ARMK - NYSE

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

Thank you, and welcome to Aramark's second quarter fiscal ‘23 earnings conference call and webcast. This morning, we will be hearing from our Chief Executive Officer, John

Thanks, Felise, and thanks to all of you for joining us today. Now halfway through the fiscal year, we continue to make progress on our strategic priorities, which have resulted in: one, strong business performance; two, positioning the Uniform services spin-off for success; and three, additional balance sheet optimization. This morning, Tom and I will share an update on each of these priorities, as well as a detailed outlook for the full-year before opening the line for questions. But first, I want to acknowledge our teams around the globe, who embody Aramark's service culture every day. Just over a week ago, we held our Aramark Building Community Day during which 1,000s of employees across the company volunteered their time, energy and expertise to over 150 service projects around the world in areas where they live and work. This is just one example of our commitment to reach for remarkable as we continue to deliver on that promise. Aramark's performance starts with our people, and I'm proud of the powerful impact in partnership that we've created with our teams, our clients and our communities. Now let me comment on our second quarter business performance. After record results last year, new business growth remains strong, and the pipeline is robust. This, combined with retention rates that remain above 95% and keep us on pace to deliver annualized net new business in fiscal ‘23 of 4.5% or more of last year's revenue and is creating solid top line momentum going into fiscal ‘24. Net new business in the U.S. segment was broad-based, driven by new wins in health care, corrections and facilities, including the University of Chicago Medical Center, the Missouri DOC and an expanded relationship with Boeing, as well as strong retention results in Collegiate Hospitality that reflect the recent proactive extension of Mississippi State University as an example. With the selling season for Education well underway, we anticipate continued momentum with numerous opportunities already in the pipeline. The International segment experienced ongoing success winning bread and butter accounts across the portfolio, particularly in the U.K., Canada, Ireland and South America. Our sales funnel continues to grow across all geographies and retention remains strong. The phased rollout of Merlin is now complete in all locations, and we're looking forward to the upcoming busy season. Uniform Services generated increased new business compared to last year, a sign that the strategic growth plan for the business is being executed. The sales pipeline remains solid, and we expect new business to accelerate as we move into fiscal '24 and under the sales leadership of industry veterans, Andy Panos, who recently joined AUS, and it has nearly 30-years of experience. Many of you know Andy's reputation in the marketplace, and we're thrilled to have him on board for the next phase of this business. In the quarter, the company's organic revenue grew 19%, compared to the same period last year, with pricing contributing approximately 6%. Within the U.S. segment, all sectors contributed to organic revenue growth of 19%, led by continued strong per capita spending and concert scheduling activity in our Sports & Entertainment business, Retail & Catering in our Collegiate Hospitality business, as well as a quarter-over-quarter increase of return-to-work practices within Business & Industry. International organic revenue grew 31%, compared to the second quarter last year, driven by solid net new business, pricing initiatives and base business growth across all geographies. Like the U.S., Sports & Entertainment and Business & Industry continued to demonstrate strength, driven by greater in-person activity levels. Our teams are also gearing up for a busy summer concert and event season ahead. Organic revenue in the Uniform Services segment increased 6% year-over-year with solid performance in both the U.S. and Canada. Adjacency services grew double-digits and while currently a relatively small portion of the business revenue mix continues to be a focal point for growth within AUS. On the Uniform spinoff, we've continued to make significant progress with respect to the transaction and are excited for the opportunities ahead for Uniform services as an independent standalone company. We continue to monitor macroeconomic and capital market conditions, as well as the business' momentum, while remaining diligent in completing the operational, regulatory and financial logistics in order to be in a position to be able to complete the separation by the end of the fiscal year, all with an eye on doing what is right for the business and Aramark shareholders. Lastly, we continue to strengthen our balance sheet. In early April, we completed the sale of our noncontrolling 50% equity stake in AIM Services for $535 million. We also recently signed an agreement to sell a portion of our ownership stake in the San Antonio Spurs NBA franchise for approximately $100 million. We expect that, that deal will close imminently, subject to certain closing documentation, and we'll continue to work closely with the Spurs as a valued client in the future. Before turning it over to Tom, I would also like to highlight some of our new partnerships as we strive to be one of the most admired employers and trusted hospitality partners. We partnered with the Thurgood Marshall College Fund to launch the Aramark HBCU Emerging Leaders program, focused on career exploration and professional development for students at historically Black Colleges and Universities. We also formed an equitable alliance with BBB Hospitality Group, a minority leader in human-centric hospitality to bring new avenues of value to our Workplace Experience Group clients, who want to empower their people and communities to overcome labor challenges and to drive more equitable impact from their businesses. And just last week, we were once again selected as a top 50 employer by Diversity, Inc. even moving up in the rankings and for the first time, also named as a top company for supplier diversity. I'm extremely proud of the hard work and significant impact that Aramark is making as a unified community to drive inclusion. Tom?

Thanks, John, and good morning, everyone. Our performance in the second quarter reflected continued momentum in delivering profitable growth, driven by actions that have strengthened the current state of the business and position the company for future success. As John mentioned, total company organic revenue of $4.6 billion grew 19% year-over-year and adjusted operating income of $213 million was 30% higher on a constant currency basis, compared to the second quarter last year. AOI margin for the total company increased by 40 basis points to 4.7% in the quarter. Through the first-half of the fiscal year, the total company AOI on a constant currency basis improved 39%, compared to the first-half last year, and AOI margin was up more than 70 basis points to 5%. In the U.S. segment, AOI increased 43% on a constant currency basis, compared to the second quarter last year, driven by the maturity of prior year's new business, supply chain purchasing compliance and tight above-unit cost management, as well as operating leverage off base business growth from return to work activity within the B&I sector and higher per cap spending within the Sports & Entertainment business. The inflation client pricing lag within our Education sector and Corrections business remained a headwind in the quarter, but we expect that to lessen as client approved pricing actions take effect during the second-half of the fiscal year. Specific to Collegiate Hospitality, the use of agency labor remains higher than historic levels, but is gradually improving. AOI in the International segment increased 3% year-over-year on a constant currency basis. As previously disclosed, the second quarter last year included $21 million in government reimbursement payments. Excluding this benefit to last year's second quarter, the segment grew AOI by 113% and expanded its AOI margin by 140 basis points in the period, each on a constant currency basis. Year-over-year AOI growth within International on a constant currency basis was driven by prior year's new business contract maturity, operating leverage off higher base business volumes from return to work activity across business and industry clients, supply chain purchasing compliance and reduced above-unit costs generated through a restructuring initiative across the segment, which more than offset the impact of COVID lockdowns in China during January and the end of the government reimbursement programs. Uniform's AOI grew 7% year-over-year on a constant currency basis, resulting in an AOI margin of 9.8% versus 9.6% in the second quarter last year. The improvement was primarily driven by operating leverage off net new business, tight controlled administrative expenses, as well as early savings related to efficiency initiatives, including an operating organization restructuring that more than offset higher labor and merchandise costs in the quarter. We expect this AOI margin progression to continue in the second-half of the year, establishing the foundation for its public company debut. Across the portfolio, supply chain remains an integral driver to AOI performance. We have seen an improvement in supplier fill rates, which are now approaching pre-COVID levels. Progress here allows us to fully leverage our current negotiated deals. Additionally, as supplier inventories continue to rebuild, we are seeing the return of opportunity buys providing another avenue within supply chain to offset cost pressures. While product costs are universally higher than they were one and two years ago and are running more than 100 basis points higher than we planned at the beginning of the year, we have started to see moderation in the sequential rate of inflation. If this trend continues, the business is expected to experience a tailwind over time from consistent pricing actions, including the cost recovery related to pricing already implemented, as well as pricing currently agreed with clients and set to be implemented in the back half of this fiscal year. Net interest expense was $114 million, and the adjusted tax rate was approximately 25%. Our performance in the quarter led to adjusted EPS of $0.28. On a constant currency basis, adjusted EPS was $0.29 in the quarter, compared to $0.21 in the second quarter last year, reflecting a year-over-year increase of 38%. On a GAAP basis, Aramark reported consolidated revenue of $4.6 billion, operating income of $182 million and diluted earnings per share of $0.21 for the quarter. Comparatively, consolidated revenue was $3.9 billion, operating income was $142 million and diluted earnings per share was $0.14 in the second quarter last year. Now turning to cash flow. In the quarter, net cash provided by operating activities was $314 million and free cash flow generated was $229 million, an inflow consistent with the historic seasonality of the business. Cash sourced from operations was better than the same quarter last year, offset slightly by a higher use in working capital and higher capital expenditures, which at 3.3% of revenue was still below historical average. At quarter end, Aramark approximately $1.2 billion in cash availability. Since quarter end, we have repaid $530 million in total debt and remain committed to lowering our leverage ratio. We will continue to evaluate broader capital market conditions and stay opportunistic in looking for ways to strengthen our balance sheet through debt repayment and strategic refinancings. So let me conclude with our outlook for fiscal ‘23, that includes our current total company expectations, as well as some additional insight on global FSS and Uniforms. For clarity, global FSS includes FSS U.S., FSS International and the Corporate Reportable segments. In short, everything except for the Uniform Services segment. The Uniform Services outlook here reflects that reportable segment and does not include any incremental public company costs or capture of additional efficiencies. With that, we currently anticipate for the full-year -- fiscal year ‘23. Organic revenue growth raised to be just over 13% year-over-year comprised of global FSS at approximately 15% and Uniform Services around 5.5%. AOI growth to be approximately 32%, compared to last year, comprised of global FSS at approximately 45% and Uniform services around 7%. Free cash flow of approximately $475 million before payment of the $64 million FICA payment completed last quarter and the anticipated cash flow impact of approximately $100 million to $125 million related to restructuring charges and transaction fees associated with the Uniform spin-off. After these specific items, we expect our reported free cash flow to be approximately $300 million and our leverage ratio to improve to less than 4 times by fiscal year-end. We remain committed to a balanced approach on capital structure at the time of the spin with no plans to overburden either company. We are confident in the momentum that continues to build in both global FSS and Uniform Services to deliver long-term sustainable and profitable growth. A strong pipeline of new business opportunities, the positive effect of ongoing pricing initiatives against sequentially moderating inflation, a stabilizing supply chain and the benefits of actions taken in the first-half to make the organization more efficient and effective, give us confidence as we head into the second half of the year and set the foundation for fiscal '24 and beyond. Thanks for your time this morning. John?

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

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

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

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

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

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

Perfect. Thank you.

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

Hi, thank you. I was hoping you could talk a little bit about the Uniforms business. You talked about -- a little two parts. One, you talked about adding new members of the team, focused on value creation. But at the same time, the organic sales in that business I think they've kind of -- it looks like they're slowing into the back half of the year to hit your guidance. I'm curious what's going on in the business right now and the opportunities you see ahead? Thanks.

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

Great. And I don't know how much you can share, but you talked about you're monitoring the macro environment, the capital markets environment with regards to the spin. Is there any thought that -- if the environment weakened that you might look to be a little bit more opportunistic around the timing of the spin? Or you're fully committed to the back half of the year?

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

Great. Appreciate the color. Thank you.

Thank you.

Next question comes from Ian

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

Well, I think you're seeing the acceleration and the realization of the net new business that's come over the last couple of years, contributing significantly to that. Top line growth as those accounts come on and mature, and we're realizing those revenues. And then you'll see as those accounts mature, continued AOI improvement and continued margin improvement as those accounts come up the profitability ramp to maturity. And so I think both of those factors are driving those results that you've highlighted. I think there's -- the culture of the organization is now really fully focused on growth. We've built the incentive systems. We've built the alignment throughout the organization and there's just a lot of excitement about the future of the company. And so that's, I think, a very strong contributor on both of those elements. And we see that continued performance improvement coming through this year. So the last two years’ performance wasn't an anomaly. It was the new culture and the new approach to running the business. And I think we'll continue to drive that success going forward.

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

Yes, absolutely. As you know, price recovery is an element of both food cost inflation, as well as labor inflation. So we don't generally end up having price give back as prices come down on food products, because we've put those pricing structures in place to recover the total cost of operation, not just the food cost. But in a time when you have some deceleration in the inflation rate, there will be a point where we cross over and have some tailwind coming from that improved pricing and the lower food costs. And you are seeing some commodities breakdown with respect to pricing, which hopefully in the longer term will have an impact on the profitability and total food cost for the operations. I would say that those are -- it's still early. We still have inflation, but at lower than the last several quarters. So it's beginning to moderate, but it's still there and still persistent. So we'll be diligent about continuing to price to recover those costs. We'll continue to be diligent about putting pricing in those businesses that, that have had a lag due to contractual requirements. And at some point, you're right, we will have a bit of tailwind as a result of crossing over that slope, if you will.

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

Okay, thank you.

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

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

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

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

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

That’s very helpful. Thank you very much.

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

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

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

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

Makes sense. Thank you so much.

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

Hi, thank you. I have two questions this morning. I just want to piggyback a little bit more on Andrew's question over here. Just in the quarter, we -- you had very strong growth and you're raising the revenue guidance, but you're really not doing that with the margin guidance and might be consistent with what you said in conferences or the lower end of what you pointed to last quarter. Could you talk about what are kind of the puts and takes within that margin? Are you seeing more inflation that's offsetting? Are there more start-up costs? Because the revenue is turning out better? If you can elaborate on that? And then I have one follow-up to that.

Yes. I think the biggest point is inflation. If you go back to the beginning of the year back last November when we put out the guidance of 32% to 37% AOI growth adjusted for AIM. The difference between the midpoint and the lower end is roughly $20 million, $25 million, same to the high end. And so the move really has been driven by what we assumed was going to be a decreasing well into the -- early in the second-half, if not slightly before inflation rate that we would get some relief with consistent pricing then coming through and get a bit of that tailwind in the second-half. It's just stayed longer and more persistent than we thought back at the beginning of the year, and that's been the tweak on the AOI. Conversely, the top line both pricing to counter that has been stronger than we assumed and the net growth as new account wins have continued to remain strong, which is the rise to the top end of the revenue. So it's just a bit of a dynamic in there for the year based on the assumption, primarily of inflation and a little bit of net growth in start-up costs.

Yes. And I would add that we're -- as Tom mentioned in his script, we're very pleased with the level of pricing activity we have going into the second-half of the year that's already approved and contractually agreed to in particular, it will affect the corrections business. As you know, that pricing goes in on anniversary dates of contracts, many of which are July 1st based on federal state and local calendars. And so significant pricing that comes into the system in July that will lead to improvement in that margin profile. And then you have already agreed pricing for the Collegiate Hospitality team that goes into effect in September for the new board plan year. So we're confident that we've got the offset to this rate of inflation that's running a little higher-than-expected, and that will lead us into a strong start for ‘24.

Great. Thank you. And just my second question is I wanted to delve a little bit more on that sale of the part of the ownership of the San Antonio Spurs. It seems like you're getting $100 million for it. Why are you selling part of it instead of all of it? Do you feel like you need to own part of it in order to retain your, kind of, commercial relationship with them? Are you trying to get some upside later on at depreciation and price? And then what do you -- is the money just straight going down to pay down debt? Or is there anything else we should think about?

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

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

Thank you.

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

Thank you.

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

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

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

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

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

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

Yes. I would say it's -- we tend to have about 50% of our business signed in the second-half of the year with a significant component of it coming from higher education and K-12 in the back half. But international tends to have an earlier selling season than domestic, and then they fall off in the third and fourth quarter and domestic has more results in the third and fourth. So it's just -- that's why we report on an annual basis as opposed to quarter-over-quarter, there's just too much variability. And again, we're not in control of the decision time frame.

Understood. Thank you very much.

Our next question comes from Harry Martin with Bernstein. Your line is open.

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

We are -- didn't quite follow on the second-half of that question, but we are getting the ramp, as I mentioned a couple of times in my script. The maturity of the contracts won again starting in the back half of fiscal ‘21 and through last year. Some of those, like Merlin take a couple two, three years to, sort of, fully become efficient, others much shorter time frame. So we are seeing that underneath that's helping drive year-to-date, 70 basis points, helping drive 70 basis points of margin improvement. And then we continue to expect that into the ‘24 and ‘25 as the contracts that we've put in place so far continue their ramp.

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

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

Great. Thank you.

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

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

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

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

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

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

Okay, thank you. Thanks, John. Thanks, Tom.

Thank you.

Our next question comes from Faiza Alwy with Deutsche Bank. Your line is open.

Hey, thank you. Good morning. So I wanted to follow-up on pricing, I know you touched on this, and it sounds like that's the area where whether it's been more of a pleasant surprise relative to the last three to six months. So I'm curious, is it -- I know you mentioned correction, is that the area where you had the most positive surprise? Or are there other areas across the business where you've been more successful as it relates to pricing?

We've been successful across all the businesses with respect to pricing activity and recovery. And when I was referencing corrections was really talking about the lag in pricing in the corrections environment. And with that pricing comes in big chunks at contract anniversary dates. But that overall 6% pricing impact that we were able to achieve through this first -- in the second quarter was broad based across the enterprise, both domestically and internationally. So all the businesses are focused on it. It's part and parcel to the way we operate the business. And we've created significant discipline to make sure that our front-line managers are able to raise price or to recover cost and we give them very detailed inflation data, very detailed supply chain data that supports the decision-making process and the negotiation process with the customer as they request pricing increases and/or service changes to mitigate cost. So it's been very broad based.

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

Yes, I don't know if it's a confidence as much as it is just uncertainty about what's going forward. I mean, at this point, biggest uncertainty would be inflation. But I think as John just referenced, we've really built in over the past year and maybe a little laid off the block a year, 1.5 years ago, reacting to pricing or the need for pricing and inflation. But I think that that's become part of what we do. Confidence has been instilled with our operators and with information and whatnot. So I think that's not a lack of confidence or we're uncertain, but we just don't -- what's going to happen, and we're just going to either have to keep after it or will it -- and it will become -- continue to be a persistent issue. Or is it going to become a tailwind? I mean that's where we are there. Otherwise, we feel very strong -- or very good about it. The pipeline and the net growth trajectory, the outsourcing trend, as we've said many times, the blip we've seen post-COVID, long may it live, but if it settles back down, we structurally change the culture, and we believe we continue on the path. So we don't see a lot that we can't handle at this point as we move into ‘24 and beyond. It's just having to react to the environment.

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

Andrew, your line is open. You can ask your question.

Oh, great. Thanks. So I was wanting to ask, I guess, on interest expense given that rates are -- have been moving up from the Fed. And you've got some of these capital transactions, including the already closed AIM transaction, as well as the forthcoming Spurs sale. So Tom, maybe could you just help us level set maybe first, kind of, comment on what you're thinking for the timing for the proceeds the Spurs sale? And frankly, if you could just help us on the interest expense line here for the second-half of the year given all the moving pieces, I think that would be helpful just to help us establish not just for these two quarters, but maybe even kind of established a run rate on a go-forward basis.

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

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

I think, it's a little bit better across the board. So I think a little bit better, as we mentioned, on pricing as we've stayed -- had to stay up with the persistent inflation and expect to for the balance of the year. The net growth, we continue to stay in the range, but it continues to be strong on a historical basis. And then the return to work continues to be equal to or maybe even slightly better than we might have anticipated at the beginning of the year. But the pricing is certainly a strong driver of those three, but the other two are equal to or maybe slightly better than we thought as well.

Our next question comes from Stephanie Moore with Jefferies. Your line is open.

Hi, good morning. Thank you.

Good morning.

Maybe -- and I don't mean to beat a dead horse here and I'm going to ask another question on pricing, but only I kind of want to round out maybe a lot of the answers that have kind of come out through this Q&A. As we think about the opportunity really in fiscal ‘24. So as we look ahead to your fiscal ‘24, could you provide a bit of color on maybe as you look at the first-half of ‘24, what will be locked in from a pricing standpoint based on really what was negotiated in fiscal ‘23? Just with the idea that I think there could be a pretty meaningful price cost lag if inflation continues to moderate. So just trying to get a sense of what percentage of your business will be still based on maybe pricing levels of 2023. Thanks.

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

Yes. And I would just add that we have -- as we talked about, we have negotiated pricing that goes into effect in the back half of the year for a couple of the key businesses that will carry over, obviously, throughout the year next year. I would say it's -- as we talked about, pricing basically contributing about 6% right now, if the inflationary environment remains consistent year-over-year, I would expect to probably see similar pricing on a year-over-year basis with maybe a little bit higher pricing in a couple of the other businesses that had that time lag. But then on average, they should be at similar rates. So we're going to -- we'll respond from a pricing perspective to the macro environment. And if we see significant deflation, we'll continue to press for price and in order to recover the other costs that we've incurred from a labor perspective, as we see continued strength in the labor market and continued need for pricing to recover those costs. So it's hard to say exactly what the percentage will be, but we think we have the ability to go ahead and execute against what we need to go ahead and manage the business.

Thank you. Our last question comes from David Paige with RBC. Your line is open.

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

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

And at 4.5% relates to net new, not the gross new business wins, the gross new business wins running significantly higher than that as a percentage of revenue. So it's really the 4.5% to -- I think I said specifically 4.5% or higher in terms of net new business contribution based on last year's revenues.

Thanks.

Thank you. I will now turn the call back over to Mr.

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