphasize the pricing component because, again, we talk about we're trying to bring value to our clients and to just pass through pricing that they can almost do on their own doesn't create a lot of value. So we want to drive this more through the healthy foundational strong new business, strong retention. And then just pass-through pricing or price appropriately and then ultimately try to drive some same-store sales on top of that. So the key driver here is the net growth and we really like to get that up ultimately into that 4% to 5% range.

John Zillmer, CEO

Yes. That's absolutely right. And thanks for the question, Toni. We want the key driver and the growth narrative to be net new. So improved retention, net new sales in that, call it, 4% to 4.5% range, potentially getting higher in some years as we have great results and then some volume recovery as a result of enhanced marketing capabilities and enhanced programmatic support. So building base business volumes through increased participation at the component of it. And then we see pricing really as a definite offset to inflation to keep the margins moving upward as we're able to accelerate the growth. Because there's so much margin opportunity and so much leverage opportunity as we build scale and get that growth engine running, but that's what we're really trying to focus the team on. We'll get our cost recovery through pricing. We'll mitigate costs through various other kinds of initiatives, but we'll really drive growth by selling new accounts, retaining our existing business, and then growing volumes in our base business.

Toni Kaplan, Analyst

I wanted to follow up on Education. It really exceeded our expectations for the quarter. You mentioned the record number of new clients in Higher Ed. From your perspective, did you notice a significant number of students returning in person compared to what was expected? Or was the better-than-expected performance primarily due to the new client acquisitions?

John Zillmer, CEO

Yes, I think it's a combination. I think the students returning to campus was roughly on our estimates; some up, some down a little bit, depending on the individual university or account. So I think all in all, that was relatively neutral, but we had an extremely good new account sales year and a great retention year as well. So I think that was the key driver for Higher Ed.

Ian Zaffino, Analyst

Hi, great. First of all, congratulations on the II Award, it's pretty impressive, and also on the quarter. But the question would be on the self-ops. And obviously, you saw a nice increase there, amidst on lot conversions. Can you maybe talk about the areas where you saw the most wins? Maybe also where you sort of least wins? And if you can maybe bring those up where you'd see an increase or an even greater increase in self-op wins?

John Zillmer, CEO

We had broad success across the enterprise, with almost all businesses experiencing significant net new sales activity, except for a few that were heavily affected by COVID, such as national parks. The National Park Service hasn't had any bidding processes in the last 24 months, leading to limited growth in that area. While we continue to bid on new opportunities, that business is mainly focused on its current operations, which are being managed effectively, but growth is lacking. In contrast, other divisions like Facilities had outstanding sales years, with significant conversions in self-operations, which is very encouraging as demand continues to rise. Higher Education achieved record wins, while K-12 and Business & Industry performed strongly both domestically and internationally. Overall, it was a successful year for new account sales and retention, driven by a broad range of activities across all business lines.

Ian Zaffino, Analyst

Okay. And then, a follow-up would be on the Education side. What do we need to see to basically get back to pre-COVID? You talked a little bit about like the retail and catering volumes were a little bit slower to recover. Is that a function of just students being back? Is it a function of take rates or any counter types of restrictions? Maybe just give us a lot of color there.

John Zillmer, CEO

Yes. I would say that that's really more of a function of campuses changing their business model, at least, in the short term until they work through the full recovery. So I know you're seeing less catering by administrations, student activity at pretty much normalized levels, and the number of student enrollments at pretty much normalized levels and meeting our expectations. But the campus administrations are not having big meetings and big conferences and those kinds of things. So that's that extraordinary catering that typically add significant revenue growth to us. So I think that will take a little bit longer to return. And so I would say it's that kind of a change more than a gap in terms of student expectations. Tom, I don't know if you have any other color you want to add to that.

Tom Ondrof, CFO

No, that covers it.

Ian Zaffino, Analyst

Okay. So, it's basically the B&I component of Higher Ed sort of the way to think about it?

John Zillmer, CEO

Yes, you could characterize it that way. Sure, certainly.

Andrew Steinerman, Analyst

Hi, John. I just wanted to go through the client retention a little bit which obviously not only did you have an extraordinary year at 95.5%, you're ultimately targeting 97% over the medium term. I really just want to talk about kind of the 95.5% and kind of going into fiscal '22. I surely heard that some of the contracts that might have been up for a competitive bid in the whole industry, so it's not Aramark. It's the whole foodservice industry just was really kind of pushed out a year because of COVID. And so my question is do you see the same thing, some delayed RFPs just kind of staying with the current vendor which might make for the whole industry, fiscal '22, harder to hold on to all the client retention gains in '21? Like in other words, maybe Aramark's client retention has to recede before moving higher?

John Zillmer, CEO

Yes, that's a great question. I would say that 2020 experienced significantly low activity levels, while in 2021, we saw normal levels of activity across all businesses. In 2020, there were no K-12 bids, but last year, they increased due to the legislative requirement to rebid. We observed pretty normal activity in our fiscal 2021 from a rebid standpoint. As for retention, there were businesses and universities that closed down and did not reopen, which contributes to the difference between my expectations of 97% and 95.5%. We consider those closed businesses as losses. We'll discuss this further on December 9 to clarify the impacts for both 2020 and 2021. Overall, I believe 2021 was a normal year and I expect 2022 to be the same, with the only exception being increased outsourcing activity that could present further opportunities for us.

Andrew Steinerman, Analyst

Great. Thanks, John.

Ashish Sabadra, Analyst

Thank you for taking my question. There is strong momentum in securing new business, along with robust guidance for new wins in fiscal year '22. John, you mentioned a healthy pipeline, and in response to the previous question, you pointed out the increased potential for self-operation conversion. I am curious if the '22 new win expectations are still primarily driven by self-operation, around 50%, with the rest coming from competitive wins. Could you provide more detail on that?

John Zillmer, CEO

Sure. I would say we have an expectation of continued first-time outsourcing activity in '22 that will impact the total percentage. I think we have an expectation that that phenomenon will normalize. We've always had about, call it, 35% of our wins coming from self-ops. So that gap of 15% year-over-year over the historical average is significant in '21, and we've taken very strong advantage of that. Whether it still maintains that level in '22, hard to say. But my expectation is that we'll see continued significant impact from that self-op conversion process across a range of the businesses. And so if it's 50%, if it's, call it, 40% or 45%, I think that that's probably a good way to think about it. And if it continues to accelerate, we'll disclose it as it happens. But we're very encouraged by the level of activity.

Ashish Sabadra, Analyst

That's very helpful color. And maybe just a quick question on Uniform services. As the volumes have come back close to the pre-pandemic level and then with the new leadership in place, any incremental thoughts on strategic optionality for that business?

John Zillmer, CEO

Sure. I have to tell you, I'm very excited about Kim Scott joining the company. She has an extraordinary background and as a commercial leader, as a growth-oriented leader, and we're very excited to have her join the team. And I think she'll bring new insights and fresh perspectives to the business. I think the team has done an extraordinary job over the course of the last couple of years really managing through COVID. In spite of the write-off we took on PPE, the company has worked very aggressively to get the ABS implementation done, to get the new business rates up, and to achieve record retention. So all in all, I'm very happy with Uniform's performance and excited about Kim's new perspectives and leadership moving forward. As we've said before, we always maintain strategic optionality. And the Board will always be considering what's the appropriate next step. But for right now, we are focused on driving the performance of that business and we think we have a great leader to do that.

Ashish Sabadra, Analyst

That's very helpful color, thanks. And congrats once again on a strong quarter. Thanks.

James Ainley, Analyst

Good morning, everyone. Thank you for taking my question. You mentioned that $1.6 billion to $1.9 billion of revenue is still being impacted by COVID. Could you provide a breakdown of that revenue according to industries? When do you expect that revenue might recover, and what risks do you see? Also, reflecting on our previous conversation, you mentioned that the Delta variant delayed some companies' plans for in-person office returns. I'd like to know what corporations are currently saying about their return plans.

John Zillmer, CEO

Sure. Tom and I will both address this. The main challenge we're facing is understanding the pace of recovery and how to model it, which remains somewhat unclear. Companies are approaching their return-to-work strategies cautiously. While we're motivated by the activity and changes taking place, it's very challenging for us to accurately predict how this will develop, especially in the B&I sector, both in the U.S. and globally, as countries are affected by new COVID waves or shifts in government policies. We've made efforts to clarify for the market what the potential impact could be for the year. However, our estimates are based on our understanding of current business conditions. Many businesses are affected. Tom, you may have additional insights about how that $1.9 billion is distributed across industries.

Tom Ondrof, CFO

Yes, we tried. As John mentioned in the presentation, we aimed to break that down and show you the components. First, there are some core parts of each business that have returned to or exceeded 100% of pre-COVID levels. However, there are still some areas and revenue streams that are relatively or significantly impacted at this time. The pace of recovery is uncertain, but it appears to be a diminishing portion as we move forward. Looking at the first half of fiscal '22, especially the first quarter, there likely won't be much movement. There's nothing particularly new this quarter compared to the previous one. With sports moving indoors, we are uncertain about the impact in that area. Therefore, I don't anticipate significant changes in this area during the first half. However, as we discussed in the outlook, we expect to see a return to pre-COVID levels or close to it as we progress through the year and into the second half.

James Ainley, Analyst

Okay. As a follow-up, could I maybe ask you a bit more color in terms of the cost outlook? I mean you talked about being able to pass on cost pressures in terms of price. But when you sort of look at the buckets of labor and food, what kind of price increase do you think you need to pass on in the year ahead?

Tom Ondrof, CFO

I hope there isn't much. We create value for our clients through cost control, which is a balancing act since we need to recover our costs while also delivering value. This approach varies on a case-by-case basis, similar to our experiences during the early days of COVID. Our teams actively work on negotiating contracts. In some situations, there may be a delay in pricing, particularly in higher education, where prices are fixed for the semester and renegotiated for the next. In other cases, changes can happen immediately based on contracts. We always aim to find ways to provide value before considering passing any costs to the client.

John Zillmer, CEO

Yes. I would just add that while we still have the contractual right to do that, we think it's imperative that we use all the levers we have under our control because ultimately, that's what helps the client derive value from us as an operator, that they see higher value if we're able to really deliver to them beyond their expectations. But there comes a time when you have to use the lever. And we've got systems in place and infrastructure in place that really assist our frontline managers with understanding what the cost implications are going to be for them. And they're very specific location because it's different by geography. It's different by business unit based on the products that they use and the mix of menu offerings. So we've got systems in place and process in place that really helps them make their individual decisions and negotiations. And we're very confident in our team's ability to go ahead and recover those inflationary cost pressures.

James Ainley, Analyst

Okay, perfect. Thank you.

Steven Grambling, Analyst

Hi, thanks. I may have missed this at the beginning, but what are some expectations at the segment level regarding organic growth and margin assumptions for 2022? Also, could you help us understand the connection between sales, margins, and free cash flow guidance, considering other line items like CapEx, contract investments, cash taxes, and working capital?

John Zillmer, CEO

Tom, you'll get this one.

Tom Ondrof, CFO

Yes, five segments, Stephen. I haven't provided that level of detail, so I'll decline to comment on that. Overall, we're seeing broadly positive results year-over-year. There may be some variations, but we're optimistic about the progress each segment is making in their growth journey and expect good results from all three over time. Regarding cash flow, we had a very strong quarter and year, significantly aided by federal tax refunds, excellent working capital management, and solid operating results. The cash flow conversion rate is likely higher than in the past due to some CARES Act impacts. However, we expect to return to approximately 45% to 50% cash flow conversion next year, which has been our historical standard. I personally hope to see that conversion rate continue to increase. In terms of capital expenditures, when looking at this year's new business wins, the market continues to be rational. As John mentioned, we are maintaining our return expectations and not significantly increasing our investments to secure these contracts. Therefore, I don't feel pressured regarding capital expenditures and, consequently, free cash flow. I believe that aiming for a near 50% cash flow conversion rate is a realistic goal for us.

Steven Grambling, Analyst

And perhaps one follow-up as a point of clarification. On the 10% to 15% headwind you cited for new contracts, is that the full headwind from both going from, call it, zero to 3% in net wins and the impact of the ramp from new contracts? Or is it really just the headwind from kind of going from zero to the 3% plus?

Tom Ondrof, CFO

Yes, it's really the headwind both from a standstill. So the zero to 3% portion because that's what I'm saying. Once we start to lap it in a few years and we've got a consistent growth model going, that headwind dissipates.

Andrew Wittmann, Analyst

Yes, good morning. And thanks for taking my question, guys. And first, just on the disclosure for the net new retention, the gross new wins; this is obviously really important indicators that I think many of us have wanted to see disclosed for a long time. So, thank you for the transparency, it does a lot. Just based on that, I thought we'd use the opportunity to ask a question as well. And regarding the gross new wins, record, heard that. We heard record retention, and that's all very positive. The context that I'm looking for is the 1.24. How does that compare? You said record. How much...

John Zillmer, CEO

Andrew, did we lose you? Hello?

Andrew Wittmann, Analyst

I apologize. Hello?

Tom Ondrof, CFO

No worries. Yes, you're back.

John Zillmer, CEO

No worries. You're back.

Andrew Wittmann, Analyst

I'm sorry. Thank you. My phone has been off all morning. The context I was looking for was that the five-year average of new wins has one year impacted by COVID, which brings that number down. So how much better was 2021 in gross new wins compared to historical levels?

Tom Ondrof, CFO

Yes, I think that was a fair number. I mean COVID '20 was impacted the five-year average. But believe it or not, there were years in the past five, and certainly the past eight, that were lower than last year in '20. So I don't know that I'd attribute a lot of that five-year average just to COVID helping out the cause in terms of the jump from the five-year average to '21.

Andrew Wittmann, Analyst

Okay, that's helpful. I was wondering about the impact of where you're gaining your business. Education and Facilities appear to be the areas where you've had the most success. Can you explain how the margin profiles in those sectors compare to your overall fleet average? As the business continues to recover, will this positively influence your average margins, or does it work the other way?

John Zillmer, CEO

Yes. I would say, in general, helpful. We don't like to talk about margins in the individual components of the business because of the competitive nature of the marketplace. So I don't want to be disclosing my individual line of business margins. But I would say, in general, helpful. Both businesses operate above the company average.

Richard Clarke, Analyst

Hi, good morning. Thank you for taking my questions. My first question is about the industry's trend of margins recovering before volumes. Looking at your guidance for next year, do you anticipate a significant COVID impact as we move out of 2022? Or given the acceleration in new business wins, do you feel that your expectation of margins recovering ahead of volumes might change?

Tom Ondrof, CFO

Well, Richard, it’s a bit complex and we discussed this last year. If you assume that the new $16 billion, which reflects our pre-COVID level, is identical to the current $16 billion, I believe we would see a recovery. We maintain that perspective. However, fortunately, the new $16 billion comprises some pricing and significant new business, which presents a challenge for our margins as we transition from no growth to growth. It’s important to analyze this closely. We demonstrated on the slide that if we merely returned to the same revenue levels, we would experience a margin recovery higher than in 2019. However, given the presence of new revenue that dilutes margins in the short term, the pathway to reach that $16 billion margin will look different. Ultimately, this situation bodes well for the long run because I would prefer substantial growth over just a straightforward margin recovery.

John Zillmer, CEO

Yes, I would add that as volume recovers and accounts that are still below pre-COVID levels bounce back, they will generally recover at a higher margin due to the leverage in the business and the actions the company has taken. Therefore, if we build the recovery volume on top of what we've achieved from a net growth perspective, we should be operating at a higher margin as we move forward.

Tom Ondrof, CFO

Right.

Richard Clarke, Analyst

Okay, that makes sense.

John Zillmer, CEO

Okay, I would just add that the level of optimism in the business is palpable and I think that the changes that have occurred, both culturally as well as in terms of performance in the numbers, will really allow us to continue our growth trajectory. Thank you for your questions.

Tom Ondrof, CFO

No worries. Thank you, everyone.

John Zillmer, CEO

I would like to say thank you to all the associates and employees of Aramark around the world who have done such great work for our clients and our customers and looking forward to seeing them all in the field as we all recover and get back to normal life. Thank you very much.

Operator, Operator

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