Aramark

NYSE:ARMK

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, and welcome to Aramark's Fourth Quarter and Full Year Fiscal 2022 Earnings Results Conference Call. My name is Luciana and I will be your operator for today's call. At this time, I would like to inform you that this conference is being recorded for rebroadcast.

[Operator Instructions]. I will now turn the call over to Felise Kissell, Vice President of Investor Relations and Corporate Affairs. Ms. Kissell, please proceed.

[Felise Kissell, IR & Corporate Affairs Executive]

Thank you, and welcome to Aramark's Earnings Conference Call and Webcast. I hope all of you are doing well. This morning, we will be hearing from our Chief Executive Officer, John Zillmer; as well as our Chief Financial Officer, Tom Ondrof. As a point of reference, there will be accompanying slides for this call that can be viewed through the webcast. These slides will be made available following our prepared remarks also for easy reference. Additionally, our notice regarding forward-looking statements is included in our press release this morning, which can be found on our website.

During this call, we will be making comments that are forward-looking. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties and important factors, including those discussed in the risk factors, MD&A and other sections of our annual report on Form 10-K and our other SEC filings.

We will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found in this morning's press release as well as on our website.

So with that, I will now turn the call over to John.

[John Zillmer, CEO & Director]

Thanks, Felise, and thanks to all of you for joining us. This morning, Tom and I will review our fourth quarter performance and briefly recap our progress throughout fiscal '22. We will also preview the year ahead that is anticipated to build upon the strong momentum the business has established over the past couple of years. And finally we will provide an update on the previously announced uniformed services set off transaction which is expected to occur in the second half of fiscal '23.

As I think about the past year, I am incredibly proud of our teams across the globe, who have embodied the client focused profitable growth culture we set out to establish. Despite a challenging and complex operating environment, we were able to demonstrate significant value for clients and deliver on our strategic priorities. Our ability to achieve the highest annual revenue in Aramark’s history, combined with the second consecutive year of record net new business is a testament to the exceptional talent embedded throughout our organization.

Aramark's strong growth performance was broad based coming from multiple lines of business and geographies, as well as from clients with large and small, annualized gross new business went exceeded $1.6 billion, representing 10% of pre-COVID fiscal '19 revenues and retention rates were once again about 95% as we sustained a step change improvement.

In client retention collectively, this resulted in $790 million of net new business, which is more than 50% higher than fiscal '21 and over eight and a half times greater than the company's historical five year average between fiscal '16 through fiscal '20. This exceptional level of net new business represents nearly 5% of our pre-COVID fiscal '19 revenues, already at the top end of the 4% to 5% range provided our analysts day financial algorithm.

Again, our growth extended across all segments during the fiscal year. Our U.S. food and facilities segment delivered over $400 million of net new business more than 40% higher than fiscal '21 and about 20 times higher than fiscal ‘19 driven by strong retention and significant growth new business wins, particularly in facilities, healthcare and corrections.

International also reached a new milestone with nearly $300 million of net new business more than doubled last year. There have been significant wins across the portfolio ranging in size from small startup operations to large multi site accounts like Merlin, which you may recall was the largest win in the company's history awarded earlier this year.

Even excluding Merlin net new business performance reflected a record results in the international segment, a testament to our growth strategies and consistent success of our team. Uniform services continued strong growth momentum with net new business more than 25% higher than fiscal '21 and retention rates maintain the significant improvement from last year.

Our continuous investment in the unit on sales force, an ongoing focus on customer experience have driven sustainable success in new business wins and vertical sales opportunities. Across the portfolio, we capitalize on greater first time outsourcing opportunities, with over 45% of our wins coming from self-op conversions, including six of our top 10 largest wins this year in the U.S. alone. With our robust pipeline and commitment to drive profitable growth, I remain confident in our ability to achieve our growth targets, and drive our business to even greater heights.

I would now like to review Aramark's financial performance in the fourth quarter. Despite unprecedented global inflation levels, our teams remain focused on providing high quality service while simultaneously working closely with clients to mitigate costs, and implement pricing increases.

In the quarter, pricing contributed more than 6% to revenue growth. Moreover, we are leveraging our robust supply chain to gain real time insights for effective pricing strategies tailored to specific clients, sectors and geographies. The pricing environment is something we will continue to actively monitor and address as appropriate.

Our results in the fourth quarter continued to build both on the top and bottom line reflecting record level net growth, pricing and effective cost management through ongoing base recovery. Organic revenue grew 26% year-over-year reaching 113% of pre-COVID levels and AOI margin increased nearly 140 basis points on a constant currency basis compared to the fourth quarter last year.

Within U.S. food and facilities organic revenue rose 26% year-over-year with contribution from all sectors. Education experienced typical seasonal slowdown in the summer months and is now off to a strong start in the new academic year as we welcome back students and educators in both collegiate hospitality and student nutrition at the end of our fiscal fourth quarter.

Our teams have introduced new concepts including innovative culinary offerings, technological advances, and enhanced dining spaces. Where appropriate and possible we worked closely with clients to implement additional pricing action for board plans and on campus retail outlets.

Sports, leisure and correction continued its positive performance trajectory. Sports and entertainment maintain high attendance levels with better than historic per capita spending across event categories. I also want to take this opportunity to congratulate our clients, the Philadelphia Phillies and Houston Astros for both reaching the World Series. Destination and greater gift activity year-over-year despite unforeseen weather and fire challenges at certain sites, and corrections reporting growth led by record level new business wins during the year.

Our workplace experience group showed progress has returned to office continued across the portfolio, particularly in September. We're providing clients with solution oriented services customized to their specific needs with the transition back to P&L contracts are occurring as volumes increase.

Healthcare Plus recorded increased patient and retail activity as well as benefited from the contribution of a significantly higher net growth from newly awarded client contracts, improved retention rates and success in providing additional services to existing clients. Facilities and other drove performance or ongoing demand and core business offerings and existing client locations and had a strong level of new end throughout the year, largely from self-op conversions.

International organic revenue grew 39% compared to the fourth quarter last year, driven by higher per capita spending at sports and entertainment venues, particularly in Europe and increased B&I activity across the portfolio.

Similar to the U.S. education internationally, it was largely closed and summer resumed activity at high levels with the start of the fall semester. And another year of consistent net growth and international continued to drive strong results, creating additional scale across geographies.

Organic revenue in the uniform services segment increased 8% year-over-year driven by both the current recurring rentals and adjacency services. Came in the team remain focused on building upon their momentum and executing on strategic growth initiatives across the estimated $40 billion market in North America.

We're making progress on the planned tax free spin off of this business into an independent company and we will be sharing further details in the New Year regarding this strategic transaction. I also want to reiterate that we expect to be able to complete the transaction under the terms of our existing debt agreements. And we believe that with our prudent capital structure strategy in place, which Tom will review, both companies will be positioned for great success.

Lastly, I'd like to spend a moment sharing some recent initiatives focused on one of our core goals contributing to the greater good with our focus on people and planet. First last month we submitted our proposed greenhouse gas reduction targets for validation by the science based targets initiative.

Next, in partnership with the Humane Society, we announced their commitment that by 2025, at least 44% of our residential dining menu offerings will be plant based. Third, we find the Pacific Coast foodways commitment as an extension of our existing pledge to reduce food waste by 50% by 2030.

And finally, I want to commend the passion exhibited by 1000s of Aramark teams who worked around the world on a recent Aramark Building Community Day, which consisted of service projects to reduce inequity, support and grow local communities and protect the planet.

Our people truly are the cornerstone of everything we do. And this day of impact, among many, it's just one example that speaks volumes of the special culture we have created.

I'll turn the call over to Tom for detailed financial review of the business.

[Thomas Ondrof, EVP & CFO]

Thanks, John. And good morning, everyone. Our results in the fourth quarter and in fact, our performance throughout the entire fiscal year reflect the resolve of our teams across the globe to execute on our growth driven strategy. Despite ongoing macroeconomic challenges, we continue to stay focused on delivering top and bottom line improvement and remain committed to our long term priorities.

On analysts day we shared our plans to re establish a growth culture. We build the hospitality field focused mindset, built margin through scale and deleverage through focused cash management.

These strategies is yielding positive results. And it's just the beginning. John mentioned we signed an historic high of $1.6 billion of annualized gross new business in the year and our client focused field empowered approach delivered retention rates above 95% once again, resulting in record net new business levels. Revenue and profits are on the rebound. Cash flows rebuilding and leverage is reducing, keeping us on track to achieve our fiscal '25 goals.

Before reviewing our fiscal '23 outlook, I want to first provide some additional insights on our fiscal '22 financial results. In the fourth quarter, organic revenue grew 26% year-over-year to $4.5 billion and exceeded $16.3 billion for the full year, up 35% compared to the last fiscal year.

Performance is driven by strong net new business pricing pass through and ongoing recovery of COVID related volumes, which is just over 90% of pre-COVID levels for the year progressed each quarter from an estimated 85% in Q1 about 95% in Q4.

We expect this COVID related volume recovery continue to contribute to both revenue and AOI results in fiscal '23 most materially in the first half of the year. Adjusted operating income was $267 million in the quarter. constant currency increases 62% compared to the fourth quarter last year, resulting in an AOI margin of 6.2%.

Constant currency AOI margin was 6.1% due to approximate 10 basis point impact from FX. This performance reflects continued AOI margin recovery, with the fourth quarter closing in on 80% of the same quarter pre-COVID margins, compared to 60% in the fourth quarter last year.

AOI for the full year was $780 million, resulting in an AOI margin of 4.9% nearly 250 basis points better than last year's AOI margin on a constant currency basis. This progression was driven by our ability to contain above unit operational costs, and leverage SG&A support across higher sales volume as well as benefits from a stabilizing supply chain in tight in unit cost management.

Our teams and partnerships with our clients have been and continue to be actively working to mitigate inflation through the various actions available to us across food, labor, and direct cost categories and ultimately passing through price as needed, and where appropriate.

Over the course of the year, we've been gradually able to transition back to preferred suppliers and products as fill rates improved. While there's still much more to go, this year was an important step for a return to normal supply chain operations.

In addition, as the supply chain settles, and our net new business growth significantly increases our management, we work to renegotiate current deals to achieve next generation savings is beginning. We're encouraged by the opportunity in front of us in this area.

As we've mentioned before, the significantly higher levels of new business we have delivered over the past two years tend to have a short term drag on margins due to the related startup costs and natural account profitability ramp.

In the interim, these new accounts accelerated our top line growth and add the dollar profit today and will benefit margin as they mature over time, giving us confidence when combined with the supply chain opportunity and our ability to ultimately exceed pre-COVID AOI margin levels and stay on track to deliver our analysts a margin target.

Our results in the quarter led to adjusted EPS of $0.49 on a constant currency basis, versus $0.22 in the fourth quarter last year. For the full year adjusted EPS was $1.20 on a constant currency basis, compared to a loss of $0.29 in fiscal '21. FX impacted adjusted earnings per share by one penny in the fourth quarter, and by $0.04 for the year

On a GAAP basis, Aramark reported consolidated revenue of $4.4 billion, operating income of $198 million and diluted earnings per share of $0.29 for the fourth quarter. For the full fiscal year, consolidated revenue was $16.3 billion, operating income was $628 million and diluted earnings per share for $0.75.

Now turning to cash flow. Consistent with the typical seasonality of our business, the fourth quarter generated a significant cash inflow. Net cash provided by operating activities was $836 million and free cash flow was $717 million. For the full year, net cash provided by operating activities was $694 million, and free cash flow was $330 million, compared to $282 million in fiscal '21.

The year-over-year increase was the result of improved profit performance and slightly lower capital expenditures, partially offset by higher working capital related to net new business growth and recovering base account activity.

Our strong cash flow performance combined with significantly higher earnings resulted in an improved leverage ratio of 5.3 times compared to 7.4 times at year end fiscal '21. We remain on track to reduce leverage below 3.5 times as mentioned at analyst day, and we believe we are well positioned to navigate the current environment with a net debt portfolio of more than 80% fixed rate instruments inclusive of swaps, no significant maturities until 2025 and over 1.8 million in cash availability of fiscal year end.

Plan uniform spin also create some degree of flexibility related to our balance sheet. There are a number of different paths execute the transaction, we will be strategic in managing the capital structure, particularly in the current environment in a way that we expect will maximize value for shareholders and best position each independent company for sustaining the same success.

We're confident in our ability to complete spin under our existing debt agreement, and that we will not be required fully or partially replace the existing capital structure other than what we choose to do.

We continue to make progress in completing the essential tasks necessary for the separation and look forward to sharing additional details, including distinct financial targets and leverage profiles for each company as we get closer to completing the transaction.

Let me wrap up by sharing our outlook for fiscal 2023. Based on our current expectations, we projected following full year total company performance. Organic revenue rose between 11% and 13% reflecting a slightly higher results and the approximately $18 billion mentioned during the last earnings call.

We expect the components of growth to include 4.5% to 5% of net new business, 3% to 4% from recovery of COVID related volumes weighted to the first half of the year, and 3.5% to 4% pricing in any inflationary environment remains constant, as we partner with our clients to balance operating costs with quality service.

Adjusted operating income growth of 34% to 39%. With this target, we expect to achieve 97% to 100% of our fiscal '19 pre-COVID AOI dollar levels, inclusive of the contributions and unions of fibers and portion of which will remain excluded from our AOI until we left the acquisition date in June.

Following a nearly 250 basis point unproven AOI margin in fiscal '22 organic revenue and AOI outlook at the midpoint anticipate another roughly 100 basis point margin improved progression this coming year.

Finally, we expect free cash flow to be in a range of $475 million to $525 million for payment of the following items. First, we will make the last two deferred FICA payments associated with the Cares Act like last year, and as a previously articulated, we expect to make this payment of approximately $65 million in the first quarter. Second, we anticipate a cash flow impact of approximately $100 million to $120 million related to restructuring charges, public company costs and transaction fees associated with a uniform spin. After these specific items, we expect free cash flow to be in the range of $300 million to $350 million.

With the benefit of this strong cash flow generation, combined with expected higher operating income, we anticipate our leverage ratio to be between 4 and 4.5 times by the end of fiscal '23. This year is the next significant step on our journey to achieve the fiscal '25 goals we established on analyst day. Our strategy is producing results. And we're excited to keep building on this momentum. Thanks for your time this morning.

[John Zillmer, CEO & Director]

Thank you, Tom. As a company, we've moved from recovery mode to growth mode very quickly, including our fiscal year on substantially stronger footing, and believe we are well poised to continue the strategic transformation we set out to achieve back at the beginning of fiscal '20.

This year, we achieved the highest annual revenue results in company history, more than doubled our AOI margin compared to last year, and realized the second consecutive year of record net new business performance exceeding the midpoint of our original targets by nearly $200 million. I'm extremely proud of the performance milestones we've accomplished this past year as a global team.

Fiscal '23 is just underway with new client wins already occurring, as well as a strong pipeline of opportunities ahead. With our plans strategic initiatives in place we have big goals for this year and beyond. And we expect the exceptional momentum across the company will enable us to achieve them.

Thank you, everyone. And operator, we now like to open the call for questions.

[Operator]

Thank you. Ladies and gentlemen, we will now begin the question and answer session. [Operator Instructions] And our first question coming from the line of Heather Balsky from Bank of America. Your line is open.

[Heather Balsky, Bank of America]

Hi, thank you. Two questions on revenue. The first is when you look at your outlook for next year in terms of growth, can you help us appreciate sort of the macro dynamic you're thinking about? And if there is a tougher environment kind of sort of where you think you can, I guess the give and take in your outlook. Thanks.

[Thomas Ondrof, EVP & CFO]

Yes. I think a couple of things there. We feel as though one of the tailwinds continues to be the outsourcing trend. And the net new business wins, we have a incredibly strong pipeline at the moment as we enter into fiscal '23. So we feel confident about that. The teams are really starting to get stability and sort of pace to their process that's been built over the last couple of years. So feel good about that. Retention rates within our control. And so that feels solid. We actually have probably a lower level of rebate activities issues, and we've had in '23 than we've had in '22. So that's helpful as well.

Pricing is a big variable. Depending on what happens with inflation as I mentioned, certainly we will continue to keep pace between pricing pass through and mitigation activities. That pricing really did accelerate for us in the second half as it needed to this year. And so inflation continues to move and has been, we will go ahead and keep pace if it mitigates the debts and then that might take some pressure off and then lastly to COVID recovery is getting harder and harder to track that as we get further and further away from early 2020 and with some effects of recessionary pressures, particularly within business dining, kicking in it's really hard to segregate those. So those would be the overall comments. I think it helps John.

[John Zillmer, CEO & Director]

I think that characterizes it well. We're very excited by the by the revenue achievements that the company has been able to establish. Our teams very focused on the operating side of the business. We've got great momentum on the new account, sales side, very good retention activity. So we're confident in the revenue number, but there are a couple of macroeconomic factors that could impact that next year and we'll respond aggressively as we always do.

[Heather Balsky, Bank of America]

Thank you. And as a follow up, when you think about pricing, on a longer term basis, if it turns out that we're in a higher than normal inflationary environment for multiple years, rather than sort of this one or two years. I guess, what does that mean for your business, your ability to take price consistently in that type of environment and your ability to kind of manage that on the margin line, as well as taking into account that you did a pretty good job this year.

[John Zillmer, CEO & Director]

Yes, that is absolutely the economic model that we've been operating in for decades, and we've seen different inflationary environments. Both Tom and I have seen it both with high inflationary environments and low inflationary environments over the years. So we expect the business to be able to adjust our operators in the field, we'll be able to adjust. And the pricing activity will be a significant component of that. And we've got very strong disciplines around it, very strong technology to support and tools to support the pricing initiatives.

We give our frontline managers data on a monthly basis with respect to supply chain activity and food costs inflation. So they have the tools in place in order to manage this. And as you know, we run the business with literally weekly P&L. So our frontline managers are constantly adjusting to the realities that they're operating in. And we expect to be able to continue to mitigate those inflationary pressures, whether through pricing or menu adjustments, or supply chain changes, we've got a number of tools to address it. And it's just the nature of the business. And I'm confident our people will be able to manage through it.

[Operator]

Thank you. One moment for our next question. And our next question coming from the line of Ian Zaffino from Oppenheimer. Your line is open.

[Ian Zaffino, Oppenheimer]

Hi. Great. Thank you very much. Very strong results here. So congratulations on that. So

it was a clean sweep on the IR side and Tom John Felice, also IR says that's a big accomplishment. So congratulations to you guys. John, I know when you joined, you mentioned enhancing the sales force, and that would be the driver of new business, but a new business clearly coming in better than expected. What is going on there as far as is this just the sales force? You putting in any in any other measures to get the growth that you have and then can you comment maybe on how much is market share, per se versus industry growth like a post COVID environment? Thanks.

[John Zillmer, CEO & Director]

Certainly. Well, there have been a number of actions taken over the last couple of years to drive this step change in terms of new business growth the first of which was, as you described working on the sales organization, adding resources, adding sales management expertise, and really giving the sales organization and the operating organization, the freedom to respond to customers, and develop proposals that are highly customized to meet their particular needs.

So I think it's both the tools as well as the resources in order to accelerate that increase sales activity. It's also frankly, cultural. It is the objective of the entire organization to grow. We believe that our best pathway to improved earnings over time is to grow the business. And so we've implemented incentive programs for both the operators and the sales team that are aligned with that.

So 40% of the incentive compensation for the entire leadership team is focused on growth. So it's cultural. It's resources. It's individual tactical decisions made inside the business. And it's just focus. We wake up every day thinking about how are we going to grow the organization and what accounts are we working on and how are we going to achieve higher growth rates as well as higher retention rate. So it's more cultural than anything else. And we're very, very excited about the results over the last two years, when we have high expectations, not only for this coming year, but for the entire future of the organization. It is the way that we will do business going forward.

[Thomas Ondrof, EVP & CFO]

I think just picking up Ian on the market share point too because it's an important one, that

we're in an industry that's got tremendous opportunity, a lot of insourced opportunity that as we've seen over the last couple of years is has started to move and consider outsourcing. So that's really been a heck of a tailwind for us overall as an industry. And we don't focus that much on market shares. It really just depends on the line of business in the country that we're in, it varies. We believe the opportunity, really, for the industry is to grow. And that it's just a matter of taking advantage of it and having the right tools and processes and people a place to capture it.

[Ian Zaffino, Oppenheimer]

Okay, thanks for that caller. Tom, I know you touched upon P&L and the transition back to the P&L from cost plus. Where are you in that transition and then also, can you maybe touch upon the margin implications as you do that, and then maybe touching upon inflation as well, as you think about P&L? Thanks.

[Thomas Ondrof, EVP & CFO]

Sure. We're not quite back to where we were '19, where we had, particularly in the business side, we had about two thirds P&L maybe a little bit more. We're not back there yet. But we are moving back purposefully to the P&L. We do like that model better in the long run. It can be more profitable as we control the entire P&L and a lot of the decisions around it. But we're doing it very paced, making sure that it's driven by the volumes and the economics that they account, before we make that transition.

So that we really in the end are able to manage that margin. If we do it too quickly, we would take a hit. And so we want to make sure that it's an account by account case by case basis to transition in conjunction in conversation with the client. So the margin implications should not be noticeable at all, if we do it at the right time.

[John Zillmer, CEO & Director]

That's right, I would add that we're driven first by the service requirements of our clients

and customers in contractual modifications back to P&L will take place as revenues continue to increase as customers return to their work sites. And again, this keep in mind, this is predominantly a B&I phenomenon. In the other businesses, they pretty much transition back to P&L. So as businesses, execute their return to work strategies, and the COVID pandemic continues to move into the past we will transition account as it makes sense. And as our clients need us need us to or want us to based on their service expectations.

[Operator]

Thank you. One moment for next question. And our next question in queue coming from the line of Andrew Steinerman with JPMorgan. Your line is open.

[Andrew Steinerman, JPMorgan]

Hi, Andrew. Tom, I just want to get the exact margin in the guide. So you said nearly 100 basis points margin expense for fiscal '23. I assume you using a 4.9 fiscal '22 base. And when you say nearly 100 basis points, is there a notable difference between constant currency and reported and so like, what should we think of in terms of a target fiscal '23 operating margin on a reported basis?

[Thomas Ondrof, EVP & CFO]

Well, if it were to sort of stick with that 11% to 13%, top line growth and 34%, 39% AOI dollar growth you can you can work with those variables to come up with a margin that at a margin range. So that's really the focus for us is to continue to grow those dollars. And again, we think that at the midpoint that's going to drive about 100 basis point margin improvement year-over-year.

[Andrew Steinerman, JPMorgan]

And is the 100 basis points reported or constant currency?

[Thomas Ondrof, EVP & CFO]

It would be reported.

[Andrew Steinerman, JPMorgan]

Okay, thank you very much.

[Operator]

Thank you. One moment for our next question. And our next question in queue coming from the line of Toni Kaplan from Morgan Stanley. Your line is open.

[Toni Kaplan, Morgan Stanley]

Hi. I wanted to ask about competition. So on the slide where you broke out this source of new wins. It looks like you're getting additional wins from the regional players. So anything to call out on that front are the sort of smaller players having more trouble competing because of the higher cost environment or would you attribute it to something else? Thanks.

[Thomas Ondrof, EVP & CFO]

Hi Toni this is John. I think that's probably a good assessment. We are the big step change continues to be the self upconversion activity that's increased over the norm and continues to run at a pace of probably 10% to 15%, higher than the industry norm has been over the last 10 to 15 years. So that'd be that would be the big step change.

The other areas are very, kind of typical. There are areas where we compete against the other big three, other excellent companies based on what they have, what kind of rebid activity exists in their contract base this year, we had a higher level of rebid activity based on the analyzation of certain contracts and their expiration date. So it just it cycles. I don't think there's any real change in the competitive dynamic between the big three or the regionals. But I think additional cost pressures probably do have an impact on the smaller players.

Our supply chain is much more robust. And we're much more able to respond to those kinds of cost pressures than the smaller competitors are so but the big tailwind for us is really in the self-op conversion mode. And that looks like it's going to continue.

[Toni Kaplan, Morgan Stanley]

Yes. Understood. Wanted to ask on the 2025 margin target of 7% to 7.5%. It sounded like from the prepared remarks, and this is consistent with prior quarters, it sounds like you're still confident and being able to achieve that. And you had put out that target before we really started to see inflation really escalate. I know there were probably some supply chain issues at the time. But I think and it sounds like supply chain is moderating now. So I just wanted to understand, like, just given that inflation has become a bigger factor. Are there some offsets, like what are the offsets needed to get to that level? Is it the negotiations that you mentioned, Tom in the prepared remarks, or are there other factors that we should be thinking about? Thanks.

[Thomas Ondrof, EVP & CFO]

Sure, I do, certainly inflation has been a headwind to that target from a year ago. And all things being equal, probably be towards the lower end of the range, given the inflation impact than the higher end of the range, but that said, there are to your point, some offsets supply chain will continue to mitigate. We're confident of that and settle in, over the course of the next three years, as we move towards that period, talked about with fiscal '25.

And then we also continue to, the new business wins, and the ability to leverage those wins, both through our supply chain negotiations, as well as our above unit overhead costs are going to be a tailwind to the margin. So we're growing and we're actually probably a year ahead of pace, in terms of trying to get to that 4.5%, 5%. net new business growth number, we talked about it on analyst day. John and I was very pleasantly surprised with the way the teams gelled and delivered that results a little bit quicker than anticipated. So that again benefits us as we build margin through scale going forward over the next three years. So I think inflation is a headwind. But I think the some of the offsets are the pace of growth, and supply chain [survey].

[Operator]

Thank you. One moment for next question. And our next question coming from the line of Shlomo Rosenbaum with Stifel. Your line is open.

[Shlomo Rosenbaum, Stifel]

Hi, good morning. Thank you for taking my questions. Hey Tom there's been a very strong, gross new business wins and maybe you could give us a little bit more detail and what does that represent in terms of like a margin headwind in fiscal year 23? Just in terms of you have the ramp up, they're not mature yet. I'm not sure where you are yet with the fiscal year '21 new deals. Is there some way to think about hey, the underlying margin is improving by X amount, but there is a headwind from these new deals that are coming in faster than expected. That is kind of limiting it a little bit and then I have one follow up.

[Thomas Ondrof, EVP & CFO]

Yes. So it's a great question. And I understand from the outside looking in that it can be a little tough to dig into this area and it is an important one. But and I hate to give you the answer, but it does depend, it just depends on the size of the account. Smaller accounts ramp to natural margin relative, very quickly, typically in the first six months to 12 months at the most, the longer one of the bigger ones, as we talked about before, particularly in the higher ed or healthcare space contend to take three years or so to ramp to that.

Then you got the offsets of retention and proactive retention and what happens to the margin there. So, there's a lot of moving pieces to it. But typically, if you just work with that one to three year basis of margin maturity that'll probably put you in the right direction.

[John Zillmer, CEO & Director]

Sorry, didn't mean to interrupt there. Keep in mind in this in when you have these accelerating net new business wins, and remember, last year was 500, this year is a day, it's 800. So you'd have an accelerating growth in those new account wins, so the opening costs that are anticipated, the ramp and maturity costs that are anticipated are accelerating during that time period. So as you get to a more steady state that normalizes and it's much more predictable.

As we continue this acceleration process, and we continue to believe that we will ramp up sales again this year that it's a little more difficult to predict exactly how that ramp will unfold based on the size of the accounts, the location, the geography, the type of operation, it is, but we are highly confident in our ability to deliver on our analysts date targets.

And we've weighed that growth into those targets as we establish that program. And so everything that's unfolded here with respect to the performance of the company, is very much the way Tom and I predicted it and as we established the plan. So we're confident in our ability to go ahead and hit those targets that we've identified.

[Operator]

Thank you. One moment for our next question. And our next question coming from the line of Neil Tyler with Redburn. Your line is open.

[Neil Tyler, Redburn]

Good morning. Thank you. Couple of questions left, please. Firstly, on the conversion rate, the speed of conversion of some of the longer term pipeline of new when opportunities that you see -- you mentioned, Tom, that the U.S. sort of a year ahead of the original plan? Is that basically the same size pie, but you've taken a bigger slice out of it, or has the pie grown? That's the first question. Secondly, you called out facilities playing a fairly sizable role in new wins. And I wanted to ask whether that was sort of cross selling to existing clients or whether that's actually something that's brought new clients on board.

And then finally, I'll chance on margin as well. And think, just wonder if you could sort of help us understand in terms of the sequential uplift that you talked about the 100 basis points or so how the price versus cost and specifically the removal of some of those ramped up costs, how those sequentially are expected to contribute '23 versus '22 into that 100 basis points?

[Thomas Ondrof, EVP & CFO]

That's a lot to unpack. Good questions of all of them. Let me start with the margin. As John just talked about the ramp, and we've had some serious acceleration of net growth, obviously, from year Zero in '19 into 20 to [indiscernible] this year. If you look at the guidance, '23 is going to be north of 800. But that's we're sort of hitting cruising speed to a degree and getting to that 4.5% to 5% annualized net growth.

So the first half of the year to your question is going to be where I have more of the startup costs that are new or incremental to the prior year and then that will wane as the year goes on. And certainly in a '24, '25 is we're healing cruising speed and staying at cruising speed. to John's point, we're just but a lapping prior year startup costs and those won't become as much of a factor over those next couple of years. So I think the pace of it is going to be more so in the first half than the second half, if you're just looking at '23.

[Neil Tyler, Redburn]

Okay, thanks.

[Thomas Ondrof, EVP & CFO]

[indiscernible] In terms of pie size fortunately, we are benefiting right now from both taking share self-ops, that has continued to be a primary source for us a little bit higher than the historical norm. And then the regional players that, of course, the other big players in certain markets. But the pie size has also increased a bit here over the last couple years. And so, we're benefiting in an industry from both phenomena.

And again, as I said, we continue, we don't feel as though we need the outsourcing, learned to continue to stay at those mid single digit rates that we reached this year, and are expecting into '23. So we're just very pleased with again, to have it be in a position to be able to capture this opportunity based on the investments we made throughout the pandemic, and the results that our teams are showing.

And if all you had a question about facilities, it hasn't particularly been cross selling opportunities, they've been standalone beachhead opportunities, and we do like that, because getting into an account, no matter with either service, food or facilities is a good, good starting point for us and then ultimately can build to there and that cross sell opportunity could be an opportunity.

[John Zillmer, CEO & Director]

Yes, and I would just add that the facilities wins have been brought based across multiple industries, multiple geographies, and both standalone and existing customers. So it's a very significant year for them. And it's a business, we operate in a couple of different forms. Obviously, we've got the standalone facilities business, but we also serve facilities, customers in the healthcare space managed by healthcare. So it's a great segment for one for us, the one that will continue to focus on growing and their wins this year had been both self authoring versions as well as existing account conversion. So they're really nice year for facilities as a business unit.

[Neil Tyler, Redburn]

Fantastic.

[Operator]

Thank you. One moment for next question in queue. Our next question in queue coming from the line of Andrew Wittmann with Baird. Your line is open.

[Andrew Wittmann, Baird]

Great. Good morning. Thanks for taking my questions, everyone. I guess question on the capital structure, you mentioned that you've got the flexibility and you don't have to do anything that what you choose to do. Just hoping you could explain a little bit more about what that means. I guess, with the uniform business representing probably just over $40 million of EBITDA the company's leverage being at the end of the year around four times. So it feels like there's at least a billion and a half of new debt, that's going to have to get reformulated somewhere. Do you have the ability to pay off your existing series of debt and partially without having to redeem them in fall or anytime you could just give us a little bit more detail as to how you planned to effectuate the new capital structure over there at least?

[Thomas Ondrof, EVP & CFO]

Yes, still prefer not to give out or go into too much detail at this point. Because the markets move we're continuing to evaluate what's best. I think the key point is that there's really nothing we're in our hands being forced to do with the transaction, Andrew it's going to put us in a position that we really don't want to be in. So how we ultimately finalize the details, what we pay off, what we refinance, is all being determined and will again, give you more details on that as we move forward and get a little closer in the transaction.

[Andrew Wittmann, Baird]

Okay, we'll stay tuned for that. I guess my follow up question. I wanted to ask about the international segment a little bit more. And I was hoping you could just comment on the margins in that business in particular, obviously, this business has got a lot more of a dynamic economy. Certainly that's happening there. And I want to understand how that's affecting your profit margins in that segment specifically and how much more you have on variable costs to potentially manage those margins, if needed, recognizing that you're coming out of COVID where you actually probably did a lot of those activities already. Maybe if you could just kind of boil it down to help us understand what the margins could be in 2023 for that swing, it would be helpful. Thank you.

[John Zillmer, CEO & Director]

Yes, margins international have moved forward quite nicely, actually. They have a model that's been more stable. We talked about that before. Their sales growth has been more consistent. So it really is a bit of a proof source as to what's happening in the U.S. as we rebuild the growth engine, and margin through scale model, the U.S., sorry, the international business has really been doing that for a number of years.

So they were able to move the margin north of 4% I think, this year, and then we'll continue and reach pre-COVID levels, I think in '23, or very close to that. So they've got the same levers as the U.S. in terms of accounts from an account basis, in terms of what they do to drive margin. But again, they've been able to scale through their growth, both benefiting from the supply chain, and managing the [indiscernible] unit overheads quite nicely, this past year, and we're expecting the same as '23. And then from an inflation standpoint, they just have, it's part of the DNA for them in many of their countries.

So their ability to price was part of the mix for them. And part of what they face the challenge they face, again, in many parts of the international business for some time.

[Operator]

Thank you. One moment for next question. Our next question in queue coming from the line of Faiza Alwy from Deutsche Bank.

[Faiza Alwy, Deutsche Bank]

Yes, hi, good morning. I was hoping to get an update on the labor environment?

[John Zillmer, CEO & Director]

Labor environment continues to be challenging pretty much everywhere around the world. We've met, however, we have been able to, through the use of both technology and a number of tools and resources we've established for people in the businesses, we've been able to meet the staffing challenges that are that our units face, we have a very, very strong talent acquisition organization that's been in place for a number of years, and is very adept at meeting the recruiting needs of the business.

As you know, we have a couple of businesses that have very strong seasonal ramp up activities. So we've built the processes for the organization in order to meet those ramp up demands for sports and entertainment, higher education and other businesses.

And so we've been able to go ahead and meet the needs of the business. One of the tools that we put in place over the course of the last year was daily pay, that was a very strong incentive for lower wage earners to go ahead and join Aramark as they were able to access their pay on a daily basis with very little cost to them.

And that's been very, very successful in terms of driving recruitment activity. And so, all in all, still, the pressures exist. But we do see a softening in the labor market, as you've seen announced layoffs and others, we're beginning to see more people returned to work and a higher level of concern. So I would say our turnover numbers are kind of normalized. And our recruitment activities are in very good shape.

[Operator]

Thank you. Now our next question in queue coming from the line of Manav Patnaik from Barclays. Your line is open.

[Unidentified Analyst]

Morning, thank you. This is actually [indiscernible] on for Manav. May I just reconfirm for the 11% to 13% organic contributions from each of net gross price volume COVID recovery? And I'd be particularly mindful in consideration of timing, I think you'd said, most of the COVID recovery should come in the first half. And then lastly, any insights for organic constant currency revenue expectations by segment?

[John Zillmer, CEO & Director]

Yes. The COVID recovery, we do expect to be weighted more to the first half as we lapped we got to 85% here in the fourth quarter a little better than that, actually. And so by [indiscernible] the next fourth quarter, that should be waiting versus we talked about being much less than the first quarter of last year it's time to recover. So the first half way to determine that. On the other, no real comment on the split by geography.

[Unidentified Analyst]

Okay. And then can I ask you just to repeat the contributions from net growth price I mean prior COVID recovery?

[John Zillmer, CEO & Director]

Sure, it's all one of the it's on the slides attached to it. No problem, 4.5 to 5 for net growth. 3 to 4 from COVID recovery, and a 3.5 to 4 for pricing. Again, assuming a constant inflationary environments.

[Unidentified Analyst]

Okay, thank you. As a follow up.

[Operator]

Thank you. And our last call question coming from the lineup, Stephanie Moore from Jefferies. Your line is open. Stephanie your line is open.

[Stephanie Moore, Jefferies]

Hi, good morning. I wanted to touch on the business and industry continuing to see a nice recovery there. Could you maybe speak to areas where you've seen or areas where they might be lagging just versus those pre-COVID levels and other areas where you've seen some improvement here during the quarter, and particularly throughout the year? And then I just wanted to get your high level thoughts as you think about this business returning to pre-COVID levels, and what that means just given hybrid work schedule companies that have maybe reduced office space, at the same time, the opportunity to gain new business and kind of how all of those triangulate together. Thank you.

[John Zillmer, CEO & Director]

Yes. That business has continued to have a net new business growth year-over-year and it's performing very nicely. We do have varying states of recovery amongst the clients that we serve. Some are back on 100%. Obviously, the blue collar operations back at 100%. And still some white collar operations lagging and particularly in the coastal environments, if you will, so call it the financial sector, or the high tech sector. But even those over the course of the last couple of months, those have begun to improve dramatically.

We saw based on these results is a significant transition in September. We continue to see an acceleration of that return to work throughout the first quarter of the new year, which I won't comment on. But we do see that pace of change accelerating. We believe that this business will be highly profitable going forward. There is plenty of growth opportunity in this segment and while individual client locations may be different than they were pre-COVID, that overall, the business will be very strong, fundamentally a good business to be in.

And so it may look a little bit different in terms of the customers we serve and the type of services that they want and the individual locations. But ultimately, we see this as a core business for the company with strong growth dynamics, and in a very strong leadership team in place to continue that growth.

[Stephanie Moore, Jefferies]

Great, appreciate the time. Thank you.

[John Zillmer, CEO & Director]

Thank you.

[Operator]

Thank you. I will not going to call back over to Mr. Zillmer, for closing remarks.

[John Zillmer, CEO & Director]

Terrific. Thank you very much, everybody, for joining us this morning. We obviously are very excited about the performance of the company in the fourth quarter, and our prospects for fiscal '23. We're excited about the growth the company has been able to achieve in the net new business wins.

And we have a strong commitment to those goals that we've established as an organization during our analyst day for both growth and margin and we will be back together again here at the end of the first quarter to talk about, to talk more about the spin and the implications for both sides of the business going forward.

And we will update you then at that time. So thank you again for the time this morning and I look forward to continuing our conversations in the near future. Thank you.

[Operator]

Ladies and gentlemen, thank you for participating. This concludes today's conference. You may now disconnect. Good day.