Aramark

NYSE:ARMK

Earnings Call Analysis

Aramark Eyes Strong Fiscal '24 with Strategic Wins

Aramark has had a year of strategic advancement and financial success, marked by a 16% increase in organic revenue and a 50% surge in adjusted EPS on a constant currency basis. They accomplished the Uniform Services spin-off, aligning with their vision for performance enhancement. Fiscal '24 promises steady growth with expected organic revenue growth of 7% to 9%. AOI (Adjusted Operating Income) and adjusted EPS are projected to grow 15% to 20% and 25% to 35%, respectively, on a constant currency basis. By fiscal '24 end, they aim to achieve a leverage ratio of approximately 3.5x, signaling continued financial prudence. Even with past inflation impacts, Aramark maintains its trajectory towards a greater than $17 billion revenue goal and an AOI margin of 5.9% to 6.4% by fiscal '26. The steady deleveraging and strategic positioning have poised the company well for the coming fiscal years.

A Strategic Leap Forward

Fiscal year 2023 for Aramark has been pivotal, marked by a hospitable and customer-centric culture that led to the third year of robust net new business growth. This success translated into an impressive 16% rise in organic revenue when measured against the prior year. The adjusted operating income skyrocketed, more than doubling the organic revenue growth, signifying a substantial enhancement in margins from the previous year. With strategic cash management and asset optimization, Aramark achieved a 50% uptick in adjusted EPS on a constant currency basis. The landmark accomplishment of spinning off Uniform Services is anticipated to fuel further performance gains, allowing both businesses to thrive independently.

Fiscal 2024 Projections and Strategic Factors

As Aramark sets its sights on fiscal 2024 and beyond for its Global Food and Facilities business, the focus on consistent profitable expansion remains. Driven by a mix of net new business, strategic pricing, and growth of the foundational business, income growth prospects appear robust. AI technology in labor scheduling, recovery from price inflation delays, and improved supply chain economics are among the factors expected to accelerate AOI growth, leading to what could be an extraordinary advancement in margins for the coming years—surpassing the usual revenue growth rates.

Forthcoming Fiscal Highlights

In fiscal 2024, Aramark's global FSS business is projected to experience an organic revenue leap of 7% to 9%, comprising both pricing advancements (3% to 4%) and net growth (4% to 5%). In concert with this, adjusted operating income is predicted to burgeon by 15% to 20% on a constant currency basis, and adjusted EPS is anticipated to climb by 25% to 35%. The company plans to maintain a leverage ratio of approximately 3.5x by the end of the fiscal year, underscoring a commitment to leveraging profit growth and disciplined cash management for continued debt reduction.

Long-term Financial Goals and Adjustments

Aramark has set ambitious targets, including a revenue milestone of over $17 billion, which it now expects to achieve ahead of schedule, reflecting potent net new business and robust pricing. While the company previously faced a post-COVID AOI margin of 1.2%, it has since surged to 4.7%. However, due to high inflation in recent years, the AOI margin target of 5.9% to 6.4% is projected to be reached by fiscal 2026 rather than the initially planned timeframe. Adjusted operating income is on course to land in the range of $1 million to $1.09 billion by fiscal 2025. Adjusted EPS for the global FSS sector specifically is planned to fall between $2.30 and $2.50 by fiscal 2026, factoring in the interest rate increments since their last Analyst Day.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, and welcome to Aramark's Fourth Quarter and Full Year Fiscal 2023 Earnings Results Conference Call. My name is Kevin, and I'll be your operator for today's call. At this time, I'd like to inform you that this conference is being recorded for rebroadcast. [Operator Instructions] 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 earnings conference call and webcast. This morning, we will be hearing from our CEO, John Zillmer; as well as our CFO, Tom Ondrof. There are accompanying slides for this call that may be viewed through the webcast and are also available on the IR website for easy access. Our notice regarding forward-looking statements is included in our press release.

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 SEC filings. We also will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found in our press release and IR website. With that, I will now turn the call over to John.

[John Zillmer, executive]

Thank you, Felise, and thanks, everyone, for joining us. This morning, Tom and I will provide a detailed review of our fourth quarter and full year fiscal '23 results and key performance drivers, including net new business. Our growth teams continue to deliver, including significant new business wins closed in just the past few weeks, which I will review shortly.

I'm proud of the work we've done to strengthen performance and culture and I'm eager to capitalize on the numerous opportunities, our client-focused approach continues to generate. We'll also preview our performance expectations for the year ahead, which show positive momentum entering this new era for Aramark following the completion of the Uniform services spin-off.

We'll take a moment to highlight the results for uniforms at a high level, and Kim and Rick will provide more detail on their upcoming earnings call for Vestis, now an independent publicly traded company.

Aramark's performance this past fiscal year demonstrated the progress we've made towards the strategy and financial goals outlined at Analyst Day nearly 2 years ago, resulting in a stronger balance sheet, improved profit and margin performance and meaningful sustainable growth.

Over the past year, organic revenue grew nearly 16% and adjusted operating income increased 34% on a constant currency basis. Free cash flow was $334 million. That included a payment of deferred payroll taxes related to the CARES Act as well as transaction and restructuring costs associated with the spin-off. Free cash flow before these items was $471 million, which along with higher EBITDA and over $800 million of net debt reduction throughout the year resulted in a 1.4x leverage ratio improvement from the prior year to 3.9x at year-end.

Adjusted EPS increased 50% on a constant currency basis compared to prior year. As part of these results, global FSS, consisting of the food service for the U.S., Foodservice International and Corporate reportable segments drove organic revenue growth of nearly 18% and AOI growth of more than 46% on a constant currency basis. And in the Uniform Services segment, organic revenue grew 5.5% and AOI increased 10% year-over-year on a constant currency basis.

The Uniform team's strategic initiatives contributed once again to its improved profitability in the fourth quarter. AOI grew 15% on a constant currency basis and AOI margin reached 11.8%, nearly 70 points basis -- nearly 70 basis points better than the third quarter and 106 basis points better than the fourth quarter of last year.

We believe the pathway for value creation that Tim and Rick outlined at the Vestis Analyst Day in September is taking shape and we're excited for their promising future as a stand-alone company.

Turning now to global FSS, net new business. With a growth mindset now well established, our net new business momentum continued achieving a 4.3% of prior year revenue. High retention rates and strong new business wins drove growth in this priority area.

The hospitality culture that we continue to cultivate and enhance has resulted in strong relationships with our clients. We've also been opportunistic in repositioning the portfolio within our Next Level business as we create a new senior living offering, which we believe has enormous potential ahead.

Retention rates were 95.5% of strength across the portfolio, maintaining the positive step change versus our historical levels even as the environment normalized this year. Annualized gross new business wins totaled nearly $1.2 billion, representing 8.8% of prior year revenue.

Now entering another year of expected strong new business performance. We believe that we are starting to reach a cruising speed and delivering consistent growth. We added clients, both large and small, across multiple lines of business and geographies. Among others, a notable win added in the fourth quarter was the Indianapolis Motor Speedway, one of the world's biggest sports complexes and home to the iconic ND500.

Favorable outsourcing trends continued throughout the year, with 40% of our wins globally and close to 50% in the U.S. coming from self-op conversions compared to around 1/3 historically. While we provide more detailed disclosures on our net new business performance at the end of each fiscal year, our focus on driving growth is constant.

In just the first few weeks of fiscal '24, we're off to a great start, which includes having just been selected to provide food and nutritional services to one of the most admired and respected children's and pediatrics institutions, Boston Children's Hospital.

We remain confident in our robust pipeline for fiscal '24 and expect to achieve net new business equivalent to 4% to 5% of prior year revenue for the third consecutive year.

Now turning to our fourth quarter results, again, exclusively focused on global FSS. Overall performance reflected a strong top and bottom line across the portfolio. Revenue of $4.2 billion included organic growth -- revenue growth of more than 12% year-over-year, driven by strong net new business, pricing and base business growth.

Operating income was $220 million. Adjusted operating income was $256 million, representing an increase of 33% year-over-year on a constant currency basis. Operating leverage from higher revenue and the maturing of new business from prior years, as well as improved supply chain economics and disciplined above unit cost management resulted in higher year-over-year profitability in the quarter.

The FSS U.S. segment increased organic revenue more than 10% compared to the same period last year, and AOI grew more than 24% on a constant currency basis. Performance was driven by strong per capita spending and greater event attendance in sports and entertainment as well as continued favorable trends across the B&I sector.

As we previewed last quarter, we've made notable progress on the price inflation lag within the education sector and corrections business. This pricing partially benefited the fourth quarter and will be more fully -- and will more fully contribute to results in the first quarter of fiscal '24 and beyond.

The FSS International segment grew organic revenue approximately 19% year-over-year and increased AOI more than 50% on a constant currency basis, even without the AIM operations following its divestiture in April. Performance in the quarter reflected strong results across geographies, including a busy events calendar and greater B&I participation rates in Europe, strong mining activity in South America and the start of the school year for higher education clients in Canada.

Corporate expenses were relatively flat year-over-year as we remain focused on above-unit cost containment while appropriately supporting the international and U.S. segments. Collectively, our performance in the quarter was a strong end of the fiscal year and sets a solid foundation going forward.

Given our strengthening financial profile, the Board of Directors just approved a 15% increase to our pro rata portion of the pre-spin dividend. The $0.095 dividend per share will be payable on December 8. We remain focused on driving our ESG and DEI strategies, which resulted in the following recent accomplishments.

Aramark was selected as one of the America's Greenest companies by Newsweek for our commitment to our sustainability footprint. We were recognized as the best company for diversity, equity and inclusion by Black Enterprise and named the 2023 Champion of Board diversity in the form of executive women. And just a few weeks ago, we announced our partnership with JPMorgan Chase on their diverse supplier brand initiative that is focused on assisting diverse owned businesses.

Before turning the call to Tom, I want to congratulate 2 exceptional Aramark leaders on their well-deserved retirements. First, Bruce Fears, with 40 years of stellar service to the company, most recently as President and CEO of Aramark Destinations. Bruce's commitment to our business and stewardship to some of the country's most iconic places is legendary and we're grateful for all the years he served Aramark and this industry.

Sasha Day will step in to lead Aramark destinations, returning to her roots where she initially joined the company 20 years ago. Most recently, Sasha served as Chief Growth Officer for the Collegiate Hospitality business.

And Andy Silos, President and CEO of Aramark Canada since 2016. With his passion and focus on results, Andy established strong client relationships and elevated Aramark's position as a Canadian company. Steve Prisco has been named President and CEO of Aramark Canada. Steve has extensive experience within the Canadian business, which he joined in 2004, having served in roles including Assistant General Counsel, Chief Financial Officer, Regional VP for Canada's largest operations and most recently, Chief Growth Officer. I wish the best to Andy and to Bruce in their retirement, and I know that Sasha and Steve will be remarkable in their new roles. Tom?

[Thomas Ondrof, executive]

Thanks, John, and good morning, everyone. Fiscal '23 represented another significant step towards delivering our strategic and financial goals. As John just reviewed, our reestablished hospitality-driven customer-focused culture has resulted in a third consecutive year of strong net new business performance, which helped drive a 16% increase in full year organic revenue compared to prior year.

Adjusted operating income grew at more than twice the rate of organic revenue, resulting in significant AOI margin improvement over last year and we continue to meaningfully delever through focused cash management and strategic asset optimization, which, when combined with AOI growth, led to a 50% year-over-year increase and adjusted EPS on a constant currency basis.

We also completed a major milestone with the Uniform services spin-off that we believe will drive enhanced performance and value creation as each independent business executes on its own distinct strategic vision. As we move past this exciting inflection point for Aramark, our commentary today will be focused on the global food and facilities business in fiscal '24 and beyond.

The fundamentals of the business remain unchanged. We expect to deliver profitable growth and margin through scale. Revenue performance will continue to be led by net new business, appropriate pricing actions and expanding our base business. AOI growth, which is favorably positioned for outsized increases in the near term, we believe will be driven primarily by 5 factors: first, the profitability ramp of new business as a result of operational maturity and efficiencies following 3 consecutive years of adding new clients; next, the recovery of the price inflation lag and expected benefits from recent trends related to the slowing of inflation.

As John mentioned, we made particular progress here in our education sector and [indiscernible] business that benefited the fourth quarter. And assuming continued moderation of inflation, we believe will continue to contribute to AOI growth during the first quarter of fiscal '24 and beyond.

Third, the run rate from improved supply chain economics both externally as product availability has returned to normalized levels as well as internally through enhanced purchasing compliance, efficiencies from SKU rationalization and benefits from new deals driven by greater purchasing scale.

Fourth, the continued recovery of unit profitability is middle of the P&L cost related to food, labor and other direct stabilize, coupled with the flexibility of our variable cost operating model. Labor dynamics continue to improve compared to a year ago, particularly in collegiate hospitality, where we are no longer relying on excessive agency labor.

Our frontline teams continue to innovate in impressive ways to drive unit costs down without compromising the customer experience. As just one example, we are using AI to streamline labor scheduling and more efficiently and effectively plan menus.

And lastly, the disciplined control and containment of above unit cost as we continue to create a fit-for-purpose overhead structure post spin that appropriately supports the remaining business. The combination of all these factors being in play at once is expected to drive AOI growth at a faster rate than revenue, even more so than our typical business model, resulting in expected strong margin progression over the next few years.

As a reminder, we still expect a historic U-shaped AOI margin cadence with higher profitability in the first and fourth fiscal quarters, primarily related to seasonal peak activity in the education sector as well as the Sports & Entertainment to destinations businesses.

Let me now move on to the fiscal '24 outlook and then recap the halftime review update of our fiscal '25 goals from Aramark's Analyst Day back in December 2021, which were set for the total company, including Uniforms. Recently, we broke out the original assumptions for just the global FSS business and our published materials this morning include certain disclosures in more detail to help ensure we are all working from the same starting point.

In fiscal '24, for our Global FSS business, we currently anticipate Organic revenue growth of 7% to 9%, comprised of 3% to 4% pricing and 4% to 5% net growth, AOI growth of 15% to 20% on a constant currency basis, adjusted EPS growth of 25% to 35% on a constant currency basis and a leverage ratio of approximately 3.5x at fiscal year-end as we continue to prioritize deleveraging through profit growth, focused cash management and disciplined investment.

We are proud of what we've accomplished in fiscal '23, and we've built solid momentum going into fiscal '24. Assuming a continued easing of inflation over the next couple of years, we believe that we remain on track to deliver the Analyst Day goals for global FSS, adjusted for the spin of the uniform business and divestiture of an services as follows: revenue of greater than $17 billion. We expect to hit this goal a year earlier than initially planned as captured in the fiscal '24 outlook as a result of stronger net new business and higher than anticipated pricing over the past couple of years.

AOI margin of 5.9% to 6.4%. When we originally set our target following COVID-impacted fiscal '21, the global FSS AOI margin was 1.2%. Just 2 years later, AOI margin has increased nearly 350 basis points to 4.7%. Fiscal '24's AOI is expected to grow more than twice the rate of revenue, driven by the outsized AOI growth factors just reviewed, which we anticipate will deliver another significant jump in AOI margin this coming year.

However, due to 40-year high inflation experienced over the past 2 years and the price inflation lag in a few of the business lines, we now expect to reach the AOI margin goal by fiscal '26. Adjusted operating income remains on track to be in the $1 billion to $1.09 billion range in fiscal '25.

Adjusted EPS and leverage were not specifically broken down by segment when we originally set these targets. So I'd like to take the opportunity to share our latest thinking here for the Global FSS business. Adjusted EPS is expected to be in a range of $2.30 to $2.50 by fiscal '26, simply as a result of the roughly 250 basis point rise in interest rates since Analyst Day.

The debt leverage ratio for the total company was originally targeted to be in a range of 3 to 3.5x by fiscal '25. Since that time, we divested our interest in certain noncontrolling assets, including AIM services and paid down debt. With that, we currently expect to be at the top end or just inside our initial target range in fiscal '24, achieving our Analyst Day goal a year early as we just reviewed, and in a range of 2.75 to 3.25 by fiscal '25 as we remain committed to deleveraging.

We have a lot of confidence in not only achieving these financial goals, but getting to and through each one as we continue to build a sustainable business model set on providing valued services in a highly attractive recession-resilient growth market that can create long-term value for our shareholders.

With the Uniform spin complete and a new era dawning for Aramark as a focused global food and facilities provider, we couldn't be more excited for the future of the company. Thanks for your time this morning. John?

[John Zillmer, executive]

Thank you, Tom. I'm extremely proud of the milestones we accomplished this past year as a global team, and I'm excited about the positive momentum we've generated for the year ahead. Our strong performance is driven by our commitment to our strategic priorities, which we believe have established the groundwork for more opportunities and success to come both in the near term and long into the future.

With the spin-off now complete, fiscal '24 represents a new chapter in the company's history. We're confident in our ability to build upon what we've worked hard to establish, leveraging the hospitality culture and growth mindset now firmly rooted within the organization. Operator, we'll now open the call for questions.

[Operator]

[Operator Instructions] Our first question comes from Harry Martin with Bernstein.

[Harry Martin, analyst]

I thought I'd ask one on the guidance, please. The Q4 EBIT number, I calculate as being 3% ahead of 2019. It looks like the 15% to 20% AOI growth into next year can be hit, assuming a pretty similar 3% ahead of 2019 number for the rest of the quarters to come in 2024. So I just wondered how conservatively do you feel like that, that guidance has been set and what the moving parts are there?

And then just a more strategic question. You mentioned on the supply chain and the benefits that can have on the margin from compliance, scale and new deals. I wonder if I could get a little bit more detail to help quantify that? What is the purchasing volume of the GPO today? What percentage of that is in food items versus the other hospitality items of procurement? And then what proportion of the sites today are in compliance? And how much do you expect that to drive an improvement going forward? Thanks very much.

[Thomas Ondrof, executive]

Do you want to start with supply chain?

[John Zillmer, executive]

Sure. I'll start with supply chain. First of all, compliance is a statistical measure across the contract foodservice business. So those statistics are reviewed with each operating business. Every month, they have a goal in terms of their overall compliance and are working very hard to achieve to achieve those numbers. There is always opportunity. And in the last year, that was significant because of the disruption that occurred in the supply chain over the course of the last couple of years. So our compliance numbers are very, very close to optimal. We continue to push and to get units to purchase the right products from the right suppliers. So there is always opportunity to improve upon that. But in general, I'd say we're very close on the compliance numbers. The GPO spend today, I don't think we disclosed what the total GPO spend is.

[Thomas Ondrof, executive]

Yes, it's about $16 billion.

[John Zillmer, executive]

Yes, about $16 billion, which includes both our contract foodservice revenues as well as the spend that we manage for our clients through Avendra and the other GPOs we operate. So we have significant scale and we work very aggressively to utilize that total spend to method both our clients as well as Aramark as we continue to manage new deals with suppliers and manufacturers, and that supply chain team is very expert at optimizing for all of those contingencies. So we're very comfortable with the potential growth for the GPOs. We have significant opportunities to grow both domestically and internationally in the GPO market, and we see continued supply chain economics improvement as a result of that focused growth of that -- in that area.

[Thomas Ondrof, executive]

Yes. And Harry, I think on the margin question, is it conservative? And if you play it off against either '22 or '19 and I'm not sure how relevant '19 is anymore given the spin and different economic dynamics versus 5 years ago and 5 years ago now. But we're very thoughtful about what we're trying to accomplish here in building this sustainable model. We all know what chasing margin does, and it doesn't end well. So we're continuing to move the business forward in a thoughtful way, trying to balance retention, new business growth, our client needs. We're very happy with the progression of the margin off the low of 1.2% in '21, like I said, improved it by 350 basis points so far. We'll continue to progress and we still feel, as I said, very comfortable and confident in the goals that we set out with some adjustments for timing. We'll continue to push through that. If there's an opportunity to move it faster, which will probably be driven off a stronger easing of inflation over the next few quarters and a couple of years, we'll do that or we'll have that opportunity. If it goes the other way, it will be a bit of a headwind. So overall, we feel good about the number. I don't know if it's conservative or not, but we'll continue to do what's right for the business.

[John Zillmer, executive]

Yes. And I would just add a final commentary to that is that we're off to a good start in the quarter. We see continued improvement in the slow moderation of inflation. That's our expectation built into the model and built into the plan. And if inflation continues to ease more rapidly, then certainly, we'll be able to -- we're well positioned to take advantage of that. As we discussed in our commentary, we've made significant progress on the price recovery in those businesses that we're lagging. We saw that in the fourth quarter, and we continue to see that play out in the first quarter in early days. So we're confident in the targets. And as Tom said, we have a commitment to the goals that we established at Investor Day. We see ourselves reaching those goals and getting through them and doing even better in the long term.

[Operator]

Our next question comes from Neil Tyler with Redburn Atlantic.

[Neil Tyler, analyst]

Actually, I think I'll start by following up on Harry's question about the margin and your comments there. So the guidance suggests, if I'm calculating correctly, that the basis point improvement will be a little bit better than your typical operating leverage but not significantly. And so I wanted to ask with the comments you just made in mind, to what extent your sort of reinvesting in the business in order to maintain growth just really an operating cost. That's the first question.

And a second part of that, I suppose, is I don't know whether you look at the business this way, but can you compare gross margin or in-unit margin on Business One versus business lost over the last, say, 24 months? I'm trying to get a sort of taste for any structural change in the profitability of the business that's coming in.

[Thomas Ondrof, executive]

Yes. I mean the margin is -- business won is always lower than business loss. So that churn is we're getting up to the cruising speed that John referred to is the headwind we've talked about for the last couple of years. But as we consistently build that cog it levels out over time, and that's where we'll get to here over fiscal '24 and fiscal '25. The normal model in my mind, this is a 6/9/12 model, so to some folks before in a normal basis, 6% top line, 9% bottom, 12% EPS. And probably be a bit outsized for us on EPS because of the -- as we delever. That yields probably a 20 basis point margin improvement in the normal course of things. We expect to double, maybe triple that over the quarter, if you take the guidance this year. So it is quite outsourced and or outsized. And I think that, that has the opportunity that fiscal '24 and '25 and even into '26. And obviously, they hit the polls as everybody is doing the math, that's what we have to do, but we feel confident -- so I think it is -- the next couple of years is quite outsized AOI growth, margin growth compared to the normal model, which would probably be around 20 bps.

[Neil Tyler, analyst]

Sorry, I wasn't particularly clear in the first part of the question, Tom, I apologize. I mean I really meant that whether there were sort of contracts you were deliberately sort of leaving behind that were suboptimal in terms of their profitability. So I wasn't thinking actually sort of on day 1 necessarily in that switch. But when you look at each of those portions at their cruising speed, whether there's much difference in the profitability of the bits that you've lost versus gained?

[Thomas Ondrof, executive]

No, I don't think so. I mean not ultimately, to your point, I mean Merlin is going to provide a good strong margin for us over time once we get it fully implement -- or up to speed and operational. But no, I don't know how you feel, John, but I don't see any business that we've been booking that has any different margin profile than we have in the past.

[John Zillmer, executive]

Yes. No. And one of the things -- the mantra inside the organization is profitable growth. So it's not growth at all costs. It's growth that is margin accretive and earnings accretive and that is what the organization is focused on. So if you look at the portfolio of business that we've sold over the last 3 years and the consistent ramp-up to growth, it's all met on our pro forma targets and our performance expectations for returns on invested capital in the other metrics we utilize to evaluate the new accounts as we sell them. So no, there hasn't been a structural change in our expectation and there hasn't been a structural change in the value of the business we've sold relative to the business that we've lost over that period of time. So I'm highly confident the growth engine as designed will stimulate this margin recovery that everybody is so anxious for us to achieve. And we believe in it, and we see it happening in the business. I think if you relate -- yes, I think as we get through the balance of this year, we'll see continued strong performance, continued strong growth leading to that margin recovery and hitting the expectations we've set for 2025 and 2026.

[Operator]

Our next question comes from Ian Zaffino with Oppenheimer.

[Ian Zaffino, analyst]

Impressive results here. I know you guys indicated kind of that U shape, but can you maybe give us a little bit of color on how October is going and some trends you can maybe point to and kind of what gives you confidence in the guidance.

[John Zillmer, executive]

Yes, I would say we were very pleased with the results in October. One month is not a year make, but we are very pleased with the results. As you know, we our units report to us on a weekly basis. We see the results as they come in. As we indicated, we've seen improved performance in the price recovery area, particularly in corrections and higher education, that bodes very well for the balance of the year in terms of that earnings improvement. So October -- also, we had some significant new business wins, some of which we just talked about, Boston Children's and many others that we're still working to get to final contracts. So we're we're very pleased with the early stages of this fiscal '24 as we're through the first 5 or 6 weeks.

[Operator]

Next question comes from Andrew Steinerman with JPMorgan.

[Unknown Analyst]

This is Alex Hess on for Andrew Steinerman. Just wanted to ask on net new. FSS net new inclusive of Merlin appears to be down 18% year-on-year in 2023. Is that a fair characterization? And then how should we think about the puts and takes around net new maybe verticals where you're seeing traction maybe verticals also where you're seeing share loss? And then I'll follow up with a question on margins as well.

[John Zillmer, executive]

Yes. Well, we're not seeing any verticals with share loss. So that's an easy question to answer. I think we're seeing growth across all the businesses and had net new pretty much across the board. Yes, there are some years that are bigger than others based on the size of the whales that we might sell in any given year like Merlin last year being such a significant component of that. but this last year represented our third best historical performance for growth for net new growth. So we're very pleased with the results. And one of the things that people have to remember is that while we measure it in fiscal year terms and report on it on that basis, sales activity is driven by the clients' decision dates. And so many of the decisions that leaked into 24, for example, were decisions that we would have expected potentially in '23. So we don't see the change from year to year as the performance drop off. We just see it as a kind of a lag in decision-making around some of those large customers and large clients, some of which are very significant in size. So again, our third best performance ever last year in terms of net new. And again, contributing to that 3-year history or a 3-year track record of net new growth which is, quite frankly, a significant change from the history of the company. So we're very pleased with it.

[Unknown Analyst]

Got it, John. And then on margins, if I interpret this right, your FSS sort of pro forma margins were up something in the range of 80 to 90 basis points in 2023. Your guide seems to imply something closer to 40 basis points this year. and then that would have to sort of pick up perhaps a little to hit the now fiscal '26 target of at least 5.9%. Is that a fair framing? And then is there anything sort of in this year that is specifically compressing that optical margin?

[Thomas Ondrof, executive]

Yes. I think that, yes, the margin this year was a little over 90%, approaching 100 bp improvement. We still had a little bit of tailwind in COVID, particularly within the B&I world this year. So that helped drive that outsized performance. Yes. Again, the margin is something that is a result, not a cause for us. We continue to focus on driving the AOI dollars, retaining our clients reinvesting in the business. And so it's a balance of all that as we move forward. I'll say it again, we're confident in being able to achieve the financial goals into 25 and 26, as we just laid out. So I don't know what else to really say, except for we're feeling confident about that and continuing to balance and do the right thing for the business when it comes to drive profitability and as a result, the margin.

[John Zillmer, executive]

Yes. I'll just add the final commentary on that. It's -- we are optimizing for growth retention and earnings improvement as a result of all the growth that we're achieving in. So we're -- we are focused on the margin. We get it. We understand that the marketplace will reward us for improving margins over time. But we think the best way to consistently deliver margin expansion is to grow the business and achieve that margin through scale. And so we're optimizing to achieve those objectives over a period of time. And I'm not worried about 10 bps this year versus 20 bps next year. I'm more worried about achieving that sustainable growth model and maintaining it and continuing to deliver for our customers day in and day out. And the margin is an outcome of that strategy. It's not the strategy. So we're confident. We believe in the goals and we have the team in place to go ahead and deliver on it. And if we get lucky and inflation wanes more rapidly, then you'll see that translate into improved margin performance over time as well. And just very hard to predict where we are today, as you probably saw CPI was unchanged in the announcement this morning. But CPI does not reflect the inflation rate that we project for food product around the world, which is closer to 5% or 6%. And our teams look at food inflation by business unit, by market basket, by product category, it's a very detailed analytic that we have to evaluate it. And so we've baked that into our assumptions. And if we have been conservative I think ultimately, that plays well to our advantage as we continue to negotiate new terms, new agreements with our suppliers and with our customers.

[Operator]

Our next question comes from Heather Balsky with BofA.

[Heather Balsky, analyst]

So to start, I was hoping you could talk about the cash flow statement. Now that you have spun off Vestis, just what your free cash flow profile looks like perhaps maybe help us shape what conversion looks like and any cadence around the cash flow quarter-to-quarter.

[Thomas Ondrof, executive]

Yes, the cadence shouldn't change much at all because the global FSS business was really the driver of that seasonality. So you'll, again, see a big outflow in Q1, a big inflow in Q4. as you have seen in the past, Uniforms cash flow was fairly consistent quarter-to-quarter throughout the year. So you'll see the same cadence, just slightly lower numbers. In terms of conversion rate, we're probably looking at about a 40% AOI conversion as we settle out through this year and really stand up as a food and facilities only business. That probably is going to be the best benchmark. We've got a couple of things this year that are of note on free cash flow. So we do have some hangover transaction costs that we talked about from the spin that we're paying in the first quarter or roughly $35 million to $40 million. And then we do have the taxes on AM service sale that we'll pay in the first quarter as well, about the same amount. But I think overall, again, you'll see the same cadence about a 40% AOI conversion as a target a bit less than that this year given those 2 one-off items that I talked about.

[Heather Balsky, analyst]

Got it. That's helpful. And then as a follow-up question, with regards to less a margin question, but more an operating question. Over the last 2 years, you've had to make adjustments with menu and your labor force and operations to help offset what we're seeing with regard to inflation. As food cost inflation waves, it's still there. How are you thinking about menu and operations? Can you unwind some of that? Or do you think this is sticky and you're kind of happy where you are today?

[John Zillmer, executive]

No, I think our operators have done a great job of adjusting menu and service offerings to meet the inflation issue head on. And I think we're largely through it. And so now we're really at a place where I think we have kind of a new normalized operating model and a new normalized menu structure. We don't see the need for additional changes there. And I think the product supply issues that were prevalent over the course of the last couple of years have all essentially been normalized. And so our people are really able to go ahead and structure the programs the way customers want them. So I think we're very comfortable in today's environment, and we do believe that over time, we're getting back to a much more consistently normalized environment with respect to inflationary cost pressures, both for food and labor as labor availability has improved as well.

[Operator]

Our next question comes from Andrew Wittmann with Baird.

[Andrew J. Wittmann, analyst]

Great. I guess I heard a couple of things in your remarks that are margin drivers. You talked about the maturing of all the new business that you sold recently in particular. And that indicates to me like if you're selling new business all the time, there should always be some new business that needs to mature. So it's going to give you a margin benefit, it might suggest that that maybe your focus is more going to be on delivering the profit margin targets that you've set out here rather than maybe as aggressively growing the top line. Obviously, you always want to do both. But I guess, John, philosophically, to hit the margin targets? Do you have to pivot a little bit more to lean into the margin, the operational performance to deliver the above normal gains here over the next 2 or 3 years?

[John Zillmer, executive]

Really, no. We see growth as a path to margin expansion and that growing consistently over time leads to both AOI improvement in terms of dollars and in terms of margin. And it comes from a couple of different sources, Andy. The both the growth in terms of the profitability from the new accounts that are added, which does scale up over time as well as the improved economics on supply chain spend. So as we add new business, it provides additional spend for supply chain to managed to craft better deals with suppliers and manufacturers, which leads to improved economics for everybody. So as you know, in the supply chain world, you get paid for growth. And so you might get x number of dollars per case, if we're buying at a certain level. And we get x plus, if we're buying more. So the growth feeds the supply chain economics and then it also creates additional leverage with respect to overhead because we don't need to add significantly above unit costs as we're growing the business. It's -- we're able to grow the overheads at a rate that's much slower than the growth rate of the company. So by maintaining that consistent growth profile over time, we deliver the margin expansion that we all seek to shut the growth down or to focus more on margin as opposed to growth would actually be counterproductive. And that's, frankly, what the company did back in the mid-teens, back in the earlier days post IPO. The company went on a margin march and stopped growing. And that's what led us to the point where we needed to make a significant strategic change. So we see growth as the optimal strategy, and we can consistently deliver margin expansion through that growth. And -- but we're also focused on managing the middle of the P&L. We want our people to get better and better every day at managing food cost, labor cost and direct expenses. So we give them tools and technology to go ahead and manage the middle of the P&L more and more effectively as well. So as inflation moderates, managing that middle of the P&L gets easier as well. So it's not just about pricing, it's about managing that cost structure at the same time. So -- but we think growth is the primary driver and will continue to be the strategy of the company.

[Andrew J. Wittmann, analyst]

Great. And then just one quickly here for Tom. I just looked at the share count, it looks like you guys are estimating a 270 million share outstanding number here for fiscal '24. In the quarter you just reported, you're at 263 million. That was up about 1 million shares -- about 3 million, 4 million shares year-over-year. It seems like the number of share increase is unusually high this year. Is there a lot of shares vesting here that were coming here to vest in the first quarter or something? Or what's driving the somewhat larger share count creep?

[Thomas Ondrof, executive]

Yes, 2 components to that. One, there's roughly usually about $3 million of normal dilution as we go year-to-year. And then secondly, you've got the sort of rebasing of the remain co employee share options and restricted shares from the spend. So because of the math, in essence, of the spin. It's about a $7 million total, $4 million related to spend and $3 million just as normal dilution.

[Operator]

Our next question comes from Toni Kaplan with Morgan Stanley.

[Toni Kaplan, analyst]

I wanted to talk about new business. It's been very strong for the past couple of years now. I just wanted to ask if you could sort of compare and you alluded to it a little bit in the first question asked previously, but -- just could you talk about the sales force a little bit more if you compare the number of salespeople you have now versus when you started? Has that gone up meaningfully as it been just increases in productivity that has been accelerating this new business? Has it been the technology or the decentralization. Just anything that sort of talks to the sustainability of this accelerated new business going forward?

[John Zillmer, executive]

Sure. It's actually all of those things. First of all, as you may remember, as we joined the company, we went ahead and made significant investments in sales infrastructure in a couple of different ways. First, by adding sales resources to the Street, and that level has been now constant probably for the last 3 or 4 years. We made the initial investment as as we joined the company, we made some changes in sales leadership, and we downstreamed the sales function back to the business unit. So it's now sitting in the geography closest to the customers. And that way, it's much closer to get to where the job needs to get done. And so we invested in those resources back 3 years ago. And the level of reinvestment we've made over time has been essentially de minimis sales manager here a salesperson, they're dependent upon business unit strategy. So there hasn't been a quantum change since our initial reinvestment in that business. So what you've seen over the last 3 years has been enhanced productivity and increasing sales volume for each sales manager based on their time and territory based on their time back in the business, which was really our strategy to begin with. We wanted people to be working in the lines of business, in the territories that they were responsible for and that led to significant ramp-up of their productivity. So we don't see the need for continued reinvestment. We think we're at a steady state in terms of the number of resources that we have. we're always looking to optimize, and we may add a person here or there depending on the total opportunity set. But in general, we feel like we're in very good shape from a sales structure perspective. Tom, I don't know if you have anything you want to add to that?

[Thomas Ondrof, executive]

Yes. No, I think the only thing I'd add is that time and territory is so important, and that just will continue to build strength in the sales force as they work their pipeline in a territory for multiple years in a row because as we've talked about a lot, hello to contract in our business can vary anywhere from a few months to many years. And so our -- the stability in the workforce, which is still 3 years young in terms of this close to or over 40% increase from fiscal '19 and before is still getting their sea legs and still developing that stability in their markets. So I think it will close rates and productivity will continue to improve.

[Toni Kaplan, analyst]

Great. And international had a very strong quarter of growth again. I wanted to ask if there was anything that really has been driving the improvement there and how you see that going into 2024 with regard to sustainability of growth in international.

[John Zillmer, executive]

Yes. I would say, yes, they have had another terrific year in terms of net new growth consistently across all geographies. And I think that is driven in large part by the stability that Tom just described. The international sales organization was largely intact and in place before we rejoined the company. So that organization has been more stable, and they've been working those territories more consistently over a longer period of time. So I think that, that's worked to their advantage. I think it's also very helpful that we have a very disciplined and focused strategy with respect to growth in those geographies where we really want to be. And so we're consistently focused on those markets and consistently focused on those businesses. And we're not out planting flags in new countries. We're really focused on those geographies where we have the right to win and a competitive advantage, and that's translated into continued performance improvement. So yes, we feel very good about the international team and their productivity and we've been the beneficiary of significant stability in those markets.

[Operator]

Our next question comes from Shlomo Rosenbaum with Stifel.

[Shlomo Rosenbaum, analyst]

My first question, I just want to talk -- ask you a little bit more detail on the pricing catch-up in education and correction space. Is is the effort that you made over the last couple of quarters in terms of the contract renewals, is that really going to fully catch us up to the inflationary pictures that you saw? Or is there any further efforts that are going to be needed next year? And then I have a follow-up on that for part of the business.

[John Zillmer, executive]

Yes. I think we're very close to being caught up in both of those businesses. We'll continue to work to improve in pricing across the enterprise, not just those businesses as we continue to see the need for price recovery and as inflation continues to to be somewhat persistent on the food side. So we're going to be very diligent about making sure that we continue an elevated pricing strategy to recover those costs going forward. And -- but I think we're in very good shape, particularly compared to where we were last year when inflation was running 10% to 12% and in those businesses, and we were not able to price for it. So I'd say we're largely caught up, and we'll continue to work to improve across the enterprise and get even better.

[Shlomo Rosenbaum, analyst]

Okay. Great. And then just a follow-up, you mentioned in passing the strategic positioning of Next Level Hospitality. I know there's been changes in the marketplace for that business since you bought it. Maybe you could talk to us a little bit about the strategic repositioning and whether you think that business can get back to kind of the strong growth rates it had before you bought it?

[John Zillmer, executive]

Yes. We think -- first of all, the addressable market is very significant. And we have work through developing a kind of a new additional service model to a next level was initially providing. So we're expanding the range of services and the capabilities and focusing really on the senior living business as well, which is multiple billions of dollars in terms of addressable market and opportunity largely self-op. And so we think that represents a very significant growth potential. There is still growth potential in the core business at Next Level operated in and was doing so well at -- so we'll continue to look at both sides of the business, both senior living as well as skilled nursing. And we'll bring a balanced approach to growing that part of the business.

[Operator]

Our next question comes from Josh Chan with UBS.

[Joshua Chan, analyst]

I guess you mentioned food -- could you talk to the shape of food inflation that you expect through the year? What's baked into guidance? And then how does that kind of shape through the year?

[John Zillmer, executive]

Yes. We baked an assumption of approximately 5% to 6% of food inflation globally. Now it's different by market. It's 5.5% in the U.S. for the overall inflation rate for our expectations. It's a little less in Canada, a little higher in Europe and a little lower in Asia. So we do it on a blended basis based on the size of the organization, call it, somewhere in the range of 5% to 6%. And that's what's built into our assumptions and built into our planning models for the year. and built into our negotiation discussions with our clients and customers. And so that is based very specifically on individual market baskets by product, for instance, we expect meat to be up 5.9% in 2024. We expect roots and vegetables to be 7.1. So we have -- and then kitchen supplies down at 1%, right? So we've got a very detailed market basket of products by business unit that we buy and that we monitor for our locations on a monthly basis. So that's the overall assumption and if inflation continues to moderate and we see a lowering of those expectations, we'll keep the Street informed as to what we're seeing and -- and as to how we see it affecting our balance of the year.

[Joshua Chan, analyst]

Okay. That's really helpful color. I appreciate that, John. And then I guess circling back on the normalized margin improvement that Tom mentioned earlier. It's definitely understandable that this year will be an outsized year of improvement because of the price inflation catch up. I guess, how do you think about 25 being outsized years to items, such as contract maturity, supply chain, they seem to be relatively normal course. So how should we think about margin improvement beyond this year?

[John Zillmer, executive]

Yes. I think Tom will jump in here as well. But I think you'll see continued margin improvement and an outsized performance in '24, '25 and '26 as we continue to see the normalization of these phenomenon that you just described, new business maturity, we will have ramped the business for '24 and '25 and this business sold over the course of the last couple of years, the price recovery lag or price inflation lag will be largely done in -- we'll continue to see drivers of outsized margin performance in supply chain throughout the cycle. So we'll continue to get better in '24, '25 and '26 as we add scale and improve supply chain economics. We expect SG&A over that time period to also be managed at low growth rates in the business. So they're all drivers to outsize margin performance, and we see that model playing out consistently. Tom, do you?

[Thomas Ondrof, executive]

Yes. No, same thing. I think all 5 of those factors play into '24 and create the outsized AOI growth. Many -- most of those still play into maybe the new business hitting that cruising speed sort of drops off as a factor into 26. We've included this in the slides. So it is our overall view of how these things play out over the midterm. But -- but we're getting down to the core where growth begets supply chain leverage, which begets overhead leverage, and we continue to manage the middle of the page as we move into that sort of 20 bps long-term sustainable model. But over the next 2 to 3 years, it's going to be more than that.

[Operator]

Our next question comes from -- sorry, our last question comes from Stephanie Moore with Jefferies.

[Stephanie Benjamin Moore, analyst]

Just wanted to touch on the guidance outlook for fiscal '24. It's a pretty tight range. But I was just curious, as you look at both ends of the range, whether you pick AOI growth or EPS growth. Maybe you could talk about some of the factors that would contribute to hitting either in kind of assumptions around the macro, inflation, pricing, et cetera, just to provide some guard roles there.

[Thomas Ondrof, executive]

Yes. I think it's the same components we just talked about with the inflation being sort of the big factor. I think the sharper it would decline and become a nonfactor. I think that creates upside. If it ticks back up over the levels John just ran through, I think that becomes a little bit of a headwind again, we talk about huge increases in new wins. We got good progression baked into the plan, and we expect that. If there was a lot of oversized wins, that's a bit of a headwind unfortunately, which we don't want at all, we underperformed on new business, that would probably be a margin help. So you can go down each of the lines and sort of work through a plus and minus scenario on each. I think with inflation being the overarching theme in there as to what may help us overachieve or present a bit of a headwind.

[John Zillmer, executive]

Yes. I would second that. I think if there is one key driver that I would call out as being a potential risk or benefit to the range, it would be that inflation number and the expectations around it. And I think we're all very hopeful based on what we see in the marketplace today. And based on the actions that the team has taken in terms of pricing recovery we're very hopeful that, that will lead to improvement so that we can be trending towards the upper end of the ranges. Too early to make that call and but that would be the 1 key driver I would focus on. I think all the rest of them, whether it's new business maturity, SG&A, supply chain, those I think, are going to be very consistently delivered against those objectives. And so that would be the one variable I would be most focused on.

[Operator]

I'll now turn the call back to Mr. Zillmer for any closing remarks.

[John Zillmer, executive]

Terrific. Well, thank you very much, everybody. Really appreciate the time and attention this morning and the support of the company. As we said, we are very confident in the performance. We're very pleased with the year-end and very confident in our performance for '24 and in the expectations that we've set for '25 and '26 as well. We are committed to this strategy. We're going to grow this business and deliver improved earnings and improved margins over time. And we're here to deliver on the commitments we've made, not only to our shareholders, but to ourselves as well. So we're all the big believers in the strategy and big believers in this company, and we're going to go deliver. So thank you very much.

[Operator]

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