All right. Hi, everybody. Thanks for joining us here for the next session. I'm Andy Wittmann. I'm the senior research analyst that covers facility services. And we're really glad that you're taking some time out of your day to spend with us this next half hour with Aramark. Jim Tarangelo is the company's Chief Financial Officer here. He and I are going to be having this fireside chat for the next 29 minutes or so. If you wanted to ask a question and you didn't want to raise your hand, you can email me at session2@rwbaird.com. And I will be monitoring this iPad for questions while we chat here today. But I'm just going to get it kicked off here with something, frankly, I've been saying this first comment to our clients here for the last six months or so, Jim. I'm going to say it here now. I truly believe that having covered Aramark since its most recent IPO, which was almost 10 years ago, the last two quarters that I've seen from your company are probably the two best quarters, I think, that I've seen since the IPO. Just like really clean top line with better-than-average growth that we've seen, very impressive margin expansion. It just kind of feels like you guys have got a little bit more control over the business, fewer reasons behind, not excuses, but fewer things to call out, good or bad. It just feels like you're playing your game today. My question that stems from that is, what is different today that you've done over the last few years to put you in a position to deliver a result like that? Sure. Well, the organization has gone through quite a transformation over the past few years with John coming back to the organization in 2019, restoring the hospitality culture, implementing a firm growth-oriented mindset and model. Along the way, there are obviously some headwinds, macroeconomic with COVID, record inflation levels, staffing challenges in supply chain. We're at this inflection point where this model is firmly in place, this growth-oriented model. What were macroeconomic headwinds have become tailwinds, generally, as the operating environment stabilizes. With that, the model is working. What I really like about the first quarter results and the second quarter results, the margin drivers are based on growth. The levers that we target as part of that model are working and delivering the results that we expect. I like the consistency, AOI growth of about 30% in both Q1 and Q2, about 65 and 70 basis points of margin improvement Q1 and Q2. It gives us a lot of confidence in the outlook and that we're on the right track as an organization. Yeah. There's kind of a lot to unpack there. So let's just briefly, one of the things, I mean, you're getting leverage, the 65-75 basis points the last two quarters, you're getting leverage through the business, like you mentioned. Some of that is just like looking at your SG&A line, it feels like it's kind of just a number now. It doesn't feel like it's moving around a lot. Is that your view? Are you doing things on your corporate or your overhead intentionally that you need to do to keep that from going up? Or what's happening on the SG&A line that's allowing you to leverage it so well? Well, the SG&A budgets were a personal area of responsibility prior to coming into the CFO role. So it's an area of the business I know very well. Part of our model is to contain SG&A. We don't need to add a lot in the way of SG&A to take on a significant amount of growth. In fact, SG&A was down about 10% in corporate expenses in the first half of the year. With the spin of the uniform business, this is an organization that is fit for purpose. We could take on a lot more growth without adding a lot in the way of SG&A. And I think that model will continue going forward. Yeah. You talk a lot about on your conference calls, this idea of controlling the middle of the P&L. Just for the benefit of the room, for anybody reading a transcript or less familiar with that, what does that mean? That's not all corporate. There's this middle of the P&L. What's that? That's my operating finance background. I've been with the company for 20 years in many senior financial roles. That's a term I like to use. It refers to food, labor, and direct cost associated with performing services at the client level. As the operating environment has normalized right after a period of significant disruption, our operators can do what they do best. That's providing great service and quality service to our clients while optimizing food and labor costs. Just a few specific examples, talk about blocking and tackling as the environment normalizes, reducing overtime and agency costs are things we're very focused on as an organization. It's something I monitor very closely when I look at the operating metrics and we conduct our business reviews. Those, again, are things that are contributing to these margin improvements that we saw in both Q1 and Q2. Is there more to do on that? I think it was last year at this conference, and we collectively had felt like the labor market had normalized, where most companies didn't need as much overtime anymore. Is there still more to do on that, or is that largely played out as we sit here in the middle of 2024? There's still opportunity ahead. If you look at our base business margin, sort of where we were in 2019 versus where we are today, there are still opportunities to improve the middle of the P&L. So again, I think even into it will be a tailwind as we head into 2025. But again, it's a balance. We're doing this in a very constructive way without disrupting or compromising our service to our clients. So it's maintaining that balance of optimizing food and labor without sacrificing quality to your clients. Okay. That's on the labor side. When I really think about the gross margin of this business, it's food and labor. It's food and labor. Primarily. It just really is. So let's talk about the supply chain. This is something you guys have been flagging a lot lately about using your purchasing organization to help you benefit from the scale. Can you talk about some of the initiatives that you've got in place and maybe specifically talk about the status or the growth of your global purchasing organization? Sure. So our Avendra acquisition, which was completed at the end of 2017, was really a step change in spend and strategy for the organization. I was very involved in getting that deal done. That's resulted in our spend, both managed spend and GPO spend, increasing from about $12 billion in 2017 to about $19 billion today. So when you're looking at that level of spend, it puts you in a category that very few companies are in. It significantly increases your ability to negotiate better deals with suppliers and manufacturers. On top of that, the GPO model itself is very attractive with high margins, negative working capital, very low capital intensity. So we like that business a lot. Our supply chain team is doing a great job at executing on that increased spend. It's a big part of the margin improvement we've seen in the first half of the year. So I just did some monkey math. And that seems like the managed and spend and the GPO spend is up, kind of CAGR-ing in the high single digits. Is that the right rate that you think that can? Yeah. Directionally, that sounds about right. Correct. Yeah. What's the delta to your margins from having this GPO, do you think? What has the scale afforded you? Is that 50 basis points? Is it 10 basis points? Like I said, of the 65 and sort of the 50 basis points of underlying margin levers, the supply chain efficiencies is the top lever. I think more structurally, if you look historically at the difference between Aramark and Compass, a big significant portion of that margin differential is driven by the GPO and the leverage you have with spend. Interesting. Okay. I'm trying to think what other things I want to ask about on the gross margin side. I think that's most of the discussion I wanted to have there. I want to talk a little bit next about the top line. If you could just talk, in covering service companies, the one lesson I've learned after doing this for 15 years is growth always starts with the customer you don't lose. I think that's such a fundamental principle. Can you talk about what your customer retention rate is and maybe how it compares to peers? If you have any goals to, I mean, always, obviously, 100% would be great. Just talk a little bit about where retention is for Aramark today and how it's changed over the years. Sure. I mean, retention and growth are really core to the model and part of this transformation that we have executed. Forty percent of our incentive compensation is based on net new, which is comprised of both growth and retention. So it's a real organizational focus. It's also very ingrained in the way we manage and operate the business. Our monthly business reviews with each of the businesses, we literally look at the list of top targets, top retention plays, top prospects, and go from them from a strategic standpoint. So it's really ingrained now in our culture. With that, we've seen an elevated improvement in retention for about 94% to 96% is where we've operated the past three years. And then on top of that, the record net new over the past few years sort of pays that the results are working. Yeah. I mean, it's a logical extension. Even if you sell the same, you retain better, your net new is going to get better. This is such an efficient way, a margin-friendly way to grow is by having retention. It's those customers that are new that the first two or three years are weighing on your margins. So this is a really important development to talk about there. You've invested, I think, in the sales and service culture over the last three or four years to enable some of this retention improvement. Can you just talk about how you've changed the service model, where the heads reside, how they interact with your customers today versus before? And if there's any further investment that needs to happen there, if you feel like you've got the right team on the field. Sure. So part of the transformation in our approach to this growth-oriented model involved decentralizing the business. And that meant bringing the sales folks from the center back into the lines of business and specializing in individual sectors, which is where they're most effective. I think that's how your competition has been doing it. I think that's generally right. It's the right approach with that. Putting the decision-making closer to the field and elevating our levels of client service on top of that. We invested about over a 30% increase in our U.S. sales force over the past couple of years, so direct investments in investment and growth. We're seeing the results. The productivity has improved. The average sales per sales professional, the conversion rates, the percentage of business won based on what we proposed, has improved in many lines of business. It's paying off in the results, three years, if you look at the record net new that has been generated, I think it's a direct result of those investments that we've made. Is the success, then the productivity enhancement that you're seeing out of these salespeople, is it driving greater employee tenure? There's nothing more beneficial than a tenured salesperson. It does. The better the salesperson, the more they sell, the more the compensation. And it's an incentive. And the seasonality, the tenure of our sales organization has improved, particularly on the U.S. side of the business. I would say on the International side, that business was left more or less intact from when there was some cost cutting back in the 2017, 2018, 2019 time period. And there you see the results of having a more tenured and seasoned sales organization. That's why one of the reasons that business has performed particularly well with respect to net new. No doubt, we didn't talk about it yet. You'll get there. The International business, let's talk about it. If you looked at the last two quarters, I made the comment before, some of the best quarters I've seen. Honestly, the International segment might be not the biggest part of the business, but certainly the area we're seeing the performance there. Are there specific parts of that business and markets, B&I, entertainment, that are driving the International results? Are there specific countries where your teams are performing at a higher level than others that we should know about inside that? This is an area I know I spent about half of my career in the International group at Aramark, co-moderating the International CFO up into 2016. I think, again, like I said, it's sort of the tenor and the longevity of this growth-oriented model. We always viewed ourselves as the growth engine of Aramark, and that prevails today. It's just a more productive sales organization as part of that. A little more opportunity Internationally. I think in terms of opportunity, yeah, if you look at the percentage of the market that continues to be insourced, it's larger International. Many of the businesses in International, China is a good example. Really, the industry just started in China in 2003, 2004. That's when we executed a couple of acquisitions. The market is attractive. I got to give a lot of credit to Carl Mittleman, who's our COO for International, the International leadership team, who deliver solid, strong results quarter-after-quarter. The business has performed really well. Got it. Let's talk about some of the domestic trends. This is a market where it seems like you're having pretty good success with gross new sales as well. Can you talk about over the last 12 months where you've been having more wins and any reasons behind those? It kind of feels like, I guess for me, it was like you've done well in corrections. Sports and entertainment has been a segment the last few quarters that's really stood out. Maybe some thoughts about you or where you're seeing some of the better success stories. Yeah. Let's start with sports. I think growing about 16% year-to-date. So that business is really doing well with both new and particularly with base business growth. Like-for-like growth, I use the term base business. So we're seeing the average checks, average spend, attendance levels remain at very high rates. Many stadiums are recording record average checks. I was at a large baseball stadium recently. The average check has gone from $25 to nearly $40 per cap in just 5 years. So we see some segments of the consumer slowing down. That's not the case in what we're seeing in sports in this experience-based economy. On top of that, they're introducing autonomous technologies to sort of expedite transactions and sales process, sales at the different venues. And we've got frictionless, cashless, shorter lines, and credit cards. People tend to spend more. It's amazing. I'm tripping over beer vendors every time I'm at the ball game because it always feels like there's another point of sale. Easy access to beer for you, right? It's almost like Disneyland. You can't help but spend money everywhere you go. That's right. You guys are, that seems like something that you guys have really executed. The sector has performed really well. I'd also add on top of that, our dining business, really strong growth across the board. We have folks, I think there's a steady state of folks coming back to the office, not necessarily a step change, but a steady state of folks in the office. And when they're in the office, the participation rates are higher. So if you're only coming in three or four days a week, you're more likely to be in the corporate cafe. So on top of that, proactive retail strategies to increase spending in dining. And then the net new has been very strong in that business as well. Just in the sports entertainment, is there a mixed effect? Are your customers better teams that are winning more and then are driving more enthusiasm that's driving this? Is the concert lineup better, or has it been better? Is there anything we need to think about over a 2023, which an early 2024, which was a good sports and entertainment segment performance as we think about the end of 2024 and 2025 in terms of comparison? I know it's a game that you're trying to get away from talking about. I remember there was a quarter, this was like five or six years ago when Mick Jagger was in the hospital for a heart condition. A whole bunch of shows got canceled. I came up on a conference call. Well, Mick wasn't singing. We missed the quarter. And I'm oversimplifying it, but you guys aren't doing as much. No, I'm not expecting to miss any quarters due to someone a performer getting sick. I mean, we're lapping, obviously, the Taylor Swift impact from prior year. But even with that, just the strong growth that we've seen in the core business, which is professional stadiums, that is up significantly versus the prior year. And we expect that to continue and mask any sort of reduction in any venue or concert activity. Okay. Okay, I think the next thing, so one of the things that you talked about through a lot of last year, the company talked about through a lot of last year was how at the tail end of the hyperinflation, you were still having to bear some cost on contracts that reset annually. This is particularly relevant in your education, your corrections space. And so until you got the fall reset, basically school going back in session and some of those contracts coming up, you kind of suffered. But now you've got that, that you had the bump. I think this is one of the drivers, frankly, as I look at your results in the first half of your fiscal year that you've got now that price that you needed to get those on the right side of things. There's another pricing window coming up. Is there anything we should think about in terms of the price-cost dynamics? Do you expect above average price this year in some of these contracts that reset less frequently? And so let's start there, and we'll talk about the cost next. Sure. I think some context. So a significant portion of what we call the contractually based pricing, K-12, corrections, residential meal plans in Higher Ed, happens basically the May, June, and July time period. And generally, that pricing is fixed for a year. So as inflation was rising, that becomes the headwind that we saw in 2021 and 2022. As inflation moderates, it becomes a tailwind, as I've described in some of our earnings calls. Our approach is basically to price consistent with inflation levels. So inflation levels, we talked about being in the 4% to 5% range, closer to 4% in the U.S. So as we have those contract discussions, that's how we're thinking about mitigating potential inflation. Should inflation moderate, that becomes a moderate tailwind to the margin, to the performance. I mean, as I think about the next 12 months, 4% to 5% pricing, if that's, you're not saying that's your guidance, but that's what you're going for is something in that range, it sounds like. You put on a couple of points of volume growth. This does deliver you to that upper end of the high single digits kind of revenue range that you're talking about. Is that kind of the is that the way to think about it? Is maybe kind of 4%-ish, 5%-ish price, a few points of volume gets you 7% on the top line-ish? Yeah. I'd be a little careful. Again, that's 1/3 of the business is where we're pricing today. There's 2/3 that is more dynamic. And we'll, I think, as inflation moderates, so will that significant portion of the business. I think in terms of the long-term growth algorithm, as you talked about, sort of mid- to high-single digits is where we think the steady state of the business will be. And that's more than double where we were in the periods leading up to 2019. And that's a place that generates the margin increase that we expect to deliver. Yep. Okay. Any other trends inside of as you look at education, which has been one of your biggest end markets, I think you guys have historically indexed to Higher Ed over K-12. Is there a reason for that? Is the Aramark value proposition better at Higher Ed, or is it just more competitive at K-12? What are the reasons for your indexing towards Higher Ed education? Just in terms of just the percentage of our business, Higher Ed is a bigger portion. Both those businesses are performing very well. We're seeing nice growth and good margin improvement from both businesses. We maybe talk about Higher Ed a little bit more just given the larger footprint overall. And that business, again, performing education in general, growing 8% year-to-date. Within Higher Education, they're benefiting from both net new growth and from like-for-like or base business growth as well, which is really a core part of that business's strategy. So a couple of examples of where we've been proactive in expanding like-for-like growth is optimizing meal plans. So traditionally, students were offered a Bronze, Gold, Silver meal plan. In many instances, we've introduced a Platinum meal plan. And as you know, a portion of the population will typically upgrade to platinum. We have a real significant opportunity for our upperclassmen as well. As you would expect, typically after your freshman and sophomore year, the enrollment in board plans typically drops. Well, that represents a significant opportunity within the existing Aramark portfolio. And the Higher Ed team has done a really nice job of targeting those upperclassmen. So those are two key drivers of the strong performance we've seen in our Higher Education business. We've also had a lot of success with our Harvest Table brand, which is our more premium brand within Higher Education. So we have Aramark Collegiate Hospitality. We have this Harvest Table premium brand. So depending on client preferences, we can adapt and tailor the approach. Got it. So that's interesting. You've also had some, I think, decent wins on the corrections side of the business. I'm just wondering what the driver of that, how the Aramark value proposition is resonating there. And if your recent acquisition in the commissary space, which was actually a fairly large acquisition, I didn't know that there were such large acquisitions in corrections commissaries. Is that part of why you've had some success there, do you think? It is. I think it's a strategic differentiator. So historically, Aramark was very strong in the traditional feeding of inmates and staff at correctional facilities. The commissary business is both bulk delivery and commissary offering as well. There are very few companies that can offer both at the scale and geographic coverage that we do. And so that's been a differentiator for us. And that business has been one of the big drivers of our net new for the organization. Okay. One of the tougher areas of the business has been in healthcare, and particularly in long-term care. It's garnering a little bit of investor focus today. I thought you would just talk a little bit about what you're seeing in that dynamic for healthcare, particularly in that long-term care arena. Given that that's just a tough market because the funding mechanisms behind long-term care are challenged, what can you do as a company to help those customers be successful and help yourself be successful in the long-term care space there as well? Sure. So as you look at our healthcare results, we're lapping some strategic pruning of the portfolio within our Next Level business, which is that long-term and skilled nursing care. We've lapped that in the third quarter and expect to return to growth within our healthcare business. That long-term and skilled nursing opportunity, it's a very large market. The demographics in the U.S., which indicate that that is a growing market. We confronted some of the similar inflation challenges, as I talked about with K-12 and corrections initially in the skilled nursing business as well. Having said that, it's a relatively small size of the overall Aramark healthcare footprint. We've sort of repositioned the portfolio. We think there's a lot of opportunities in that space going forward. Okay. All right. So let's talk about the balance sheet and the time that we have remaining. I think it's really interesting. I mean, frankly, if we're all honest here, Aramark has run at very high leverage really since its IPO. And I think you can say today that your leverage is darn near the lowest it's been since that time or pretty close. It begs the question that once you get to your fiscal third, which isn't a great cash flow quarter, but that fourth quarter, gosh, that's where a lot of your cash flow comes. It really feels like fourth quarter for them is September. So when you turn the page to October, I feel like the balance sheet's going to be in a place where you can start thinking about really investing in the business or returning capital in a bigger form or fashion. I'm just curious. It feels like with better-than-average top line growth, better-than-average annual margin expansion, at least for this year and next year that you've alluded to many times, not just here today, but on the conference call previously, it kind of feels like, to me at least, that the buyback could be a little bit higher priority maybe than other uses at other times in your company's history. But maybe that's just me. Do you foresee yourself doing large acquisitions or maybe biasing more toward returning capital? They start with leverage. A clear line of sight to 3.5x by the end of this fiscal year and targeting about 3x in fiscal 2025. That will be the lowest leverage the organization has had since 2007. It's a company with very attractive cash attributes. We've been comfortable with leverage. Having said that, we recognize in this elevated interest environment the importance in some of the optics of getting below 3x. We're on that path. With that, in terms of the capital allocation strategy, we'd expect generally our M&A to be targeted towards small and bolt-on type deals that either offer a differentiated product, service, or capability. A good example of that would be Wilson Vale or Graysons in the U.K., which are relatively small deals, but increase the premium capability and offering on top of that core Aramark brand. That's driving some of the growth that we see over in Europe. GPOs is another area we talked about earlier, just a very attractive model. We like the margins. We like the low capital intensity. And we like the contribution it gives us to our spend. Having said that, there's not another Avendra out there. So those would tend to be smaller, smaller deals as well. And we're very focused on bolstering our International footprint with the GPOs to improve our ability to serve large multinational clients. There's very few companies that have that capability to serve a global GPO. Are there targets for that? There are targets out there. Not Not large targets, but there are opportunities that we are proactively looking at. Then after that, it's certainly repaying debt, deleveraging. And in conjunction with that, we are already in active discussions with our board. And I'd expect to have a share repurchase authorization by the end of this year. And as there's dislocations in the stock or trading below historic multiples, then that could be a buying opportunity for the business. Got it. All right. The last question is one from the audience here. The question is this: your comment on your example of the sports check going from $25 to $40. If you could just break that down between inflation versus mix and volume. I don't know. Do you have any insight as to how that was driven? Yeah. I think certainly a portion of that is obviously there's some inflation ingrained in that. But I think the main driver of what we're seeing in our sports business is certainly increase in transactions. As you said, the autonomous frictionless experience, number of transactions is increasing as well. So that's really the main driver of that, not necessarily inflation. Great. We're going to leave it there. Thanks a lot for your time. Thank you. We've got a breakout session. Thank you. I should mention here, the breakout session is in Astor B, I believe. So you can follow us there if you have any follow-up questions. Thanks a lot.