Aramark

NYSE:ARMK

Earnings Call Analysis

Aramark Expects Strong Growth and Lower Leverage in FY24

Aramark is showing robust financial health with $1.5 billion of debt repaid from proceeds of a spin transaction, resulting in $100 million annual interest savings, and an additional $630 million debt reduction from divesting interests. The company has achieved a more than $2.2 billion year-over-year reduction in net debt, anticipating the lowest leverage since 2017 with a target ratio of approximately 3.5x. Despite moderate seasonal cash outflow, driven by strong business growth and moderate capital expenditures, $1 billion in cash remains available. Facing softening inflation, Aramark boosts its FY24 outlook, expecting organic revenue to grow by 7%-9%, Adjusted Operating Income (AOI) by 17%-20%, and adjusted EPS by 30%-35%. The executive team demonstrates confidence in the ongoing momentum and sustainable performance of the company.

Strategic Debt Reduction and Improved Earnings

The company has made significant financial maneuvers, notably repaying $1.5 billion in debt from the Uniform Services spin transaction proceeds. This repayment is pivotal, as it will save $100 million in interest expenses for fiscal year '24 compared to the previous year. The adjusted tax rate was reported at approximately 26%, contributing to an adjusted earnings per share (EPS) growth of 33% on a constant currency basis compared the prior year.

Optimistic Financial Outlook for Fiscal '24

The updated outlook for fiscal '24 indicates a positive trajectory with organic revenue expected to grow between 7% and 9%. Adjusted operating income (AOI) is anticipated to spike between 17% to 20%, while adjusted EPS growth could surge between 30% to 35%. Aiming for a leverage ratio around 3.5x by the year's end, the company sets targets in line with pre-pandemic levels, underscoring confidence in their financial strategy and operational efficiency.

Performance Drivers and International Growth

Across the board, performance has exceeded expectations, notably with organic revenue excelling, particularly internationally. Margin performance was driven by scale, efficiencies in administrative expenses, and a streamlined supply chain. These internal improvements, coupled with moderating inflation, have provided an additional push to the company's upward trends.

Revenue Trends and Health Care Segment Focus

With solid growth in the first quarter, the company remains cautious about altering the revenue outlook due to potential changes in new business timing and the inflationary landscape. They express confidence in the health care segment despite a temporary downtrend, attributing it to strategic portfolio reoptimization. There's a robust growth outlook for this segment as the fiscal year progresses.

Margin Projections and Inflation Assumptions

Analyzing profit margins, AOI margins are estimated to be in the range of 43 to 47 basis points at the lower end of the revenue scale and could peak closer to 55 to 60 basis points at the higher end. These calculations reflect a steady food inflation rate, consistent with how it played out in the first quarter, indicating the company has adapted to the current inflationary environment without tailoring its business strategy around fluctuations.

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, and welcome to the earmarks First Quarter 2021 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 this conference is being recorded for rebroadcast. We will open the conference call for questions at the conclusion of the company's remarks. I will now turn the call over to Felise Kissell, Senior Vice President, Investor Relations and Corporate Development. Ms. Kissell, please proceed.

[Felise Kissell, executive]

Thank you, and welcome to Aramark's First Quarter Fiscal 2024 Earnings Conference Call and webcast. This morning, we will be hearing from our Chief Executive Officer, John Zillmer; as well as our Chief Financial Officer, Jim Terangelo, who started in this role in January. We at Aramark are excited for Jim's appointment. As a reminder, our notice regarding forward-looking statements is included in our press release this morning, which can be found on our website.

During this call, we will be making comments that are forward-looking. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties and important factors, including those discussed in the Risk Factors, MD&A and other sections of our annual report on Form 10-K and our other SEC filings. Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found in this morning's press release as well as on our website. With that, I'll now turn the call over to John.

[John Zillmer, executive]

Good morning, and thanks for joining us. Before we get started, I first want to acknowledge our team in Chile as they are dealing with devastating wildfires near Santiago. Although our operations are not affected, scores of our employees have been impacted. We're working with our leadership team on the ground to ensure everyone's safety and we'll be coordinating a thorough response with the appropriate relief organizations. Now to the quarter. I am really pleased with our great start to the new fiscal year, generating broad-based revenue and AOI growth with solid margin improvement across the business.

The strong performance resulted in record revenue for both the FSS U.S. and international segments, along with record first quarter profit in International. Our growth focused strategies are working and we're seeing favorable margin trends driven by prior year's new contract maturities, scale efficiencies in our purchasing and tight SG&A cost management and which has been helped by moderating inflation. We're extremely encouraged by what we are seeing in the business, and Jim will be reviewing in greater detail shortly.

We're excited to have Jim as Aramark's newly appointed CFO. As you know, Jim is a 20-year veteran of the company with a proven track record and he's worked closely with Tom over the past 4 years, his depth of knowledge about the company across the board and across borders, having served as CFO for our International segment is a tremendous asset in his new role.

Tom is also joining us today as he continues to serve as a trusted partner and strategic adviser to help ensure a seamless transition over the next few months. Tom leaves a strong legacy that is both broad and deep, focused on accelerating net new business, optimizing supply chain economics, containing above-unit costs and instilling a value-creating mindset throughout the organization.

Our top line momentum continued in the first quarter with year-over-year organic revenue growth of 13%, which was driven by especially strong base business growth, net new business and pricing. A combination of higher sales volume and pricing contributed to the favorable trends that are positively driving the top line. The U.S. segment increased organic revenue 10% compared to the prior year starting with collegiate Hospitality, which experienced strong performance in residential dining, retail and catering as well as improved pricing with the start of the academic year.

We're having early success with our recently launched Eat to Excel Health and Wellness program, which is focused on providing student athletes with a balanced nutrition regimen to support peak competitive performance, personalized to each athlete's training schedule goals and biometrics. The dietary recommendation is fully integrated with our Collegiate hospitality dining program and is easily accessible through a digital app.

Sports and Entertainment demonstrated strong per capita spending and high attendance levels from the NFL and NCAA regular seasons, along with more concert events. Our culinary team had great success partnering with well-known NFL mom, Donna Kelsey during the holidays at Lincoln Financial Field and Arrowhead Stadium adding the famous [indiscernible] mix for their songs in support of the Eagle's Autism Foundation in Kansas City-based operation breakthrough, a win for everyone involved.

I also want to congratulate the Kansas City Chiefs for reaching this weekend's Super Bowl. And workplace experience benefited from the start-up of significant new client wins and strong base business growth, as our services provide a compelling solution for employers with revenue in this business now fully recovered from pre-COVID levels.

International organic revenues increased 21% year-over-year Performance was driven by consistently strong net new business, combined with an active events calendar in Europe, particularly in the U.K. and Germany, continued strength in education in Canada and greater mining activity in Chile. New business wins at this early stage in the fiscal year have been broad-based across the company. This includes adding Tulane University and collated hospitality, expanding our services for the European Central Bank in Germany and more locally being awarded to Philadelphia Zoo, among others.

We believe our new business pipeline is robust, and we continue to see high retention levels across the client portfolio. Now let me turn to global supply chain. Our overall focus continues to be growing and leveraging spend to generate value for the enterprise, while also providing quality products and services to clients and our customers. We've seen inflation moderating over the past quarter.

And while some areas of the globe are slower to show this trend, overall inflation is running better than originally expected, and the first quarter benefited from this tailwind in improved product costs. We believe the current supply chain landscape presents enormous opportunities, and we are actively seeking to take further advantage of this potential, working closely with our manufacturing and distribution partners. Last week, we released our Be Well Do Well progress report, highlighting our commitments on responsible business practices, specifically on people, which includes enabling equity and well-being for millions on the planet, including promoting Planetary Health on our path to net zero and on governance by assuring robust ethics and compliance in everything we do.

We're proud of our efforts in these areas and I encourage you to review this in-depth update. Before turning the call over to Jim, I'd also like to welcome Brian Delgaccio as our newest member of Aramark's Board of Directors following our annual meeting last week. Brian is currently Executive Vice President and Chief Financial Officer of Republic Services, a company I know well from my time at Allied Waste.

Brian's extensive executive experiences will provide valued perspectives, particularly in strategic planning and M&A. I want to also thank Art Winkleblack for his immense contributions to our Board. Art announced the retirement and did not stand for reelection. On behalf of all of us at Aramark, we're extremely grateful for Art's service to the company. Jim?

[James Tarangelo, executive]

Thanks, John, and good morning, everyone. I wanted to start by thanking Tom for his tremendous leadership and partnership over the past 4 years. Combined, we have over 50 years of industry experience, and it's been a real pleasure and privilege to be on this transformational journey with you. We look forward to continuing to have you as a strategic adviser and wish you well as you transition toward a full retirement in May.

We are off to a terrific start in fiscal '24. The company has generated strong financial performance with broad-based revenue and profit growth. In the first quarter, Aramark reported consolidated revenue of $4.4 billion, representing organic growth of 13% and versus the prior year period, driven by strong base business growth through a combination of volume and pricing as well as the contribution from net new business. Both the U.S. and International segments reported double-digit top line growth in the quarter.

Operating income in the first quarter was $167 million, up 10% versus the prior year. Adjusted operating income was $231 million, up 28% on a constant currency basis compared to the same quarter last year. AOA margin was 5.2% increased 64 basis points year-over-year on a constant currency basis. The higher profitability was from leveraging higher sales volumes, disciplined cost management at both unit-level P&L and SG&A as well as supply chain efficiencies. We also did experience favorable inflation trends overall, which benefited the quarter.

Our results were aided by our innovative yet practical approach to technology. We continue to leverage technology, including most recently utilizing AI throughout our supply chain to aggregate spend more effectively and get better pricing from our suppliers and manufacturers.

Turning to the business segments. The U.S. reported AOI growth of 19% with an AOI margin improvement of almost 50 basis points compared to the same period last year. Education, B&I, and sports, leisure and corrections all had particularly strong quarters driven by effectively leveraging higher revenue, especially in our collegiate hospitality and corrections businesses, from our ability to recover the price inflation lag we've previously discussed.

On a constant currency basis, the international segment had year-over-year AOI growth of 37% and an AOI margin improvement of 54 basis points, led by the team's efforts in the U.K., Germany and Canada. Turning to the remainder of the income statement. Interest expense in the quarter benefited from the $1.5 billion debt repayment associated with the proceeds from the Uniform Services spin transaction.

The $1.5 billion debt repayment will result in interest expense savings of about $100 million in fiscal '24 compared to the prior year. Our adjusted tax rate was approximately 26%. The quarterly performance resulted in GAAP EPS of $0.11, which included expenses related to the completion of the spin and adjusted EPS of $0.41, an increase of 33% versus the prior year on a constant currency basis.

Regarding cash flow, as expected and consistent with our normal first quarter cadence, we experienced a cash outflow due to the natural seasonality of the business, specifically in collegiate hospitality and sports and entertainment. This increased moderately compared to the first quarter last year due to a higher use of working capital as a result of the strong growth of the business, and increased capital expenditures, which is consistent with historic levels as a percentage of revenue.

In addition, we also had the onetime impact of cash taxes paid on our gain on sale or AIM. We've taken several strategic and proactive steps to strengthen our balance sheet, resulting in a reduction of our net debt position by more than $2.2 billion compared to the end of the prior year period. This includes debt repayments of $1.5 billion from the spin proceeds and another $630 million from divesting our noncontrolling interest in AIM and the San Antonio Spurs.

We continue to expect our leverage to be at approximately 3.5x for fiscal '24, and our debt repayments, combined with improved business performance has us on the right path to achieve this goal. This would represent the lowest leverage Aramark has experienced since 2017. At quarter end, the company had over $1 billion in cash availability. We will continue to opportunistically enhance our capital structure given our financial flexibility.

This includes a valuating additional shareholder returns as our leverage ratio comes down. I'll wrap up with our performance expectations for this fiscal year. We are highly encouraged by what we saw in the first quarter and the continued strength in the business around organic revenue growth, supply chain initiatives and cost discipline combined with inflation moderating.

As a result, we are updating our fiscal '24 outlook for both AOI and adjusted EPS growth to reflect these favorable full profitability trends and reaffirming expectations for organic revenue growth and our leverage targets. With that, we expect organic revenue growth between 7% and 9%, AOI growth between 17% and 20%; adjusted EPS growth between 30% and 35% and a leverage ratio of approximately 3.5x by the end of the fiscal year, as I mentioned.

I'm very pleased with the financial results this quarter. We are confident in the momentum that continues to build across the business. I've had the honor to be at Aramark for 20 years of my career. I clearly see in the Aramark of today, the unwavering commitment to serve our clients, the energy and focus of our growth teams to win profitable new business, and our collective ability to achieve strong, sustainable performance. Our strategy is working and producing great results. Thank you for the time this morning. And with that, I'll turn it back to John.

[John Zillmer, executive]

Thank you, Jim. With fiscal '24 now underway, we look ahead with great confidence. The work we've done has centered on building a consistent and sustainable business focused on providing valued hospitality services to our clients. The foundation is set for continued success, and we expect our momentum to carry through this year and beyond. I couldn't be more excited about what's to come. And operator, we'll now open the call for questions.

[Operator]

[Operator Instructions]

Our first question comes from Lizzie Dove with Goldman Sachs.

[Elizabeth Dove, analyst]

Firstly, I just wanted to wish Jim a big congratulations on the appointment to CFO and this is certainly a great set of results to start with. One main question for me is that you really outperformed pretty much across the board. I'd point out organic revenue coming in much higher than expected, particularly on the international side.

And then of course, your guidance range being adjusted to the higher end. I'm curious what drove the outperformance in these areas? And if you can just provide some more details and color there.

[James Tarangelo, executive]

Sure. Thanks, Lizzie, and appreciate it. Yes, I think if you think about the main drivers of the margin performance, right, it's really the underlying levers we've talked about, scale and SG&A, supply chain efficiencies. We're seeing good results in the middle of the P&L with food and labor costs.

So I think really primarily the overperformance, if you think about the 67 bps -- sort of 50 bps coming from the underlying performance. And then I think inflation moderating probably delivered a little bit of the upside.

[Operator]

Our next question comes from Harry Martin with Bernstein.

[Harry Martin, analyst]

I guess I'll ask the obvious question on the guidance. You did 13% organic growth in the first quarter, kept the guide at 7% to 9%. I mean, to hit the bottom end of that range would be quite a slowdown. So I wondered why you didn't change that guidance and what your expectations are for the rest of the year on organic growth.

And then, I guess, a question for Jim. In the presentation, in the revenues by segment, you're now including FM services within the health care line, and that line was the slot of weakness down in Q1. I assume that's related to the next level portfolio actions. Can you just add a little bit of detail on the underlying trend in the health care market and how long that next level headwind could last for?

[James Tarangelo, executive]

Sure. Will do. I'll kick it off. On the revenue outlook, so we're very encouraged by what we saw in the first quarter and the trends we're seeing with revenue, particularly strong base business growth. It's still early in the year to make the call on revenue. As you know, the timing of new and loss could affect how we think about revenues going forward as inflation moderates.

Obviously, price can moderate having an effect on the top line as well. And then the base business trends that we've seen, they were very strong in the first quarter. I think it's early to see if those are still sustainable. So with that and some seasonality, that's why you see a decline in revenue for the -- through the growth for the remainder of the year. And we're continuing to keep folks posted with how that progresses. Yes, with respect, we've now have our -- reclassified how we show our health care revenue. And with that, you can see, as we've previously discussed, so improving and optimization of our portfolio within next level is a key driver for why you see the revenues being moderately down in that segment.

[John Zillmer, executive]

Yes. And I'll just add that, that's still -- that's a segment that we have a very strong level of confidence in going forward and growth opportunity in that segment remains robust. And so we see this as really kind of a temporary restructuring and reportfolio -- reoptimization of the portfolio and then turning back to significant growth going forward.

[Operator]

Our next question comes from Andrew Steinerman with JPMorgan.

[Andrew Steinerman, analyst]

When looking at the fiscal year '24 guide, I want to know what the implied AOI margin range is? I kind of try to calculate it, and it's either 40 to 50 or kind of 30 to 60 depending on how you do the math on revenues and AOI. And I also want to know if there's been any change of assumption in the food inflation for the fiscal '24 margin guide.

[James Tarangelo, executive]

Yes, Andrew, this is Jim. So yes, I think the straight math of the sort of the load of the high, right at 17% to 20% would be 43 to 47 bps. Again, that's sort of the straight math, if you're at the sort of the lower end of the revenue range and higher end of the profit range, I think you're sort of be closer to the 55 to 60 basis points.

[Andrew Steinerman, analyst]

And then I also asked about is there a change of assumption in food inflation in the '24 margin guide?

[James Tarangelo, executive]

The current guidance reflects how inflation is running today. So the guidance that we provided reflects our current outlook for inflation, and it's pretty consistent with how it ran in the first quarter.

[Operator]

Next question comes from Shlomo Rosenbaum with Stifel.

[Shlomo Rosenbaum, analyst]

Could you talk a little bit about the pricing trends, just maybe give something quantitative to see where things are just compare it to the last few quarters to see what the trends are there? And then also, maybe you could give a free cash flow range that we should think about in terms of fiscal year '24. I know that there's that seasonality, but this is also the first year without the Uniforms business. And maybe you could give us some guidance on how to think about those items.

[John Zillmer, executive]

Sure. This is John. I'll tackle the pricing question, and Jim can tackle free cash flow. First of all, we're seeing -- we've largely caught up in terms of pricing. We had the pricing lag in some of the businesses that were contractually bound over the course of the last year, and we've seen that pricing catch up. We feel like we're in a very good position from a pricing perspective now and that we're able to go ahead and recover our cost increases as a result of that pricing.

If, in fact, we enter an environment where inflation moderates more aggressively it may put a little bit of pressure on pricing going forward, but we're not seeing that currently. So right now, it's a pretty benign pricing environment. We're able to recover our costs, and we've caught up on the pricing lag, which existed last year in, say, higher education and corrections.

[Andrew J. Wittmann, analyst]

And on free cash flow, yes, so we had a normal heavy seasonal use as we always do in the first quarter. I think some of the drivers there, additional working capital again, due to the growth of the business, so not a bad problem to have. Capital expenditure is up as well driven by the timing of new but still in line with our historic averages. And then finally, cash taxes were up about $35 million in the quarter.

And as I noted, we paid our cash taxes on the gain of sale of AIM. For the full year, again, we're not providing specific guidance on cash flow, we're guiding toward achieving the leverage of 3.5x. I noted the $35 million or so in cash taxes, the onetime part of that being with the AIM gain on sale. And then we have about $20 million to $30 million of incremental transaction cash costs from the spin that trailed into fiscal '24.

[Operator]

Our next question comes from Jesper Bibb with Tru Securities.

[Jasper Bibb, analyst]

I wanted to follow up on the margin upside. I guess curious if there's been any change in what you're seeing in labor cost inflation? I think your peers indicated that the growth in labor cost was remaining kind of sticky even if the food costs were coming down. So I'm curious if you expect have been similar there.

[John Zillmer, executive]

Yes. I would say that generally, we're seeing Labor costs moderate a touch as well as food costs. Clearly, there is less pressure in the labor environment, particularly as it relates to contract workers and the like and the payment of overtime. It's one of the benefits running through the P&L as our people are managing the those middle of the P&L cost structures, there's been significant improvement on the labor side there.

But overall, wage inflation, I think our expectations are probably no different than our competitors somewhere in the 5% range would probably be kind of an appropriate estimate on a go-forward basis.

[Jasper Bibb, analyst]

And then I wanted to ask what you're seeing from a new sales and pipeline perspective. And has there been any change with respect to the mix of new outsourcing opportunities and other takeaways?

[John Zillmer, executive]

No. I'd say the pipeline continues to be very robust. We're very pleased with the results to date and have a lot in the pipeline that we're working to close, and so we're very encouraged by what we're seeing so far. And no change in the level of outsourcing activity. It's still -- our pipeline is as big as it's ever been. So without getting into specific opportunities, we're very encouraged.

[Operator]

Our next question comes from Heather Balsky with BofA.

[Heather Balsky, analyst]

I guess I'd like to add on to the prior question with regards to your pipeline. And just when you think about the different segments you're in, where you might be seeing the most demand and also kind of how you think about the right mix to your business in terms of the end markets you want to be in?

[John Zillmer, executive]

Well, we're very broad-based opportunity both domestically and internationally. And we really were -- yes, we're seeing it across all the businesses, whether it's workplace experience or collegiate hospitality, significant opportunities in health care, significant opportunities arising in virtually every vertical.

So it's really -- we're in the businesses we want to be in. We're focused, we have and we're resourced to grow all of them, and we're seeing opportunity literally in every market that we serve. So -- that's what makes it so encouraging. There is no -- I'm not limited to one particular vertical or another one business or another. We've got a range of opportunities that we can pursue our people are delivering across the board in both domestically and internationally. And that's what makes the growth story so exciting.

[Heather Balsky, analyst]

That's really helpful. And I'm going to ask an inflation question, which is I think a lot of investors are also looking or reading what the food distributors are saying and seeing you don't necessarily report at the same time. I'm curious kind of when they talk about pricing, for example, center of the plate, how we were looking at your food costs should be thinking about things? Because presumably, you have a different business mix than the food distributors have in terms of what they're selling. Just any kind of color you can provide helps us kind of term what they're saying or what it might mean for your business?

[John Zillmer, executive]

Yes, that's a great question, Heather. And it's one that is -- that can be a little bit confusing given the kind of numbers that they report, which are really focused more on commodities as opposed to the market basket of products that we buy.

And our inflation numbers are very specific. It's the products we buy from the -- that our clients and our customers want us to serve. So ours are -- we look at this number literally on a weekly basis. We know exactly what we're paying for goods and services across the enterprise by business unit by country. So we have a high degree of correlation to what our market basket costs are.

The distributors do have much more spot kind of exposure to various commodities typically, our contract pricing normalizes for that. So it's very hard to make a direct comparison between distributor costs and our costs. And -- But I would I would say, as you see commodity pricing modulating, you'll see that eventually transfer into lower prices to our products that we buy and utilize as well. So tough to make the correlation, but always happy to confuse you further if that hasn't helped.

[Operator]

Our next question comes from Toni Kaplan with Morgan Stanley.

[Toni Kaplan, analyst]

In the past, you've had some creative technology initiatives that you've deployed. Can you talk about where you're focusing on innovation and any AI initiatives in particular?

[John Zillmer, executive]

Yes, that's a great question and both Jim and I can comment on this. It is a very significant initiative inside the company to apply technology to the parts of the business where we can really benefit both the frontline managers as well as the customer. And I literally had a report to our -- our Board meeting last week on the technology initiatives underway inside the company. And some that are the most prevalent as you might expect, are things around menu design and menu optimization using AI technologies to go ahead and evaluate customer need sets and optimal menu structures to serve them, and we literally have pilots going on in multiple businesses for menu optimization, both from a cost perspective as well as a customer acceptability perspective because you can use AI to create the lowest cost menu in the world and guess what, nobody will buy it.

So you have to balance both of those objectives. And so we're using the large language models in AI to go ahead and develop programs that really optimize both for us as well as the consumer. And it's very exciting, and the pilots have shown dramatic results, and we're very encouraged by what the possibilities are.

[James Tarangelo, executive]

Yes. I'll just add to that. We're seeing good opportunities, as I mentioned in my script. We're utilizing AI within our supply chain group to harmonize our send data and AI is enabling really effective in optimizing our matching and aggregation of SKUs across the board and enables us to negotiate better pricing with our suppliers and manufacturers.

[Toni Kaplan, analyst]

Terrific. I wanted to follow up on competition. Are you seeing any changes in the market with regard to either the large competitors or even the small or mid-sized competitors in the space?

[John Zillmer, executive]

Yes. I would say the short answer is no. Really no change. It's always been a very competitive environment. We're all pursuing those brand-name clients all the time. And the range of competitors continues to evolve and change, still plenty of regional companies out there, smaller organizations positioned against certain businesses and niches that they like.

But overall, I'd say it's a very disciplined competitive environment, really no change to economic structure, bidding strategies. We are always focused on selling quality and customization and that's what we continue to focus on. And frankly, we're seeing our competitors also doing the same thing. So we like the environment. We like the opportunity. And I would say it's been very consistent over the course of the last several years.

[Operator]

Next question comes from Neil Tyler with Redburn. Atlantic.

[Neil Tyler, analyst]

A couple from me, please. Just go back to the margin and the way you think about achieving or hitting the midpoint and the components contributing to that. The question is really over the remainder of the year. Do you expect the bridge, if you like, year-on-year in terms of the relative contribution of things like price versus inflation, ramping new volumes and the GPO?

Do you expect that sort of contribution to remain consistent or for those comp change in terms of the relative importance as we move through the year? That's the first question. And then second question on the base business ramp-up and particularly, I suppose, in the national business. Just -- I wonder if you could talk a little bit more about the -- what's going on there and whether -- to what extent there is a sort of acceleration in volumes in relatively recently won contracts that might not be classified as sort of net new, but you still seeing sort of normalization upwards?

[James Tarangelo, executive]

Yes. I'll take the first one with respect to the underlying levers. So I think the results we generated in Q1 and the sources of those margins coming from, again, scale in SG&A, supply chain efficiencies, disciplined at the middle of the P&L with food and labor and the continued progression of new business margin maturity. I think we expect a similar mix as we look toward the remainder of the year.

As I mentioned, I think if you look at the core levers drove the majority of the margin improvement in Q1 is sort of rounded to about 50 basis points. Again, if you look at the midpoint of our guidance at 45 bps, that's pretty consistent with what we're seeing. And like I said, in Q1, the sort of upside, I think, generally came from inflation moderating and that's obviously not definitively built into the outlook...

[John Zillmer, executive]

Yes. And I would just add, I think -- I'm sorry, I didn't mean interrupt you. I was just going to add on the base business acceleration that we're seeing. I think it's a combination of things. It's improved volume in existing locations, more customers having return to work on a full-time basis. So you're seeing a ramp of improving customer counts. And you're also seeing the ramp-up of accounts that we sold over the course of the last couple of years beginning to mature in terms of the range of offerings as well. So it's a combination of both. I think we can basically put COVID in the rearview mirror and say that we fully recovered any of the base business losses that we experienced during COVID, and now we're just beginning to really get back to a steady state and working on volume growth and improving customer counts.

[Operator]

Our next question comes from Ashish Sabadra with RBC Capital Markets.

[Ashish Sabadra, analyst]

Jim, congrats on the appointment and solid results. I just wanted to see if you had any thoughts on M&A, if you're thinking of any tuck-in acquisition or even in terms of portfolio, you've done some pretty good portfolio rationalization, but anything remaining on that front in terms of non-core ownership?

[John Zillmer, executive]

Yes, I would say -- this is John. We're always looking at potential tuck-in acquisitions to go ahead and build out capabilities of the various businesses we operate. We're always open to looking for those kinds of extensions, if you will, as we did with Union supply.

And nothing on the horizon today to talk about. And -- but we're always open and willing to pursue things that may become available if we can do it on an accretive basis. So Well, we don't view M&A as our primary growth driver. It's really a secondary driver, and we'll be opportunistic, but we'll be very disciplined.

[Operator]

Our next question comes from Josh Chan with UBS.

[Joshua Chan, analyst]

I know that on the net new side, you aim at 4% to 5% a year. So I guess with one quarter in, how do you feel about target for this year? And what do you see are the biggest opportunities or risks on that front?

[John Zillmer, executive]

Yes. I would say that's absolutely a target that we have established for ourselves. It's also built into our compensation system. So you have the entire management team focused on those initiatives on net new growth. And so the organization is very disciplined and very focused on it. We believe, obviously, in setting those targets that they are achievable. And there's nothing that's transpired in the last quarter that would cause me to change that target.

I would say, as I said earlier, our opportunities are very robust. Our pipeline is very large. And without getting into specific opportunities, I have no concern around the 4% to 5% net new number being a challenge.

[Joshua Chan, analyst]

Perfect. And if I can ask one on the corporate expense. That was lowered nicely. I'm sure the spin had to do with that. But I guess, is the new level of corporate expense what we should expect going forward?

[James Tarangelo, executive]

Yes, that's right. It's sort of a rebate for the spin. We're very focused on SG&A. That's an area that I oversee. I never saw in my prior role, and we work very closely with the functional groups to try to be flat to the prior year. We did have some moderate benefit with some share-based comp, a few true-ups there and some forfeitures that provided a moderate benefit to the quarter. So -- but generally, I think that run rate should be fairly consistent.

[Operator]

The next question comes from Andrew Wittman with Baird.

[Andrew J. Wittmann, analyst]

I guess with the benefit of a few months here since the Uniform Rental business has been separated out, John. I was just wondering if you look at the kind of the corporate structure that supports the business. Is there anything that you're identifying that could result in that for making it more efficient, maybe either now today? Or as you look at -- as their transition services agreement runs out probably later this calendar year when they're probably off their systems, if there's anything to think about there.

[John Zillmer, executive]

Yes. There are minor adjustments. We've really rebased the organization already, and we're able to provide those services with the base level of employees that we'll probably maintain going forward. So don't anticipate any further restructuring or any significant change.

I think we're very happy with the level of resourcing in the organization today. And we expect that we'll be able to absorb additional growth as the organization continues to add net new business and grow both domestically and internationally that we can absorb that growth without having to add in SG&A. So that's why we're very confident in being able to manage that lever very aggressively and appropriately going forward. So no anticipated significant change going forward.

[Andrew J. Wittmann, analyst]

Okay. That's helpful. And then I guess I wanted to ask on retention. And obviously, retention, you said COVID is in the rearview mirror, but one of the good things that happened from COVID, I guess, from a retention point of view is that, that kind of spiked I was just wondering if you could address the trends in your retention that you've seen here in the last few months and maybe how that relates to those spikes during the COVID period and versus the historical averages.

[John Zillmer, executive]

Yes. I would say we're basically right on the historical average we expect to be in that range again this year and really no change the pattern. And yes, during the first year of COVID retention spiked pretty dramatically. But I think it will settle in, in this 96% range. And I don't see any -- really any change to that as our expectation. Some years, it will be 96.5%. Some years, it might approach in 97%. But in general, I think that level of retention is certainly achievable and don't see any threat to that.

[Operator]

Our next question comes from Harold Anta with Jefferies..

[Unknown Analyst]

This is Harold onto on for Stephanie more. So June, quick question. Just want to get an eye that COVID is in the rearview, which our focused priorities and strategies are for the company looking forward for over the next fiscal year and further.

[James Tarangelo, executive]

Sure. I've worked with John and Tom, obviously, implementing our growth-oriented strategy, right, over the years and it's working right. You see what growth can do in the first quarter, and we're producing great results. So the strategy is very consistent as I transition into this role. I think the -- over the next year or so is really about execution, continuing to drive the underlying levers that we've discussed.

I think it's sort of back to the basics in terms of operational discipline now that COVID and the supply chain disruption is behind us. So there are some opportunities, I think, with food and labor mineral the P&L without disrupting the high-quality service that we deliver to our clients. So that's really the focus for me. I am fully committed and very confident in the outlook we provided for this year and committed to the '26 targets the company has established.

[Operator]

Our next question comes from Faiza Alwy with Deutsche Bank.

[Faiza Alwy, analyst]

I wanted to follow up around supply chain. So we talked a little bit about inflation and product costs improving but you made a comment around how the current landscape presents significant opportunities. So I wanted to hear a little bit more around your supply chain initiative beyond just inflation decelerating.

[John Zillmer, executive]

Yes. It's -- we -- as you know, we have a very robust supply chain organization that includes not only the core contract food service business, but also Avendra and a number of different GPOs in the vendor family focused on different verticals and different businesses, both domestically and internationally.

And we continue to be very interested in expanding the size and scope of the GPOs, both organically through new sales efforts by taking on new customers as well as extending geographies that we serve in the GPO arena. And so it is an important component of our future growth and our future profitability.

It's a terrific organization. Atom Bales who runs that organization having taken over for John Orobono last year when he passed away, he's doing a terrific job. He's really integrated very efficiently and effectively into the leadership of that role. And so we're very pleased with the overall performance. They are hyper focused on optimizing for our frontline managers through the right products, the right services, the right partners.

They're very focused on sustainability and all those efforts that we have from an ESG perspective as well. And so we're committed to it. We believe that we can continue to accelerate the growth of the supply chain profitability, and that will be an important part of our long-term margin improvement going forward.

[Faiza Alwy, analyst]

Great. And then just wanted to clarify or follow-up around comments you made on pricing. I think you said that as inflation moderates, pricing will moderate as well. Are you starting to get any pushback around pricing? Or just curious sort of how you're anticipating pricing going forward to the extent inflation moderates, should we assume that it's really just a moderation in incremental pricing? Or are you starting to see some sort of -- do you have to give back on pricing, I guess, is the question.

[John Zillmer, executive]

Yes. No, we wouldn't be giving back on pricing, but we'll see the rate of increase in price may moderate to more closely align with inflation expectations. So as you think about last year, for example, we had outsized pricing because of the very high inflation rate. That's kind of what drove our pricing lag, if you will, or we were pursuing very aggressive price increases to recover cost increases that were beyond the norm. I think this industry is likely to go back to a much more normalized pricing model, which is really inflation recovery. And without any significant future spikes, I think you'll just see pricing kind of moderate to around the level of inflation, somewhere in that range.

[Operator]

Our last question comes from Ian Zaffino with Oppenheimer.

[Ian Zaffino, analyst]

Congratulations, Jim, welcome aboard. Very happy to see these numbers here. So question, I guess, would be on this new environment, how does this impact your ability to win new business, to get new outsourcing versus competitive wins? How are we seeing this now, I guess, as you're getting more confidence in the business. We're seeing inflation coming down.

Pricing seems to be good like your sales force is really to top. So how do we think about that now going forward as far as what will be the big drivers of growth in those buckets? And how to think about the environment, either accelerating or decelerating, et cetera?

[James Tarangelo, executive]

Yes, I think the overall environment, as we talked about, still is a tremendous opportunity for us, right? There's a significant portion. It's a very large market that continues to have -- a significant portion of that is currently insourced. So the strategy going forward remains focused on net new. And like I said, driving the levers that we talked about previously. I think with the supply chain disruption behind us and COVID behind us, it just makes driving those levers sort of more important and brings us toward the underlying strategy that we've outlined.

[John Zillmer, executive]

Yes. I think I'll just add a couple of comments. First of all, we believe that achieving the net new numbers is important for the long-term success of the organization. We've resourced the company. We've rebuilt the organization. We've rebuilt the sales and growth culture. And those things are in place and are sustainable and will continue to drive our long-term performance.

So the model really is around retention of our existing customers and maintaining retention at that, call it, 96% range, net new of 4% to 5% a year and then cost recovery through inflationary pricing recovery going forward. And that all translates into a very sustainable long-term value-creating growth model. And we're absolutely committed, but the marketplace certainly can support the range and the scope of opportunities available to us are literally limitless both from a geographic perspective as well as a conversion perspective.

So plenty of self-op conversion left in all the markets. And we're going to be competing very aggressively to continue the growth of the organization. So we love the business model. We've built an organization that can now take advantage of it and is focused on it. is compensated on it and we're delivering on those results.

[Operator]

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

[John Zillmer, executive]

Well, first of all, I would like to say thank you for all of the team members at Aramark, who have produced terrific results in the first quarter. thank you for all your hard work and efforts. Really proud of the work that the team has done. I'd also like to thank all of the investment community for the part of the organization. and we're looking forward to a good 2024. Thank you very much for your time and attention this morning.

[Operator]

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