ARMK - NYSE

Good morning. And welcome to Aramark's Second Quarter Fiscal 2025 Earnings Results Conference Call. My name is Kevin, and I'll be your operator for today's call. At this time, I'd 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 after conclusion of the company’s remarks. I will now turn the call over to Felise Kissell, Senior Vice President, Investor Relations and Corporate Development. Ms. Kissell, please proceed.

Thank you. And welcome to Aramark's earnings conference call and webcast. This morning, we will be hearing from our CEO, John

Thanks, Felise. And thanks to all of you for joining us today. Before we begin, I want to acknowledge the deep pain all of us at Aramark are feeling from the unimaginable loss of our beloved colleague and friend who we lost during the mass shooting at Florida State University. Tiru Chabba, Regional Vice President in the Southeast has been a part of the Aramark family for over 25 years. Our thoughts are with Tiru's family and we are supporting them wherever we can. This morning, Jim and I will be reviewing our second quarter results, along with our performance, expectations for the remainder of the year. We continue to see significant growth opportunities in the business and remain confident in our ability to achieve our financial objectives for fiscal '25 and beyond. We are currently experiencing very positive trends across the company as we enter the second half of the fiscal year, including, first, a strong retention rate, a strong client retention rate above 98% in both FSS US and international, a level we don't typically see at this point in our fiscal calendar. Second, monthly acceleration of revenue growth as the second quarter progressed, which continued into April with revenue growth of 6%. And lastly, new client wins already totaling $760 million this fiscal year-to-date with significant new business immediately ahead, providing us clear visibility to achieving net new of 4% to 5% and in fiscal '25. Like others, we are managing the fluctuations in the marketplace, both on Wall Street and Main Street. Given the breadth and depth of our portfolio, Aramark has a proven track record in benefiting from a highly resilient business model, particularly during periods of uncertainty, we expect to be well positioned no matter the macro environment. The robust capabilities we've built are rooted in the power of our people, the strength of our supply chain and a growth minded hospitality culture focused on providing exceptional service for our clients. Turning to the second quarter specifically. Aramark's organic revenue grew to $4.3 billion, representing an increase of 3%, a strong outcome considering the exit of some facilities accounts last year and the calendar shift in education we discussed previously as well as certain temporary weather related client site closures that occurred in the Southeast portion of the United States during the quarter. Without these factors, revenue would have grown another 3%. We experienced record AOI profitability for any second quarter in global FSS history and once again delivered over 20% adjusted EPS growth on a constant currency basis from the consistent execution of our strategies. Moving to the business segments. In FSS US, organic revenue increased to $3.1 billion or roughly 1% in the second quarter affected approximately 3% by the factors I just mentioned. Operational performance was driven by new business and higher participation rates in workplace experience, increased micro market and vending services and refreshments and additional new business wins and corrections. Most recently, we kicked off the season in Major League Baseball, the largest component of our sports business with our client portfolio poised to have strong team performance. Our per capita rates on opening day increased nearly 15% compared to the prior year and we are seeing the trend of higher per capita spending continue. The new sales pipeline remains robust in each of our sectors, particularly in first time outsourcing. Recent new wins include the Philadelphia Union, our first entry into Major League Soccer here in the United States, the University of Nebraska athletic venue is growing our presence in the Big Ten and throughout the NCAA, Loyola Marymount University where almost every student participates in our meal plan, Rutgers University in Canada and the Okaloosa School District in Florida, to name only a few. As I mentioned previously, we expect revenue growth in the US to continue accelerating over the next two quarters from strong new business, high retention rates and increased volume growth as well as having the facilities exits behind us. The top line revenue growth drivers include an increase in base business volume within education, especially in collegiate hospitality from continued meal plan optimization as well as more operating days at multiple universities within the portfolio. The new business ramp-up in the sports, leisure and correction sector continued momentum in business and industry, particularly with increasingly prevalent returning to office practices and strong base business performance in healthcare from vertical sales and expansion of core operations with new growth in senior living. We are focused and well on our way to capitalizing on those opportunities. International had another quarter of outstanding performance with organic revenue reaching $1.3 billion, an increase of 10% year-over-year. Virtually all countries reported revenue growth in the quarter with the UK, Spain, Chile and Canada leading the way. We are seeing incredible benefit from our ongoing strategy to provide clients with a superior overall experience, utilizing our in-country expertise, employee talent and product offerings. Similar to the United States, we continued our strong success in sports by adding the Sussex County Cricket Club and Wimbledon Football Club in the UK and gaining Hanwha Eagle Stadium in Korea. We also won the Generali Stadium in Vienna, which is home to the successful Austrian Football Club FK Austria. And we are very excited about the upcoming season at Everton Football Club's new stadium in Liverpool. Additional new business ordered in the second quarter within international included the Codelco Salvador mine in Chile, the iconic [indiscernible] as well as numerous other new client wins across the entire portfolio. Along with the Board, I was just with our German team and had the opportunity to see our operations driving firsthand and to visit key clients, including the European Central Bank and Airbus Industries. We saw an excellent example of innovation with our partnership at SAP where we launched our S.Mart Store, a checkout free shopping experience that demonstrates how seamless real-time technology integration can work to bring customer experience to the next level, capabilities included advanced RFID for inventory, computer vision AI for consumer engagement and product testing and generative intelligence tools to drive smart decision-making. This pioneering solution is a living innovation lab and highlights what can be achieved in technology and hospitality joint forces. Turning to global supply chain. Our focus remains on growing, leveraging and optimizing our spend while providing quality products, services, economics, analytical insights and sourcing solutions to clients. Performance continued to be strong with the team using our AI-driven technology to create further purchasing compliance and contract productivity. We continue to actively grow our global GPO footprint and are pursuing several international geographies for further expansion. Organic revenue growth remained strong across all of our GPO channels through a combination of both new and base business. Our recent acquisition of Quantum is integrating well and we're pleased to have the talent capabilities of the Quantum team as part of Avendra International. We expect to capitalize on material procurement synergies and drive significant growth as a result of the acquisition. Recent US tariff activity has introduced a broader level of uncertainty in the market related pricing levels and inflation expectations in general. We believe that our business model is well insulated from this volatility. The vast majority of our food products are sourced locally in the respective countries, including the US where we operate. With the removal of Mexico and Canada from the tariffs list, at least for the items we buy, we just have single digit levels of purchasing from tariff countries, mostly in textiles, disposables, amenities and equipment, primarily as part of the GPO. We're working closely with clients to adopt alternative solutions for their needs and leveraging our extensive and adaptable supply chain. Regarding capital allocation, our ongoing ability to generate strong cash flow provides us flexibility to invest in the business to propel growth while executing other shareholder return strategies, including dividends and share repurchases. As part of this focus, we repurchased nearly 4 million shares or about $140 million since we initiated the program back in November. Our leverage is still expected to be around 3 times by the end of the fiscal year. We also recently enhanced our financial flexibility given further by extending certain debt maturities out to 2030 and beyond. Before handing the call over to Jim, I want to reiterate our high confidence in realizing the numerous growth opportunities that lie ahead for the business, driven by our extensive strategic and operational capability and we believe we're well on our way toward achieving them. Jim?

Thanks, John. And good morning, everyone. Our second quarter results continue to reflect progress in achieving our strategic and financial goals, including delivering another quarter of profitable growth and double digit increases in both AOI and adjusted EPS on a constant currency basis. We also advanced our capital allocation priorities even further by extending debt maturities and returning capital to shareholders through share repurchases. As John mentioned, we are very encouraged by the growth opportunities and positive trends we are seeing for the second half of the fiscal year and we remain unwavering in our commitment to drive both top and bottom line performance and create substantial value for our shareholders. Regarding second quarter profit growth, operating income was $174 million, up 9.5% versus the prior year. Adjusted operating income was $205 million, up 11% on a constant currency basis compared to the same period last year. AOI margin of 4.8% increased 33 basis points year-over-year. The strong profit growth and margin expansion was driven by consistent execution of our operating levers, including supply chain efficiencies, disciplined operational cost management and higher revenue levels. Turning to the business segments. The US reported AOI growth of 5% with an AOI margin improvement of 30 basis points compared to the same period last year. Growth was driven by higher base business and supply chain efficiencies, including leveraging AI driven technology for purchasing compliant contract productivity, which more than offset lower profit and fewer operating days due to the calendar shift in the education sector. We continue to see AI as a key driver of our innovative solutions and data driven insights, which continued to propel our financial performance. One example of AI in action is its ability to notify our front line managers with proactive product recommendations, ensuring purchases are made at optimal prices and specifications. The International segment had year-over-year AOI growth of 26% and more than 60 basis points of margin improvement, both on a constant currency basis. AOI growth was led by higher base business volume, new business majority, cost discipline and strengthen supply chain economics. Turning to the remainder of the income statement. Interest expense benefited from lower revolver borrowings in the quarter. The adjusted tax rate was approximately 26%. Our quarterly performance resulted in GAAP EPS of $0.23 and adjusted EPS of $0.34, an increase of 22% versus the prior year on a constant currency basis. With respect to cash flow, the company generated a cash inflow in the quarter, consistent with our normal seasonal business cadence. Net cash provided by operating activities in the second quarter was $256 million and free cash flow was $141 million. Our year-to-date free cash flow was stronger by $64 million compared to the prior year period from higher earnings and favorable working capital, which more than offset higher capital expenditures from new business. As John mentioned, we also continue to repurchase shares under our $500 million share repurchase program. In addition, as previewed on the last earnings call, we further enhanced our financial flexibility by extending debt maturities. We repaid our $552 million 2025 US senior notes and refinanced nearly $840 million of 2027 term loans with a new term loan that matures in 2030. Additionally, we issued a new euro senior note that matures in 2033, which subsequent to quarter end was used to repay our EUR325 million senior notes due in 2025. These actions are net leverage neutral and at comparable interest rates. We are very pleased with the outcome of these deals and proud that our new European senior notes secured the lowest interest rate for a high yield US issue of Eurobond in almost four years, reflecting our strong financial profile and strategic execution. We will continue to proactively enhance our capital structure, focusing on shareholder value creation. At quarter end, the company had over $1.6 billion in cash availability. And finally, let me wrap up with our performance expectations for the second half of fiscal '25. We are seeing very positive upward trends in the business, including accelerated revenue growth throughout the second quarter and in April, significant new client wins, record level retention rates and a substantial sales pipeline. We anticipate revenue growth to notably accelerate in the third quarter, driven by higher base business volume and net new business expansion as we begin to lap the facilities exits from last year. We expect this momentum to more meaningfully continue into the fourth quarter and position us with a strong exit rate as we enter fiscal '26. Additionally, we continue to achieve AOI growth and margin expansion from our profit drivers and we expect this to persist due to our strong supply chain efficiencies, effective cost discipline and higher revenue levels. As John mentioned, we are monitoring the broader macroeconomic trends including the latest on tariffs. And given our extensive capabilities and diversified portfolio, we expect to effectively manage to achieve our financial objectives. With that, we remain very confident regarding the full year and are maintaining our previously stated financial performance outlook for fiscal '25. In summary, we are committed to driving excellence and achieving exceptional outcomes. This gives us great confidence as we head into the second half of fiscal '25, anticipating continued success and remarkable results. Thank you for your time this morning. John?

Thanks, Jim. It goes without saying that we're monitoring the current economic environment very closely. We will continue to manage the portfolio for significant value creation through organic revenue growth, margin progression and the strengthened balance sheet. Our new business pipeline is extremely strong and we're highly motivated to win. I'm immensely grateful for our teams across the globe who are the driving force behind our success. And operator, we'll now open the line for questions.

[Operator Instructions] Our first question comes from Ian

Jim, I wanted to maybe hold you a little bit -- some of your comments about the exit rate for entering 2026, and I'll hold you a little bit to this, because I look at these numbers kind of second half was really strong, 98% retention rate. I mean, do you think there's potential to be above kind of where you are, like maybe above 5% or something along those lines for net new? How do we kind of think about that and what would be the upside just given how the business is performing right now?

As we talked about, we saw revenue accelerate throughout the course of the second quarter. The April print was 6%, right? So that's sort of takes into account some of the effects John mentioned earlier and the factors that have affected said quarter. And that's pre the facilities lapping, which had another 2% impact on the business. So we talked about our multiyear range in the 5% to 8% growth as we talked about our multiyear growth targets. And I think as we look toward the exit rate, we'll certainly be north of that or expected to be north of that in the fourth quarter.

And I guess as a follow-up, how do we basically think about Avendra here the GPO in, call it, a higher inflationary environment. Is it, it can actually benefit from inflation, are you able to pass that through? How do we think about that? And then maybe just a little bit more color on what you saw in the quarter. I guess it didn't seem like you saw any type of slowdown or any type of hesitancy from the customer perspective. Just given [indiscernible] the results are or maybe I'm misreading that.

So with respect to Avendra, certainly, we see Avendra has a very strong capability of managing through supply chain disruptions and is managing very effectively. We see inflation at this point of being relatively benign, around 2.9% in the US, a little slightly higher internationally. We're able to price to recover those inflationary cost increases. With respect to the GPO, we're consistently negotiating new and better deals all the time to try to optimize for our clients and our customers. And that's one of the reasons we're so focused on both growth of that spend as well as the extension of our capabilities there. So we see Avendra is playing a critical role, not only for our GPO customers but also helping us to leverage that supply chain to continue to have earnings improvement and margin progression for the core company. With respect to the quarter, we are seeing strong consumer behavior. We have not witnessed or it has not been in evidence with respect to slowing of the consumer with respect to our sports business, per capita spending continues to be strong. And where we have weakness in attendance, it's generally related to team performance as opposed to consumer behavior. So I would say, in general, we're seeing consistent execution and strong spending across the enterprise. To add a little more color to the quarter, as we've talked about, we've seen acceleration throughout the second quarter, January was essentially flat, primarily driven again by those weather related events in the Southeast. We lost over 750 service days in the K-12 sector as a result of school closures, which historically, we would have recovered. But because now people go to virtual learning, those days are lost. So that had an impact during the quarter. February's revenues were up almost 4%. March was up almost 5%. And as Jim said, April is up 6%. So we see that progression in growth rates coming through as we expected and we expect that to continue as we anniversary the exits as well and see the acceleration of both net new and retention impacting our exit rate for the full year.

Next question comes from Toni Kaplan with Morgan Stanley.

I think I sort of know where this is going. But when you sort of think about the acceleration you saw into the quarter and the second half needing to be at double digit. It sounds like you have a lot of momentum there and I understand the acceleration that you've seen. Maybe just go through specifically the operating metrics that need to continue to accelerate, maybe which verticals in particular also you're expecting to accelerate in that second half of the year? I know you talked about the 4% to 5% net new, but -- and the strong retention. But maybe just a little bit more color because it sounds like you're very confident in the ability to achieve that as well as the trends are sort of going in the right direction. So just any additional color would be great.

Jim, do you want to start with that?

So Toni, I think the run rate that we have, as I mentioned, if you think about April at 6% or so, so we've seen the acceleration in the base business in higher education. We've seen continued good performance with new business in corrections and our B&I business as well. We're beginning to lap that facilities impact really towards the end of the third quarter. So that sort of 2% will be sort of incremental growth into the fourth quarter. So the new business that we've won and secured is factored in to the growth rates we've discussed. So it's not like we're relying on securing new business that already isn't won at this point. So we have very good visibility into the outlook for the remainder of the year at this point.

And I would add, additionally, the -- as you know, significant portions of our business are priced in the fourth quarter. So corrections, K-12 and pricing occurs in the higher education segment for the new board plan rates for the following year, which begin to impact the business in August and September. So adding those pricing layers onto the growth layers that we've talked about, the retention rate, the existing new business coming online and opening, we're very confident in the trajectory for the balance of the year and the exit rate going forward.

And I wanted to ask about the education business, maybe any color on what you're seeing there. And just I know you have sort of a different mix with regard to geography and that has helped you. So maybe just are you continuing to see like the stronger enrollment trends within your schools because of that education, the geographic exposure and what you're seeing there in terms of when you're going into those pricing season? I know it's not for a few months, but just anything there.

No, we continue to see very strong enrollment rates in the universities that we serve and in our portfolio of business, which is heavily weighted towards the southern part of the United States, highly desirable schools with really long term strong growth rates in terms of student applications and with relatively low acceptance rate. So in my discussions with university presidents as we travel the country, we don't have a concern about overall enrollment cliffs or any of those kinds of impacts affecting our particular portfolio of business. And the accounts that we're focused on selling the accounts that we're focused on operating continue to have very strong performance indicators. So we're very comfortable overall with our education sector and in particular, higher education where we have had terrific results, both from a retention perspective as well as strong new sales results this year.

Our next question comes from Andrew Steinerman with JP Morgan.

Looking at Slide 5 on organic revenue growth. Jim, could you just mention how much revenues came from tuck-in acquisitions in the second quarter? And then looking on the right hand side of that same Slide 5, when you list the three factors affecting organic revenue growth by 3%, I think the client exits was 2% or at least it was last quarter. If you could confirm that for this quarter. So how much does that leave in terms of the revenue effect for the calendar shift and universities as it pertains to the second quarter?

I'll start on the -- with respect to the acquisitions, Andrew. So the largest deal we've done in terms of consideration is Quantum. And as you know, those deals have very little revenues associated with it, right? So the revenue impact from that is really de minimis. And the second largest M&A we've done is first class spending, which, again, aligned with our strategy to continue to do bolt-on deals and refreshment services, that deal was done, I think, at the end of February, so contributed really very little in terms of the quarter financials. So in terms of the breakout of the revenues, yes, about 2% or so coming from facilities and about 1% coming from the calendar shift and the weather impact of a total of [3].

Our next question comes from Lizzie Dove from Goldman Sachs.

This is Ryan Davis on for Lizzie. Obviously, consumer health and the macro choppiness is on everyone's mind right now, and you serve a wide range of clients. Are you seeing any shifts in consumer behavior or preferences across the segments? Any changes you can call out would be super helpful.

I certainly understand why people have those questions. I would say at this point, we are not seeing any real change in consumer behavior particularly in the customers and the portfolio of business that we operate. It's -- we serve people where they work, where they get medical care where they get their education. These are all facilities where people are continuing to frequent and continuing to eat. We do not see any significant change currently in our sports and entertainment business, we have strong for capital spending, strong attendance in the venues that we operate, we're blessed to have very strong team partnerships. And so we're not seeing a change in consumer behavior there. And in our National Parks business, we continue to see strong bookings for rooms and the like. So really no fundamental change to our portfolio, that's one of the reasons we believe our business is particularly recession resilient and particularly resistant to resilient in times of economic stress and uncertainty. So we feel very good about the portfolio we manage. We're not seeing any evidence of shifts in consumer behavior at this point.

And just one quick follow-up. Given the recent volatility and impacts from potential tariffs, have relationships with suppliers or the terms of contracts evolved at all in recent months?

No, we always -- we're always negotiating and renegotiating deals throughout and in particular, the kinds of areas where we have tariff implications are typically related to, as I said, to disposables, linens, towels, equipment and the like. We do have alternative sources of supply so we can move the purchases of those items to other non-tariff countries if necessary and our contracts are generally longer term. So we have the opportunity to manage within the contract framework to offset any potential tariff impact up to and including the opportunity basically to say no, that we don't accept that particular price increase and to negotiate through those terms. So I would say we see the tariff impact as being de minimis in terms of our overall operating performance. And we have not seen significant impact in terms of the overall inflation environment as a result of tariffs at least to this point.

Our next question comes from Leo Carrington with Citi.

Can I ask in terms of the Avendra contribution to revenue growth, you called out the net new and base business effects, but nothing on the margin impacts. Can you -- given the investments and success with the GPO just outlined the profit all three that we might expect going forward and in the quarter for that matter?

So we don't break out the profit for Avendra separately. We've talked about it being obviously a very attractive margins, margins north of 55%, 60% in that business. We don't quantify the exact amount but it certainly has contributed to Aramark's overall objectives to increase spend, which is over $20 billion. That size and scale is a big contributor to the overall margin improvement we are seeing in the business. So when I look at the 30 basis points of margin improvement for the quarter, a significant portion of that margin improvement is derived from supply chain efficiencies and economics, which again, with the backbone to that being Avendra.

And Leo, I hope you can appreciate it, we don't disclose these numbers for competitive reasons. Obviously, our two largest competitors have their own GPOs. We prefer not to give them a road map for competing. And so that's why we tend to be somewhat guarded with respect to the specifics related to our margins and our overall profitability from that segment. But as Jim said, a very strong contributor to the overall margin progression of the company going forward and we've identified that over the last several years.

And then just as a follow-up, just tying together some of the details of the one-offs in revenue dynamics in Q2 for USA. Q3 is going to be a broadly clean quarter. Where do you expect the organic growth to be landing Q3, Q4, excluding the working days effect?

Again, we're not going to give a specific quarterly number. John gave you a number for April at 6%, which is where we are for the month. In terms of the second half, again, we expect double digit revenue growth. I talked about Q4 exiting at a very strong rate as talked about being north of the multiyear range of 5% to 8%. And that's -- by the way, that excludes the 53rd week. So I think that's the guidance I can provide in terms of how you might think about the quarterly cadence.

Next question comes from Neil Tyler with Redburn Atlantic.

Just want to ask a couple of questions about retention and new business, please. The 98%, obviously, you mentioned that's well above the level you'd expect to see. But is there typically seasonality in the retention, i.e., is it directly comparable with the full year -- full year percentages that you've disclosed previously? And would you categorize this year as a fairly sort of normal rebid year? That's the first question, please. And then the second, coming back to the topic of, I guess, of sort of consumer confidence and recession. Have the conversations with customers or potential customers changed at all? I guess, what I'm trying to get at is do you see an opportunity arising from, I suppose, operational friction taking place at potential first time outsourcing locations or is it too early to really be able to pick up and any sense there?

I'll take the last part of the question first. I would say that, yes, this market volatility and uncertainty always has a positive impact on our ability to convince first time outsourcers to move forward with their decisions, which many times is a philosophical organizational decision rather than an economic one, but periods of uncertainty always accelerate the process. And we are seeing a continued trend towards first time outsourcing that has been going on for the last several years. This could provide some accelerant to that process under certain circumstances. But I would say that our pipeline is very robust and it includes a significant amount of first time outsourcing, whether that decision is being driven by economics or whether it's just a change in leadership is tough to sometimes gauge, but we see it as a potential tailwind and we're likely to benefit from that. With respect to the client retention numbers, client retention starts at 100% and works its way down throughout the year. And so we are -- and we typically don't disclose retention numbers in the middle of the year because there is a little bit of volatility associated with it based on seasonality and the like. I would say we're very pleased to be running above 98% at this point in our calendar year, our fiscal calendar. Normally, we would probably be in the 96%, 97% rate around now. So we see this continued higher levels of retention as being the result of a couple of things. First of all, we have been working very aggressively to proactively retain our customers working through proactive extensions, all of our business units do that. We've had great rebid results on key accounts that we did have go out to bid this year, particularly Arizona state where not only did we retain the business but we also added significantly to the business with their athletic revenues in their staff dining facilities. And then there is -- I would say that there is a kind of a normal level of rebid activity throughout the industry. I don't see it as being significantly different from any other year. We might have a few less K-12 accounts out for bid this year than maybe one of our competitors does. But in general, I would say it's pretty normalized year from a rebid perspective. Jim, I don't know if you have anything you want to add to that?

The only thing I'd add is you sort of asked about the sort of the first half versus second half in terms of Aramark's portfolio. We had actually more out to bid in the first half with some larger plays that we've already retained, as John talked about. So I think that positions us very well for -- in terms of the full year outlook on retention.

Our next question comes from Jasper Bibb with Truist Securities.

I wanted to ask about the healthcare business. Just curious around your discussions with possible customers given some of the headlines around potential subsidy changes and maybe they would be facing some pressure on operating margins as a result?

Yes, I would say that, that characterizes the healthcare industry constantly. I mean the industry has been very challenged for a number of years with respect to cost management, cost containment, consolidation, mergers and acquisitions, systems buying systems and looking for opportunity to save. So yes, it's constant in that segment of the industry. We're well positioned to help our customers achieve their objectives. We've got very strong partnerships. And yes, we're always looking for opportunities to help reduce their overall costs. Sometimes we do that by adding additional services to the ones that we currently operate by extending beyond the walls of food service and into the facility space, patient transport, patient parking, all kinds of opportunities to provide ancillary services where we can manage them more effectively than the hospital can using their own employees. So it's one of the things that we see as a continued opportunity in the space, still a lot of self-op conversion opportunity there. And we think market consolidation ultimately provides tailwind even though there might be short term profitability pressures in the individual systems, it provides long term tailwind to the growth of the organization and we're well positioned to capitalize on that.

And then on the outsourcing trend, I think you used to say, call it, 50% of net new was first time outsourcing a year or two ago versus a third or 35% pre-COVID. Where is that first time outsourcing as a share of net new today and I guess, where are you seeing the most opportunity across your verticals to drive first time outsourcing sales?

I would say it's still elevated. It's above the historical norm of 30% to 35%, I would say mid-40s today and still elevated. And the verticals that still represent significant self-op conversion opportunity are, again, healthcare, higher education, K-12 significant opportunities there, significant opportunities in the corrections business and vertical as well. So yes, there is plenty of conversion opportunity across a range of verticals and across geographies. So we have consistent growth opportunities for the whole organization that can come from self-op conversion.

Our next question comes from Karl Green with RBC Capital Markets.

Just a question on CapEx. If I can ask for your latest thoughts on how that's likely to progress over the next 12 to 18 months. Obviously, talking to some CapEx spending leads net new business ramp-ups generally. So just in terms of the shape of that and how you'd expect that to flow through to free cash flow over the next 12 to 18 months? That's my first question.

So I think it's about 3.7% of sales for the quarter or year-to-date, that's weighted a little bit higher due to some new business weighted towards sports and higher education. For the full year, we would still anticipate capital expenditures being about 3% of revenue. And if you look back over five, 10, 15 years, it's actually very consistent in our industry and again, sort of up -- is the foundation sort of this resilient predictable cash flow model that we have. So a little bit skewed higher in the first half of the year but for the full year, we still expect to be at about 3%.

And then a quick follow-up, if I can. Just in terms of the comments about the 15% increase in per cap in sports and entertainment. Could you possibly just unpack that a little bit between the pricing and then the fact that you're delivering better services, better efficiency, ease to serve, et cetera, just in terms of how we should be thinking about the sustainability of such strong increases going forward?

Jim, do you want to go ahead and take that?

I think that was opening days, that's obviously a point in time. It's open to a strong start to the baseball season. But I think roughly, we think about that in terms of your portion coming from price and then the remainder coming from additional efficiencies. We work very hard to put in technologies, sort of cashless experiences to bring more folks through the line. So I think roughly probably about a third price and about two thirds of that is sort of additional flow through in terms of the participation in transactions.

Next question comes from Jaafar Mestari with BNP Paribas Exane.

Just two questions, please. On the outlook, I'm not sure I'm reading this correctly, but you've inserted the statements on the guidance being based on trends currently occurring in the business, and I appreciate there's lots of noise on some of your verticals. So first question on risk and your approach to them. What are some of the things that sounds the most credible when you hear some of the noise on university funding cuts on potential cuts to mitigate and what that does to the healthcare vertical at this stage are you concerns, are you doing some sensitivities? Are you dismissive because so far a number of your clients are directly impacted? And I guess, just to be fair, second question on the opportunities. Have you already started to see any chatter from clients on expanding domestic production shifts or industrial clients opening new sites, anything to keep an eye on the upside?

I would say -- I'll answer the second part of the question first. I would say it's very early in the expansion cycle, if you will, in terms of increasing production in the US. Although, I would say that we operate significantly in the heavy industrial space in our B&I sector and serve many of the customers that are talking about expanding their production capacity. So we see that as an opportunity in both some of our existing facilities as well as in our existing relationships whether it'd be in the automotive sector or the manufacturing sector. So we see it as a long term opportunity if, in fact, there is increased production and increased investments in manufacturing in the US, we're well positioned to take advantage of that. And with respect to the healthcare budgets and cost cutting and the like, again, we're providing services to the institutions. They're mostly impacted as a result of lower reimbursement rates and the like and so they're constantly looking for ways to go ahead and reduce our overall cost. But at some point, the costs are what the costs are. You can't buy the product for zero. So there is a recognition that at some point, there's really no opportunity to reduce further in the core concept. So you're looking for ways to go ahead and build beyond that and look for ways to provide services that we can do at a reduced expense to those systems, partners that we operate. And many of our largest partnerships in the healthcare systems have more than 50% of their revenues derived from providing alternative services to those institutions. And we'll continue to look to build both that capability as well as to add those additional services. So it is -- it's a difficult environment from a cost management perspective but it's been that way for many, many years. It's no different now than it was five years ago. It's getting more attention because of the budgetary constraints and the like but it's -- this process has existed in the healthcare industry for quite some time.

And in terms of the new business signings, I appreciate you may not have debt on a weekly basis, but H1 looks good and you seem comfortable. Any slowness recently, any wait and see attitude from any of your clients, anything you thought you would find in this half that's being delayed because of the uncertainty in any way?

No, I would say the selling process the close rate process all seems very consistent with historical norms. And the level of rebid activity is normalized the level of opportunity. The pipeline opportunity, very robust and very strong. And we're highly confident based on what we have in the pipeline and where they are in the sales process throughout the calendar of achieving our overall objectives, so that 4% to 5% net new for the total year.

Our next question comes from Andrew Wittmann with Baird.

I guess I wanted to kind of ask the same question a little bit different way at the risk of beating the dead horse here. But it sounds like for you guys to deliver the revenue plan here, it sounds like the net new is baked and the biggest variable at this point is the level of base business. Is that a fair characterization?

Yes, I would say that, that's consistent. Andrew, I think we are confident in both the retention and the net new and as being the key drivers of the second half performance. And we also see base business expansion as part of that acceleration as well as we talked a little bit earlier about the higher rates of participation and menu optimization or board plan optimization and higher ed, improved work through and workplace experience in other businesses and continued growth in some of the other verticals. So I think that's very consistent.

And then just for my follow-up, I just thought I would ask a little bit more on the international business since we haven't talked about that as much on this conference call so far. And obviously, the top line growth in international has been quite good for some time. And I just -- as you look over the next few quarters, like when is that or is that -- does that become a tough comp? I guess, I would say, just given the year-over-year growth that you've put up now for a while, so just like to hear your perspective on what that segment's growth rate could be? And just quick kind of side comment maybe for Jim is, I was surprised to see that the FX impact on your revenue outlook was unchanged since last quarter, given that the dollar index at least is down pretty substantially. And I was wondering which currencies or maybe the offset to that view, if any? So those are my two follow-ups.

I can start with the -- just in terms of international, as you said, Andrew, really strong double digit growth, consistent for many, many quarters at this point. And again, it's really been the growth engine for the organization. The net new has consistently been strong, not only for quarters but for many years, right? So that gives us the confidence in sort of continuing to maintain that double digit growth and actually some acceleration from where we were in Q2 towards the -- into Q4. So strong base business. The countries we operate in have a lot of attractive attributes, leadership team, doing a fantastic job in driving that growth and really driving this growth oriented model and you see it coming through on the margins as well. In terms of FX, I think we're about $112 million or so headwinds year-to-date. Where we are for the month, you're right, it was a bit more neutral as the dollar weakened over the last month or so. So that trend continues, you're right, we would be less than $200 million. But given the environment and the sort of one tweet away from FX going the other way, we sort of just held it steady.

Next question comes from Stephanie Moore with Jefferies.

I wanted to touch on -- I guess, it's a two part question. But if you could talk a little bit about expectations for pricing to continue to run ahead of inflationary costs and above historical levels? And then maybe kind of taking a step further, as you think about the opportunities for incremental margin expansion, so where are the largest areas or drivers for that incremental margin expansion as we look out in the next 12 to 18 months?

So inflation, the expectation was in the 2% to 3% range. US was about 2.5% globally closer to 3%. So we're still operating in that range and obviously monitoring the situation on tariffs and pricing accordingly with our contractually based contracts into next year. So the long term model is we don't price for profit. We generally want our pricing to be in line with inflation and that's basically what's occurred year-to-date. And as I mentioned, we're certainly factoring in the potential for some incremental inflation in the second half of the year and into fiscal '26 into those discussions should inflation elevate into sort of the 3% to 4% range. In terms of incremental margins, I mean, the good thing is we've been very consistent with the sources of the margin improvement. So supply chain efficiencies and economics continues to be a big contributor of our margin improvement. We expect that to be -- continue to be steady going forward. We've managed our SG&A very effectively. You could see our corporate SG&A costs up only moderately in the quarter, so we were able to take on a lot of additional growth without adding a lot in the way of additional overhead. And again, that's very predictable for the remainder of this year and as we plan for fiscal '26. And then third, the middle of the P&L, I think the team has done a nice job in particularly managing food costs throughout the organization. So that would be the third lever that's been contributing to margin enhancements.

Our next question comes from Josh Chan with UBS.

On inflation, I guess if we were to hit a higher level of inflation later this year or next year. How do you think that, that environment compared with the inflation that we saw a couple of years ago coming out of COVID and how do you think about your organization's ability to kind of process through the higher level of inflation?

I would say I don't believe that we anticipate a significant shift up in inflation. We think that it will trend in these areas, call it, the 2.5% to 3% range. But our people are well positioned that they've built a muscle memory now in the process and systems are in place. We literally look at inflation data every week and we're looking at it highly -- on a highly detailed basis from your basic core commodities to all the various factors impacting our supply chain around the world. So we get very detailed information into the hands of our operators. They can use that information to go ahead and negotiate pricing in their respective businesses and they've really built the capability to do that. So I don't anticipate any significant pricing lag. If there were a spike of inflation at the same time we don't anticipate inflation to run significantly higher than where it is today. Our labor inflation is in the range that we expected, food cost inflation in the range where we expected, and we don't see anything that would really drive it significantly higher at this point in time.

And then a quick follow-up on that 6% April number. Would you consider that number to be clean of weather and timing -- calendar timing type of effects so that we can kind of think of it as a kind of number going forward?

I think it's a clean quarter, a clean month. Again, it's just -- we haven't lapped the facilities impact yet. But other than that, it's a clean month.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Mr.

Terrific. Well, again, thank you very much for your support of the company and your interest. We're very focused on achieving, as we talked about our full year results. I feel very positive about the trajectory of the company and the momentum that exists inside the organization, all committed to doing the right thing for our shareholders are in place and our customers. So again, thank you, and we'll see you next time. Take care.