Aramark (NYSE: ARMK) has released its second-quarter fiscal 2024 earnings, showcasing a robust performance with record revenue and profit, particularly in its international segment. The company's organic revenue growth of 9.4% was a highlight, spurred by base business expansion, pricing strategies, and new business acquisitions.
CEO John Zillmer expressed confidence in Aramark's trajectory, citing a favorable macro-environment and an increase in revenue guidance for the latter half of the year. The company is on track to meet its financial targets, including a significant adjusted EPS growth projection.
Key Takeaways
- Aramark reported a 9.4% increase in organic revenue growth, with the international segment delivering record profit.
- The U.S. segment experienced a 7% rise in organic revenue, with Collegiate Hospitality, sports and entertainment, and workplace experience leading the growth.
- The company is in the process of divesting its ownership stake in the San Antonio Spurs NBA franchise.
- Fiscal 2024 outlook has been updated to reflect organic growth of 9% or better, AOI growth of 17% to 20%, and adjusted EPS growth of 30% to 35%.
- CEO John Zillmer highlighted new business development momentum and a robust pipeline of new account wins.
- Food inflation input costs rose by 4.2% in the first half of the fiscal year, with recent stabilization.
- Aramark expects a 96% retention rate and sees growth opportunities in the GPO sector.
Company Outlook
- Aramark anticipates organic growth of 9% or better for fiscal 2024.
- Adjusted Operating Income (AOI) growth is projected to be between 17% and 20%.
- Adjusted Earnings Per Share (EPS) is expected to grow by 30% to 35%.
Bearish Highlights
- The company faced a 4.2% increase in food input costs in the first half of the fiscal year due to inflation.
Bullish Highlights
- Strong performance in new business development with a healthy pipeline of future account wins.
- The company is confident in achieving a high retention rate of 96%.
- Margin expansion is anticipated through supply chain efficiencies and salesforce productivity.
Misses
- There are no specific misses reported in the earnings call summary.
Q&A Highlights
- CEO John Zillmer addressed the full wind-down of Mantle Ridge's ownership, stating it is no longer a factor for Aramark.
- Zillmer expressed confidence in margin expansion goals, which are subject to inflationary pressures.
- The company is working to expand its partnership with Merlin globally.
- Aramark's sales productivity is strong, and the company is exploring new verticals to enhance opportunities.
In conclusion, Aramark's second-quarter fiscal 2024 results demonstrate a company on an upward trajectory, with strong organic growth and a positive outlook despite inflationary challenges. The company's strategic initiatives and focus on efficiency are expected to sustain its growth and profitability in the coming periods.
InvestingPro Insights
Aramark's (NYSE: ARMK) second-quarter fiscal 2024 earnings reflect a company that is not just growing, but also adapting and potentially overcoming challenges. The InvestingPro data and tips provide a deeper dive into the company's financial health and market position.
InvestingPro Data shows that Aramark's market cap stands at a solid $8.02 billion, with a Price/Earnings (P/E) ratio of 19.18 for the last twelve months as of Q1 2024. This is an indicator of how much investors are willing to pay per dollar of earnings, and Aramark's P/E ratio suggests a moderate valuation relative to earnings.
The company's revenue growth is also robust, with an 18.76% increase over the last twelve months as of Q1 2024, signaling strong sales performance. Furthermore, Aramark maintains a dividend yield of 1.2%, a testament to its commitment to returning value to shareholders.
Two InvestingPro Tips that stand out for Aramark are its status as a prominent player in the Hotels, Restaurants & Leisure industry and the expectation from analysts that the company will be profitable this year. These insights align with the company's reported organic revenue growth and updated fiscal outlook, as well as its ability to maintain dividend payments for 11 consecutive years.
For readers looking to delve deeper into Aramark's financials and market performance, InvestingPro offers additional tips. Currently, there are 6 more tips available, which can provide a more comprehensive understanding of Aramark's investment potential. Interested investors can access these tips at https://www.investing.com/pro/ARMK and use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
In summary, Aramark's latest earnings report, coupled with InvestingPro insights, paints a picture of a company with a strong market presence and optimistic future profitability, despite the noted challenges such as weak gross profit margins and expected net income drop this year.
Full transcript - Aramark Holdings (ARMK) Q2 2024:
Operator: Good morning, and welcome to Aramark's Second Quarter Fiscal 2024 Earnings Results Conference Call. My name is Kevin, and I'll be your operator for today's call. At this time, I'd like to inform you this conference is being recorded for rebroadcast and that all participants are in a listen-only mode. We will open the conference call for questions at the conclusion of the company's remarks. I will now turn the call over to Felise Kissell, Senior Vice President, Investor Relations and Corporate Development. Ms. Kissell, please proceed.
Felise Kissell: Thank you, and welcome to Aramark's second quarter fiscal 2024 earnings conference call and webcast. This morning, we will be hearing from our Chief Executive Officer, John Zillmer as well as our Chief Financial Officer, Jim Tarangelo. As a reminder, our notice regarding forward-looking statements is included in our press release this morning, which can be found on our website. During this call, we will be making comments that are forward-looking. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties and important factors, including those discussed in the Risk Factors, MD&A, and other sections of our annual report on Form 10-K and our other SEC filings. Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these items to US GAAP can be found in this morning's press release as well as on our website. So with that, I'll now turn the call over to John.
John Zillmer: Good morning, everyone. We had another great quarter of results, driven by our commitment to growth across the company. Aramark hit record total company revenue for any second quarter in our history as well as record second quarter profit in international. The vast majority of our profitability improvement in the quarter came from strategies we've taken to drive performance, while also benefiting from some inflation tailwind. Once again, substantial base business growth, pricing and net new business contributed to organic revenue growth, which was up 9.4% in the second quarter, compared to the prior year. We continued to experience consistently strong retention rates along with sizable new business potential. Organic revenue in the U.S. segment increased by 7% in the second quarter versus last year, led by three areas of the business. First, we've seen continued momentum in Collegiate Hospitality due to enhanced culinary partnerships and new business wins as well as innovation leading to increased participation. Sports and entertainment had another great quarter with impressive per capita spending rates and higher attendance levels, especially during the NFL season, as well from our growing presence in the NCAA. We expanded our grab-and-go micro-markets and self-checkout offerings and launched additional local restaurant partnerships, which continue to resonate with fans. We'd also like to congratulate the South Carolina Gamecocks, the Iowa Hawkeyes and the Purdue Boilermakers for their achievements in reaching their respective NCAA basketball championship games, all Aramark clients. And lastly, workplace experience gained momentum across all regions as the quarter progressed, led by new business coming on board, increased employee participation rates and additional catering activity. The U.S. segment continues to deliver new business wins. Most recently, we were very excited to add Oracle (NYSE:ORCL) Park, the home of the San Francisco Giants to our baseball portfolio. I was at the stadium for opening day and experienced firsthand the enthusiasm of our Aramark team, proudly serving fans with new innovative culinary creations combined with iconic fan favorites. Other new client additions include the University of New Mexico, Denison University and Clark University, and Collegiate Hospitality, as well as Dublin City Schools and Student Nutrition, to name a few. Corrections also continued to expand the portfolio taking great pride in the success of our IN2Work program as a second chance employer, a program that is now in over 300 of our locations. In the international segment, every country and region within the Aramark portfolio saw organic revenue growth in the second quarter, led by mining services in Latin America, increased business dining volume in the U.K. and continued strength in education across Canada, resulting in a year-over-year increase of 16%. Our Aramark Korea team served fans at a pair of Major League Baseball opening day games for the National League West rivals the San Diego Padres and the LA Dodgers, who played in Seoul towards the end of the quarter, leading to new opportunities in sports. New business has been strong in international, which most recently included expanding our presence with Merlin Entertainment in the U.K. offering additional B&I services to Continental AG (OTC:CTTAY) in Germany and building upon our remote camp capabilities in Canada, adding Woodfibre LNG and Ledcor group as clients. The international team has been awarded numerous new wins, collectively providing us the ability to build scale in the countries we serve. In the second quarter, we hosted our first International Innovation Summit in Santiago, Chile, which included participation from our country leaders, global clients and technology partners with approximately 700 attendees. We used our time together to explore food and facility service models of the future focused on innovation around customer experience, safety, sustainability and artificial intelligence. Now let's turn to global supply chain. Our overall objective continues to be focused on consistently growing and leveraging our managed services global supply chain and GPO network spend of $19 billion and providing quality products, services and analytical insights to our clients. International expansion is an area of focus on our strategy with several of our multinational clients offering us the opportunity to broaden our procurement services on a global scale. As I previously mentioned, we saw some continued improvement on the inflation side, which helped product costs in the second quarter. Jim will be providing additional detail on the benefits we're experiencing. Our AI work in global supply chain is creating additional efficiencies with enhanced data harmonization and analytics for our operators and clients, particularly in sourcing, optimization and reporting. As an example, we're leveraging these capabilities to share insights with our clients in further understanding their community impact with local, regional, diverse and sustainable spend to achieve their ESG goals. Finally, we continue to strengthen our balance sheet and are in active discussions to sell the remaining portion of our ownership stake in the San Antonio Spurs NBA franchise. We expect to sell the remaining interest prior to the end of the fiscal year, and we will provide additional detail on a potential transaction soon. I'll now turn the call over to Jim.
Jim Tarangelo: Thanks, John, and good morning, everyone. Over the past several months, I have spent time with many of you reviewing the business and outlining my immediate priorities since becoming CFO in January. I have focused on two primary areas, continuing to drive profitable growth with the goal of reaching new levels of financial performance and leveraging that growth to capitalize on our underlying margin levers. With that, we had another very strong quarter, building on the momentum we generated in the first quarter, reinforcing that our model is working and producing the results we expect. With this framework now firmly in place and the operating environment normalized, the company is at an exciting inflection point as we execute on our strategies, all with a mindset of creating significant value for our stakeholders. As John reviewed, in the second quarter, we reported organic revenue growth of more than 9% versus the prior year, driven by strong base business growth and the contribution from net new business along with pricing. Operating income in the second quarter grew by 27% year-over-year to $159 million and adjusted operating income was up 29% on a constant currency basis from a year ago to $187 million. AOI margin grew by nearly 70 basis points year-over-year on a constant-currency basis with approximately 50 basis points driven by those underlying levers so core to our model, including scale and SG&A, supply chain efficiencies, disciplined middle of the P&L management and progression of new business maturity with the remainder coming from improving inflation trends. Turning to the business segments. FSS U.S. achieved AOI growth of 21% with an AOI margin improvement of 65 basis points on a constant-currency basis compared to the same period last year. Education, business and industry and sports, leisure and corrections all had particularly strong quarters due to disciplined middle of the P&L management combined with higher base business growth, especially in our Collegiate Hospitality and correction businesses from our ability to recover the price inflation lag we've previously discussed. The International segment had year-over-year AOI growth of 29% and an AOI margin improvement of nearly 45 basis points both on a constant-currency basis. Year-over-year AOI growth was driven by higher base business volume, net-new business and supply-chain efficiencies led by the UK, Germany and Latin America. Regarding inflation, we are seeing trends tracking similarly to what we experienced in the first quarter and providing some tailwinds to our underlying margin levers. We still anticipate inflation to be around 4% to 5% for the fiscal year consistent with our expectations we conveyed last quarter. Turning to the remainder of the income statement. Interest expense decreased by almost 25%, primarily from the $1.5 billion debt repayment of the 2025 senior notes. The adjusted tax rate was approximately 26%. Our strong quarterly performance resulted in GAAP EPS of $0.20 and adjusted EPS of $0.29, an increase of 79% versus the prior year on a constant-currency basis. With respect to cash flow, the company generated a cash inflow in the quarter consistent with our normal seasonal business cadence. Cash flows from operating activities in the second quarter was $221 million and free-cash flow was $140 million. The current quarter was impacted by payments of approximately $25 million for the remaining fees associated with the completion of the spin transaction as well as higher income tax payments from the increased profitable growth and slightly more capital expenditures. At quarter-end, the company had over $1.1 billion in cash availability. We also took steps to enhance our capital structure by repricing our 2028 and 2030 term loans at lower interest rates. This repricing is expected to generate annual interest expense savings of approximately $10 million. We will continue to proactively pursue opportunities to further strengthen our balance sheet. I'll wrap up with our outlook expectations for the remainder of this fiscal year. We are very pleased with our year-to-date performance and the trends we are seeing in the business. As a result, we are updating our fiscal '24 outlook for organic growth to be at 9% or better and reaffirming our expectation for AOI growth and adjusted EPS growth, which we indicated would be toward the higher end of the range last quarter. With that, we currently anticipate the following full year performance: organic revenue growth at 9% or better, AOI growth of 17% to 20%, adjusted EPS increasing 30% to 35%. And lastly, a leverage ratio of approximately 3.5 times by the end of the fiscal year. Our strong performance reinforces that our profitable growth strategies are working. With the foundation for success firmly in place across the organization, we couldn't be more excited about our future. Thank you for the time this morning. And with that, I'll turn it back to John.
John Zillmer: Thank you, Jim. Our teams around the globe are the driving force behind our success and a key reason I remain confident to our ability to -- in our ability to go to and through our financial targets, focused on organic revenue growth, margin expansion, adjusted EPS growth and capital structure enhancement. We're working hard each day to build upon our momentum and deliver on our promises for all stakeholders. Very specifically, the point I'd like to convey with respect to our strong quarter is that we feel very good about the quarter that's in the books. We believe that the macro-environment continues to cooperate and we've raised our revenue guidance and our AOI expectations for the second half of this year have both risen. Having already pointed towards the high end of the quality -- of the quantitative AOI guidance range on the last quarter, we plan to update the quantitative AOI guidance range as the year progresses. Operator, we'll now turn the call over to questions.
Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Toni Kaplan with Morgan Stanley (NYSE:MS). Your line is open.
Toni Kaplan: Thanks so much. Really nice job on revenue growth this quarter and you moved to the higher end of the guidance range. It seems like really good momentum in the business. I was just hoping you could give maybe some additional color on the new business that and you called it out a number of times in the prepared remarks. So I guess, are you seeing acceleration there? Are you seeing changes like a shortening of sales cycle? Are you able to find new clients? Like, just give us a sense of what the net new was for the quarter? And how that's trending and just the environment in new business. Thanks.
John Zillmer: Sure. Thanks, Toni for the question. First of all, we feel very good about our momentum in terms of new business development, new account wins. Many in the pipeline and many that are already verbal wins that we don't have signed contracts for. So we're seeing very significant momentum on the new business side, very active pipeline, very active selling season in higher education and K-12, which as we know, they're still in the middle of their selling seasons. So we feel very good about the momentum and about our net-new goals for the year. And we'll disclose fully after the full year what our net-new results and the components of growth are for the entire enterprise. But right now, we're very pleased with the momentum and got some very satisfying wins to date and many more to come.
Toni Kaplan: Terrific. And wanted to ask my follow-up on margin. Margin in the U.S. in particular looked particularly strong. I wanted to understand the drivers a little bit better. Are you benefiting from maturity in some of the prior year's new business on the margin side and just the latest on price cost spread and how you're thinking about -- it sounds like you're thinking about updating the AOI guidance as we go along and you're already at the higher end. But just any commentary on the drivers to -- of particularly the U.S. margin performance. Thanks.
Jim Tarangelo: Yes, thanks. So really strong performance year-to-date on margins averaging about 65 basis-points of margin improvement. And as I noted, about 50 basis points coming from those underlying levers with the remaining coming from the inflation moderating. Within that 50 basis points, we really like what we're seeing, particularly in supply chain. The growth has really positioned our supply-chain organization to generate efficiencies, negotiate better deals, and we're seeing good results out of our GPOs. Secondly, I would just note the middle of the P&L as the operating environment continues to normalize and our operators can focus on optimizing food and labor without sacrificing service to our clients. We've seen really nice results there as well.
Toni Kaplan: Terrific. Thanks.
Operator: Our next question comes from Ian Zaffino with Oppenheimer. Your line is open.
Ian Zaffino: Hi, great. Thank you very much. Very good quarter.
John Zillmer: Thank you.
Ian Zaffino: I wanted to ask on -- again on the new business. What was that? Was that primarily new outsourcing? Were they competitive wins? Maybe give us a little bit more color there. And then as I look into your pipeline or as you look into your pipeline, what specific lines of business are doing particularly well with any new big client opportunities you could talk about? Thanks.
John Zillmer: Sure. Actually, performance is very broad-based. All the businesses doing very well with respect to new business wins and higher education may sell the most business they've ever sold in their history. It's in terms of numbers of new accounts. So it's a very -- it's been a very solid year from that perspective, very strong growth in B&I, big, big wins obviously across the enterprise in corrections and in other verticals. So we're very pleased with the broad-based nature of the new account wins, the strength of the pipeline, both domestically and internationally. The international business have had a very strong year from a new perspective. So, yes, we're very encouraged. And I would tell you, I think we're seeing still significant tailwind from self-op conversion around the world. We're seeing significant opportunities across all the verticals and across all geographies. So feeling very good about the new business pipeline and the overall results.
Ian Zaffino: Great. Thank you. And then if I could sneak in another question. Can you just share the status of the Mantle Ridge ownership in your company, if you have any type of sense? I mean you've been posting great results including from last quarter. Some are thinking that could be some type of overhang coming. So any insight you could give us that'd be helpful.
John Zillmer: Yes, certainly. Generally in short, the Mantle Ridge vehicle that held Aramark stock has been fully and permanently wound down and is no longer a factor for Aramark. And I'm generally not in the comment -- in the habit of commenting on matters relating to our shareholders, but I have obtained permission to share the key details of the current circumstances because we do have a reason to believe that there is a little bit of confusion around the current state of their ownership. So as I said, the fund has been fully and permanently wound down. The -- I can confirm that all the stock controlled by Mantle Ridge has found a long-term home. Some was sold over the course of the last six months since their initial sell-down in August and the balance has found their way to long-term holders. As I'm sure the filings over the course of the next couple of quarters will show the organizations that have received shares are well-respected long-term investors who've underwritten the company's strategy thoroughly, and we feel very good about the nature of that relationship. So the bottom line is Mantle Ridge's ownership is no longer a factor for Aramark. Paul Hilal is a friend and I trust I will be calling on him for advice in the future, but we have no longer a relationship with Mantle Ridge from an ownership perspective.
Ian Zaffino: That's very helpful color. Thank you very much and good quarter again.
John Zillmer: Thank you.
Operator: Our next question comes from Lizzie Dove with Goldman Sachs (NYSE:GS). Your line is open.
Lizzie Dove: Hi, there. Thanks so much for taking the question and congrats on a nice quarter. I'm curious, we've heard some negative commentary from other companies over the last few weeks. Does it feel like you're kind of seeing the same pressures. Curious if you could provide an update there just on what you're seeing in terms of health of the consumer. And I'll ask my follow-up now and also kind of any pushback you're receiving on pricing.
John Zillmer: Yes. I would say we're seeing a very healthy consumer, particularly in the businesses and the verticals that we operate in as evidenced by the organic growth of the enterprise. Continue to see very strong consumer response in the sports and entertainment business, very high levels of attendance and per capita spending and which I think is a very strong indicator. I think part of that speaks to the verticals we operate in and the essential services we provide across a range of businesses in a range of geographies. So we aren't seeing that consumer pressure if you will that other retail organizations may be seeing. From an inflation perspective, we're seeing an environment that is beginning to show some moderation as we've talked about. We still believe our expectations are in the 4% to 5% range, both for a food and labor perspective, but it's also -- we're also able to achieve pricing to offset that those inflationary cost pressures. So we feel very good about the model that's in place, our ability to recover those costs and the overall state of the growth of the enterprise and the state of the consumer that we serve.
Lizzie Dove: Great. That's helpful. Thanks so much.
Operator: Our next question comes from Heather Balsky with BOA. Your line is open.
Emily Marzo: Hi, this is Emily Marzo on for Heather Balsky. First question is, could you clarify in terms of your guidance -- it sounds like you're guiding to the high-end. Is that just on AOI growth or EPS growth as well?
Jim Tarangelo: Yes. In terms of the guidance, we're really pleased with the performance year-to-date and the traction that we have. So I think it's reasonable to conclude on both fronts that we'd be towards the higher-end of the range as well on AOI and EPS.
Emily Marzo: Okay. Thank you. And then could you -- as a follow-up, could you provide any clarity or maybe some quantitative on what you're seeing in terms of the pricing discussions on the new accounts? And if anything has changed in the last couple of months.
John Zillmer: No, really nothing. With respect to new accounts pricing discussions are part of the negotiation process as we sell the new business, but the pricing is always based on what is appropriate from a P&L perspective and a margin perspective as we sell new business. So there is no downward pressure on pricing discussions with new clients and frankly, we've got very good pricing velocity on those accounts that we already serve. So I would say right now, we're very pleased with the pricing environment. As you know, last year, we struggled during the contractual pricing period on a couple of businesses due to the lag. That lag has been fully recovered and we are ahead of that process now. So we feel very good about the pricing environment in general.
Emily Marzo: Thank you.
Operator: Our next question comes from Andrew Steinerman with JPMorgan (NYSE:JPM). Your line is open.
Andrew Steinerman: Hi. I just wanted to get a data point on that 4% to 5% food inflation for input costs that you continue to assume. How was that in your book of business in the first half of the fiscal?
John Zillmer: Yes, that was roughly 4.2% in the first half. We saw it was very stable in the first quarter, Andrew, then we saw some -- and we actually saw some improvement in the first quarter, then it kind of hung in the second quarter at around 4.2%, 4.3%, it was stable. And now we're seeing in most recent weeks a slight easing again of that. So it's been in that 4% to 4.5% range on the input side pretty much all the year with a little bit of volatility in the quarters, but our expectations are we'll see some continued easing over the balance of the year. Just very hard to predict exactly how much that will be.
Andrew Steinerman: And that's for Aramark's book of business, right?
John Zillmer: That's correct. That's for our book of business and for our specific market basket of products that we buy and sell to our consumers.
Andrew Steinerman: Thank you.
Operator: Our next question comes from Neil Tyler with Redburn Atlantic. Your line is open.
Neil Tyler: Yes, hi, good afternoon. Thank you. And firstly, John, on the new wins and your confidence that you expressed earlier, is there any change in the source of those compared to, say, this time last year, whether that's first-time outsourcing or competitive bids? That's the first question. And then secondly, and within the International segment, the obviously strong organic growth. Can you remind us to what extent Merlin contract is now sort of at cruising altitude or is that contributing meaningfully still to the year-on-year comparison? Thanks.
John Zillmer: Yes, I would say, first of all, with respect to Merlin, it's at cruising speed year-over-year. All the Merlin business was open and operating last year at this time as well. So it's basically a very similar operating environment. We did pick up an additional piece of business from Merlin, but we're just beginning to operate that now so that hasn't really affected the revenue numbers yet in terms of year-over-year comps. And in terms of the source of new business wins, I would say it's very consistent with what we saw last year, general industry trends continue to be similar. I would say first time outsourcing still contributing probably in the 40% to 45% range of new business wins. And the balance competitive bids from either regionals or other major players. So I would say on balance very similar to last year's sales environment.
Neil Tyler: Great. Thank you very much.
John Zillmer: Thank you.
Operator: Our next question comes from Shlomo Rosenbaum with Stifel. Your line is open.
Shlomo Rosenbaum: Hi, thank you for taking my questions. Hey, John, can you just go back to that Merlin comment that you made? You picked up an additional piece of business. Is that a client that has a lot of room to expand from where you are right now or are you at a point where you kind of maxed out over there?
John Zillmer: No, I'd say there is still continued room for expansion with Merlin. I don't want to speak for them, but they still, they obviously have a number of operations in other parts of the world where they continue to self-operate those and we would love to be an operator for them in other parts of the world. I would say with respect to the business in the U.K. and the U.S., it's pretty steady state with the addition of this one additional piece, we feel very good about it. But yes, I think there's still runway there with Merlin and we'll continue to work very aggressively to do a great job for them and hopefully continue to expand the partnership.
Shlomo Rosenbaum: Okay, great. And then just for the follow-up, just getting into the weeds a little bit, could you comment? There was 2% growth in rest of the world for international, and I don't know if that's just a tough comp and kind of stood out amongst a really strong growth over there. And then just in the U.S., everything's doing really well. I know that's taking some time to stabilize healthcare. If you could talk about how you're thinking you know a timeframe for that to kind of reach a stabilization and start to grow?
John Zillmer: Yes, I think we've reached that stabilization point for the healthcare business. And I think you're speaking specifically about senior living. We believe we've stabilized that business and that we will be growing from here in that segment. We're very pleased with the leadership of that team and the progress they've made in the business. So very confident in our ability to grow that significantly over time. With respect to the 2% comp for rest of world, I -- we have over 20% organic growth in rest of world. So I think the impact that you're talking really is about with respect to the gap numbers, which reflect all the currency translation effects in international. So that would account for that variance but our rest of world calculation is that we're over 20% organic growth.
Jim Tarangelo: Yes, John. I'll just add in that the $83 million of FX headwinds that we see there that was primarily in rest of the world, specifically in Latin America.
Shlomo Rosenbaum: Great. Thank you.
Operator: Our next question comes -- sorry our next question comes from Leo Carrington with Citi. Your line is open.
Leo Carrington: Good morning. Thank you, John and Jim. It sounds like you're indicating that the 17% to 20% AOI growth guide could be raised later in the year, so why hold off doing it now? What could push you above the top end of that or what lands you in the middle? And then secondly, perhaps just what kind of margin expansion might be reasonable to expect in H2 on a year-over-year basis compared to what you've achieved in H1?
Jim Tarangelo: Sure. So like I said, we had very strong performance in Q1 and Q2 with 65 basis points of margin improvement. In terms of the outlook, we remain very optimistic. And I say you're expecting to be toward the higher end of that range. A couple of factors in terms of we're lapping some significant pricing actions in the prior year, so we'll see how inflation plays out. And the timing of new obviously could have an impact as well. But like I said, we're really optimistic with the outlook and we'll continue to keep you posted on that front.
John Zillmer: Yes, I would just add commentary. As we indicated, the top end of the range of AOI and EPS, we're very confident in our ability to deliver on that. We're also somewhat subject to the -- to what happens in the inflation environment from that -- in that respect. And so we believe that this is a good environment that we have inflation that ultimately may moderate further. And if it does, that will be a continuing tailwind into the third and fourth quarter and as we experience those changes, we'll continue to update that AOI guidance. Obviously, we're working to get that number as high as we can. We're all incented for the same thing. We all want to drive that -- the performance to the organization, and we'll update further as we have more data with respect to what second half inflation might look like.
Leo Carrington: Okay, thank you. If I might just follow-up on that one. If you could help on within the margin expansion in Q2, to what extent the pricing has been driving the margin expansion, i.e. that the pricing has now caught up to the incurred cost inflation?
Jim Tarangelo: Yes. Again the underlying levers, right, which excludes the pricing component was about 50 basis points. So the delta between 68 basis points and 50 basis points. So 15 basis points to 18 basis points of margin improvement was a result of the pricing and inflation moderating.
Leo Carrington: Okay, very clear. Thank you very much.
Operator: Our next question comes from Ashish Sabadra with RBC (TSX:RY). Your line is open.
Ashish Sabadra: Thanks for taking my question. Solid progress on the margin front. I was wondering if you could highlight some of the efforts in place to continue to drive more -- better margin expansion particularly on the supply chain efficiency side as well as the progress on the cost takeout front. Thanks.
John Zillmer: Certainly, on the supply chain side, we continue to work very aggressively to pursue as we build the business and grow the organization, we continue to use that leverage to go ahead and negotiate new and better and more attractive deals with our suppliers and the manufacturer partners that we have around the world. And we've been able to do just that. We're seeing significant improvement year over year in supply chain profitability that contributes to the overall profitability of the enterprise. So very pleased with that progress. We're also working very aggressively to build our international scale in terms of global supply chain and working with other partners to go ahead and build that scale which gives us additional opportunity to impact the business both domestically and internationally. So very, very focused on supply chain growth. And we think it will be a good -- big contributor to margin expansion over time. That's one of the key levers for the company that we've identified in our business case and in our Investor Day, if you will, that that will be a solid contributor going forward and it has proven to be and will continue to be. And I'm sorry, I didn't get the second half of your question.
Jim Tarangelo: Drivers. Yes, Ashish. Some of the other drivers there of margin expansion the middle of the P&L. We really like what we saw with the operating environment more normalized. Our operators are doing a great job optimizing food and labor costs specifically reducing overtime and agency labor, again, as an environment more normalizes. And then secondly, on our SG&A, the organization is really fit for purpose. With the spin, you can see SG&A actually and corporate costs down a little bit versus the prior year. So we're able to take a lot more growth on really without adding much to the top line cost.
Ashish Sabadra: That's great color. Thank you very much.
Operator: Our next question comes from Stephanie Moore with Jefferies. Your line is open.
Stephanie Moore: Hi. Good morning. Thank you.
John Zillmer: Good morning.
Stephanie Moore: I was hoping you could talk a little -- good morning. I was hoping you could talk a little bit about the strength you're seeing in the base business. What's driving a lot of this growth in this environment? Thanks.
John Zillmer: Yes, we're seeing overall participation rates and strong customer acceptance in a number of businesses. Higher education, we're seeing very strong performance in terms of the customer satisfaction scores and the overall participation on university campuses. We're seeing upperclassmen select board plans on a more frequent basis, which is a key driver of growth opportunity. We're seeing very strong base business growth in the B&I segment both domestically and internationally, as return to work has normalized and businesses are focused on growing again. And we're seeing very strong new business wins in B&I as well contributing to that. So overall, we're seeing a very healthy environment for all the businesses we operate in and we're very pleased overall with the results in both the operating environment, their cost containment, the customer counts, overall participation rates, all very supportive of just that strong base business growth.
Stephanie Moore: Great. And that's helpful. And just as a follow-up, could you remind us for which retention rates are trending at the moment? Thanks.
John Zillmer: Yes right now we're -- we expect to achieve 96% retention, which is our historical standard and we are on track to achieve that objective this year. So feel very good about continued high retention rates across the enterprise.
Operator: Thank you. Our next question comes from Jasper Bibb with Truist Securities. Your line is open.
Jasper Bibb: Hey, good morning. I was hoping you could give a bit more color on the GPO and supply chain efficiencies. I guess, how are you thinking about the opportunity to keep growing spend under management over the next few years and what that could drive in terms of margin leverage?
John Zillmer: Well very specifically, we believe that the supply chain GPO opportunity is very significant. We continue to look at both the organic growth of that through the addition of new business as well as the potential M&A activity in the GPO sector both domestically and internationally looking at ways to continue to build scale. But our primary growth vehicle for the GPO will be the organic growth of selling new business, adding new accounts and adding that spend to our existing $19 billion worth of spend that has double benefits. We earn both the income from the GPO and we are able to negotiate better deals that impact our core business as a result of that increased volume. So it is a key factor for the long term margin expansion of the enterprise. And as I said, we are working very aggressively to continue to build that business both domestically and internationally and working with our existing partners to find ways to serve them in other parts of the world that opens up a whole new range of opportunities for us.
Jasper Bibb: Thanks. And then curious if you could provide any update on Salesforce (NYSE:CRM) productivity. It seems like you've gotten good leverage there on the investments you made a few years ago, but any update on where that stands today would be helpful.
John Zillmer: Yes, I would say we're very, very pleased with overall Salesforce productivity that as we work through the operating review discipline we have on a monthly basis with each of the businesses, we sit down and review with the Presidents of those businesses and with the country Presidents the sales results literally every 30 days. And so we've seen -- we see the evidence of that productivity on a continuing basis. So very pleased with the results. And frankly, we feel like we've got a very productive sales organization. We are fully staffed and feel comfortable with the level of resources that we have positioned against the growth opportunities. And we're always looking for new and different verticals to add to the capabilities of the company to go ahead and expand this -- the universe of opportunities for that sales group to pursue. So Merlin was a great example of that. That was a vertical which had -- was 100% self-op in the past. It was a great business opportunity and we continue to look for new verticals that we can add to the portfolio.
Jasper Bibb: That's helpful. Thanks for taking the questions.
Operator: Our last question comes from Josh Chan with UBS. Your line is open.
Josh Chan: Hi, good morning. Thanks for taking my questions. I think you mentioned that the underlying margin improvement was 50 basis points this quarter. I think it was the same last quarter. So could you just remind us what's implied in your guidance in terms of underlying margin improvement for the year?
Jim Tarangelo: Yes. So again, we haven't baked in any benefit from inflation moderating or inflation tailwinds for our full year guidance, we assumed inflation is at similar levels as they are with -- as they were for the second quarter for the remainder of the year.
Josh Chan: Okay. And then I guess in terms of just the core margin improvement, could you talk about your confidence in that sustaining beyond 2024 based on the initiatives that you have to drive improvement? Thank you.
Jim Tarangelo: Yes. Given the traction that we have, we're very comfortable that the model is working and the levers that are driving the margin improvement will continue on into 2025 and 2026 with respect to improved efficiencies and scale in our supply chain. The commentary I made with respect to SG&A that will be similar as we plan for the next couple of years as well. And then again, the middle of the P&L, the trends that we are seeing, I think will give us some momentum and tailwinds into 2025 as well.
John Zillmer: Yes. And I would just add just one. Terrific. I'll just add one final comment. No, that's all right. As Jim indicated, we feel very good about the middle of the P&L management, the operating team doing a great job of focusing on delivering efficiency and services to our customers. And that's -- and ultimately, that's the best test of an organization. Can you manage the business effectively and deliver on the results that your clients expect? And we feel very good about our ability to do that and our ability to go ahead and impact the business in a meaningful way. So with that, I'd like to thank all of you for the time that you spent with us this morning. Really appreciate it. Feel good about the quarter and we will continue to update you through the balance of this year as we achieve great results. So thank you very much.
Operator: Thank you for participating. This concludes today's conference. You may now disconnect.
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