Aramark (ARMK) Earnings Call Transcript

Good morning, and welcome to Aramark's Third Quarter and Fiscal 2026 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. [Operator Instructions] I will now turn the call over to Felise Kissell, Senior Vice President, Investor Relations and Corporate Development, Ms. Kissell, please proceed.

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, Jim Tarangelo. As always, there are accompanying slides for this call that can be viewed through the webcast and are also available on the IR website for easy access. Our notice regarding forward-looking statements is 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 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. I will now turn the call over to John.

Good morning, everyone, and welcome to our fiscal third quarter earnings call. Thank you for joining us. Jim and I are pleased to be here with you to review our financial results, provide an update on the business and discuss our strategic growth agenda, which continues to drive strong, sustained performance. We're heading into the fourth quarter with significant momentum across the portfolio, including industry-leading client retention at record levels of approximately 98%, underscoring the strength of our client relationships and the excellence of our service and execution. Accelerating organic revenue growth in every U.S. sector, absent the calendar shift in education and across all regions within international. New client wins totaling more than $1.6 billion fiscal year-to-date, 51% higher than the comparable prior year period, reflecting strong demand for our hospitality capabilities and the depth of our sales pipeline, and the launch of operations just weeks ago under our recently awarded multiyear engagement with a top global hyperscaler, alongside the continued expansion of Aramark NEXUS, which now includes providing premium hospitality services to workforce communities for an AI data center colocation leader. In the third quarter, organic revenue for the company grew 9% to $5 billion and would have increased another approximately 2% if not for the calendar shift. Once again, our strong revenue performance was driven by broad-based net new business and base business growth across sectors and geographies. These results are a testament to the dedication of our teams whose commitment to serving our clients, delivering exceptional hospitality experiences and performing at a high level every day has been instrumental in our success. Moving to the business segments. FSS U.S. organic revenue grew 8% to $3.5 billion and would have increased more than 10% excluding the calendar shift. Education would have achieved more than 7% growth absent the shift, which is expected to be fully recaptured in the fourth quarter. Collegiate Hospitality is benefiting from increased residential meal plan enrollment, record retention and the strongest selling season in recent history. U.S. revenue growth in the quarter was further driven by Sports & Entertainment strong year-over-year performance, which reflected higher revenue from the ongoing Major League Baseball season along with an expanded client portfolio, including a Major League Soccer and Collegiate Athletics. We demonstrated the strength of our capabilities during the 15 FIFA World Cup matches hosted at the stadiums we serve, delivering premium fan experiences amid unprecedented attendance and record per capita spending, with an additional 4 matches held after quarter end. We also proudly supported our NHL and NBA clients throughout the playoffs, and extend our congratulations to the San Antonio Spurs on reaching the NBA finals. Our S&E team was hard at work last month during the MLB All-Star game here in Philadelphia, providing hospitality services throughout the 3-day series of events with merchandise revenue a particular highlight. Healthcare Plus built upon the successful launch of Penn Medicine with our team actively mobilizing multiple lines of service across RWJ Barnabus Health 18 locations, while continuing to deliver strong base business performance. And workplace experience and refreshments achieved double-digit compounded growth for the 19th consecutive quarter, reflecting the contribution from new business, exceptional client retention and continued base business performance across the portfolio. Now turning to Aramark Nexus. We began operations at our first Texas-based site supporting a top global hyperscaler, which contributed to revenue and profitability late in the third quarter as we started scaling our service offerings. We're currently mobilizing a second site for this client and the scope of work across both locations is now expected to increase by approximately 40% from original estimates. In addition, the client has indicated we should anticipate supporting additional sites as new locations come online. We remain in active dialogue with other leading hyperscalers as well, reflecting the strong demand for our integrated suite of capabilities. We continue to expand the reach of Aramark Nexus recently announcing a significant multiyear engagement with a leading AI data center colocation provider to deliver premium hospitality services to workforce communities across multiple locations, including in Wyoming and Texas. The initial site is scheduled to mobilize in the first half of our new fiscal year. Data center colocators develop, own and operate facilities that supply the power, cooling and infrastructure relied upon by technology companies. As these projects increase in scale and geographic reach, we believe that Nexus is uniquely positioned to help clients attract and retain skilled labor through differentiated hospitality solutions and premium amenities that enhance the employee experience and support project success. During the quarter, FSS U.S. continued to build on its strong momentum as we were awarded several additional client wins, including our first collaboration within the University of Colorado system at Colorado Springs, Grand Canyon University, Ohio Westland University and Texas State University and Collegiate Hospitality. Texas State and Florida State University Athletics and Sports, the Camden City School District in Student Nutrition and Paul Weiss and workplace experience as we expand our hospitality services into top-tier law firms. The International segment continued its strong growth trajectory, delivering another quarter of impressive results with organic revenue increasing 11% to $1.5 billion. Performance was broad-based across geographies and sectors, led by Spain, Canada, the U.K. and Germany. Concert and festival activity was especially strong with many of our venues further benefiting from major touring artists adding performances across Europe. We are also -- we also successfully served more than 300,000 fans during the multi-day Formula One Grand Prix in Barcelona, leveraging nearly 100 food and beverage locations across several event areas. Every country within the international portfolio delivered strong new business performance, underscoring the breadth of our service offerings and focus on excellence. International was awarded nearly 200 client location accounts during the quarter, including continued expansion in the mining industry, providing remote hospitality services for Discovery Silver mine in Canada as well as Codelco's Chickamada and AMSA's Los Palomas copper mines in Chile. We also concluded our international Guest Chef's Cup in Dublin, celebrating the very best of Aramark's culinary talent from around the world, following a year of in-country competitions. It was especially meaningful to see our host chefs from Ireland take top honors this year. On to global supply chain. Our global supply chain and GPO business maintained strong momentum, delivering more than $1.1 billion of annualized new spend globally fiscal year-to-date. This performance reflects the differentiation of our value proposition, market-leading procurement capabilities and disciplined execution. We believe Avendra International is well positioned as a premier global hospitality procurement solution with multinational clients increasingly consolidating spend with us across regions and continents, leveraging our scale, local expertise and extensive global supply network. We're also seeing inflation trends remain slightly more favorable than our original expectations across regions. Lastly, I would like to welcome Tony Spring as the newest member of Aramark's Board of Directors. As Chairman and CEO of Macy's, Tony brings deep executive leadership expertise and valuable strategic insights, particularly in integrating AI to enhance consumer experiences and leading a large diverse workforce. Before handing the call over to Jim, I want to reiterate that we are extremely confident in our ability to continue building on our strong results. We believe that the opportunities before us from the outperformance of our core business to the expansion of Aramark Nexus and our global supply chain platform position us well to capitalize on the substantial value-creating actions underway at the company. Once again, I would like to thank our teams around the globe for embodying our culture and values, which remain the foundation of who we are as a company. With that, Jim, I'll turn the call over to you.

Thanks, John, and good morning, everyone. We had another record-breaking quarter, delivering impressive top and bottom line results, driven by broad-based performance across sectors and geographies. As John mentioned, we continue to experience strong momentum with the execution of our growth strategies creating significant opportunities throughout the company that position us well for the remainder of the year and beyond. Regarding profit growth in the third quarter, operating income grew 18% to $216 million versus the prior year period. Adjusted operating income increased 13% to $261 million, with AOI margins expanding nearly 20 basis points. The calendar shift reduced AOI by an estimated $20 million. AOI growth would have increased approximately 21% without the calendar shift with margin expansion of nearly 50 basis points on a constant currency basis. This double-digit profit growth and margin expansion were driven by higher revenue levels, expanded supply chain capabilities and effective cost management. Turning to the business segments. FSS U.S. reported AOI growth of 11% with AOI margins expanding more than 20 basis points. Excluding the calendar shift, AOI growth would have increased approximately 22% and with margins gaining almost 65 basis points. Profitability and margin expansion in the quarter was a result of greater revenue from base and new business, particularly in Sports & Entertainment, the Workplace Experience Group, refreshments in Healthcare. FSS U.S. also benefited from supply chain efficiencies and productivity gains from effective cost management. The International segment delivered AOI growth of 24%, with margins expanding nearly 60 basis points on a constant currency basis. AOI growth was driven by higher base business volume and net new business, along with strengthened supply chain economics. Our strong quarterly performance resulted in GAAP EPS of $0.36 and adjusted EPS of $0.52, an increase of nearly 30% versus the prior year and almost 45%, excluding the calendar shift, reflecting the successful execution of our growth strategies. With respect to cash flow, net cash provided by operating activities in the third quarter grew $41 million and free cash flow increased $42 million. These positive cash flow results were driven by strong business performance and earnings growth. As always, we expect to generate a large inflow in the fourth quarter, primarily from Collegiate Hospitality and Sports & Entertainment. The higher cash flow generation in the quarter enabled us to proactively repay $100 million of term loans subsequent to the quarter end. We remain committed to achieving a leverage ratio below 3x by fiscal year-end. We will continue to pursue additional capital allocation opportunities with a focus on maximizing returns. At quarter end, the company had over $1.4 billion in cash availability. And finally, let me wrap up with our performance expectations for the remainder of fiscal '26, with only a few months to go. We are benefiting from the consistent execution of our teams across the business from industry-leading client retention to broad-based revenue growth across the U.S. and international to record levels of new client wins and the continued expansion of Aramark Nexus. Our sales pipeline remains substantial with first-time outsourcing at elevated levels. As a result, we have raised our fiscal '26 organic revenue growth outlook to an increase of 9% to 10%, reflecting continued momentum across Aramark's portfolio as well as the early contribution from commencing operations with a top global hyperscaler. We are also reaffirming our expectations for AOI growth of 12% to 17%, and adjusted EPS growth of 20% to 25%, both of which are aligned with Wall Street estimates as we look at the fourth quarter. We anticipate accelerated AOI growth and margin expansion in the fourth quarter, driven by our multiple operating levers and the early contribution from Aramark Nexus. We are mobilizing a record level of new business throughout the company and adding Aramark Nexus growth resources as appropriate to further capitalize on the significant new business opportunities before us. In summary, the strength of our financial performance this quarter, combined with the continued momentum we are seeing across the business, reinforces our confidence in Aramark's growth trajectory. We believe the company is well positioned to drive significant shareholder value creation. Thank you for your time this morning. Operator, we will now open up the call for questions.

[Operator Instructions] Our first question comes from Curtis Nagle with Bank of America.

I guess first, just focusing on that additional Nexus contract, great numbers to hear, right, the 40% increase in scope in new sites. I guess, would you be able to provide an update on potentially how much larger this contract could be? I think initially, we were thinking several hundred million? And would the duration of this contract also potentially expand in a longer than you might think? And then I'll have a follow-up.

Sure. The initial contract, we estimated at about $100 million annualized over the life of the contract -- I'm sorry, annually over the life of the contract. And with this 40% increase in scope, we expect it to be somewhere in the range of $140 million per year. The life expectancy of the contract, we continue to believe, is somewhere in the range of 4 to 5 years dependent upon the speed of development and also determined ultimately by the total number of employees that they bring on board. So very attractive contract, very attractive returns, as we've talked about. This is a capital-light strategy for us, immediately accretive to margins above company average and will be a strong contributor going forward.

Just a quick clarification. Just it's $100 million, I guess, now $140 per site, right?

Per site, per year. That's the initial contract at that first site. The second site that we will be -- that we are currently beginning to mobilize will actually be slightly larger and approximately the same duration. So that would tend to be around $160 million a year based on the expected size of the second site.

Got it. Okay. I guess just more of a holistic question, just your confidence in being able to maintain this, call it, 9% to 10% organic growth range. Just look at your current book of business, the [ 1.6 ], the retention normalized pricing and then let alone perhaps more upside from data centers, it seems like it's pretty achievable in the next year, but just -- yes, it would be great to your level of confidence [indiscernible].

Yes. Again, we're -- the metrics on new business or great record levels of new business at this point in the year, exceptional retention levels, we're seeing broad-based growth, and as you mentioned, on top of that, the Nexus business that we are mobilizing. If you look at the underlying growth rate in Q3, excluding the calendar shift, it's in the 10% to 11% range. I think you see implied at a similar level for the fourth quarter. So that's all very sustainable, and that's exactly how we're thinking about the exit rate and the outlook as we think about 2027.

Our next question comes from Lizzie Dove of Goldman Sachs.

As on a great print I just wanted to ask more now that you're kind of several months into this, some great updates on Nexus. Like any latest thoughts on just how to think about the TAM that you have? And within that kind of addressable market, how you think about your kind of market share opportunity within that specifically?

Sure. I think total addressable market is something we're still working on. But obviously, there are hundreds of these projects that are currently under consideration for construction across the United States and elsewhere around the world. So I think to extrapolate to the total addressable market is a little bit difficult at this stage. We do think it's in the many billions of dollars in terms of the total addressable market, and we'll continue to refine those estimates as we get a better understanding of the actual construction pace and the implementation across the U.S. But right now, we feel like we're very well positioned in this segment. We are investing in resources to go ahead and bring this business to life. We've already established a very good leadership structure, committed sales resources against this business. And so I like our positioning. We currently have 8 sites that are signed and under active development in various stages. So there is a lot of runway to this business. I also think that this business is going to be very large, and it's -- I think we'll achieve very significant share gains very rapidly. But I do think this will be a competitive marketplace, and there's more than enough room for all the companies who serve these industries to succeed given the demand that appears to be out there.

Great. And then great to hear that it sounds like the 9% to 10% range you feel is sustainable over the next year. I guess any way that we should think about margins specifically on the impact of that on Nexus? It sounds like you've said in the past that Nexus margins are accretive. They're higher than the total company right now. But then I guess there's still maybe a bit of a ramp phase. And so kind of putting those pieces together, I am not asking for guidance, but just any way to think about as we move into '27 and longer term, how we think about kind of margin impact from all of this?

Yes. I think the -- certainly, the Nexus opportunity and the above company margin certainly will be a tailwind to the longer-term picture on margins. we've been consistently generating 30 to 40 basis points of margin accretion, and that's implied by the guidance for this year as well. As John mentioned, we're mobilizing 2 sites with a large hyperscaler, the colocator on top of that. The first site alone expected to add about $150 million million of revenues. So it is the $400 million to $500 million of revenue that will ramp up over the course of fiscal '27 and to '28 with above company margins. So that's how we're thinking about it. So we'll certainly be a tailwind to that picture.

Yes. And I would just add, Lizzie, that we're committed to -- as we have said over the past, we're committed to seeing significant margin accretion in the core business without the impact of Nexus. Nexus will be additive and we feel very good about that positioning, but we're also very much focused on continuing the margin expansion that exists in the core business that comes just through the normal growth of the organization as well as the supply chain discipline and SG&A leverage. So we continue to have expectations in that 30 to 40 basis point range on the core business in addition to the margin accretion that will come from Nexus.

Our next question comes from Ian Zaffino with Oppenheimer.

Really good quarter. Question, I guess, if we could just maybe move away from Nexus for just a second here. It does seem like the broader portfolio in general has had just a ton of success here. I don't know I explain other than just kind of firing on all cylinders here. But maybe talk about what the greatest opportunities you're seeing out there, again, putting Nexus aside and kind of focusing on the core business?

Sure. Thanks for the question, Ian. We absolutely do see continued growth in the core business. We've had a very strong selling season across the enterprise, both domestically and internationally, experiencing very strong growth and reactive pipelines across the range of the portfolio. So I think we've maintained our commitment to each of the businesses. We're driving performance. We've got a great management team in place, and we're executing well in terms of serving our customers' needs through adding new solutions every day. So we continue to see great opportunities in the health care sector as continued self-op conversion takes place. We see continued expansion in the collegiate sports area but we're experiencing growth in all of our businesses, even those that have been highly contracted for a long period of time, we're seeing exceptional growth in workplace experience, both domestically and internationally. So feel very confident in the long-term growth trajectory of the organization and believe our long-term prospects are excellent.

Okay. And then I'm going to ask a question here on Nexus. I just kind of want to be -- and I appreciate you guys are being prudent and kind of disciplined in managing, I don't know, call it, maybe expectations here. But when we think about just the business in general and maybe again, the margins, why are the margins higher? Is it a factor of -- or maybe let me ask it differently. How do we expect the margins to ramp? Typically, in the core business, we see some dilution as you win large contracts initially and then it kind of ramps throughout the contract. Is that something similar we're going to see here? And how should we kind of wrap our brains around this, so we kind of keep everything in check and retention is in line with Nexus? And what you're seeing actually on the ground, et cetera?

Yes, sure. So the -- there is some moderate ramp with Nexus as we ramp up the number of folks that we are serving. But the primary underlying structure of these contracts is cost reimbursable. We don't want to get into too much detail for competitive reasons, but that's how we structure them. The margins are attractive, especially if you compare it to some of the smaller players in the industry, margins are actually much higher than that on their model. So it's low capital intensity with that cost reimbursable primarily. There are some moderate cost upfront, but it scales much faster than a sort of a typical, say, higher education or sports contracts so that we have very good visibility into the margins, very predictable. So there's not significant start-up costs like we see typically in a contract of that size.

Next question comes from Leo Carrington with City.

Please ask some follow-ups on the AI data center progress you've made. Firstly, that point about the scope of work on the hyperscaler contracts having increased 40%, can you give some more color on what kind of services you've been able to add and how this came about? Is there scope for further increases with the -- in terms of scope with hyperscaler.

Really -- I'm sorry, go ahead. Go ahead and finish, Leo.

I was just going to just ask sort of a similar question on the co-location side. it'd be interesting just to hear the similarities and differences versus the hyperscaler contract. And if there was anything you could add in terms of the revenue opportunity for this co-locator contract versus the numbers for the hyperscaler one you've already given us?

Sure. Typically, what drives the difference in scale is the number of people expected to be employed on-site, which you could roughly translate into beds. And remember, these are residential communities. These are workforce communities that are being created in remote areas. And so you can kind of think of the number of beds as being kind of an indicator of scale and scope. So our initial site was originally projected to be about 3,500 employees. The increase in size and scale is directly related to the number of beds that they will have on site. So second location estimated to be 4,000 beds, the co-locator site originally looking at like 4,500 beds. So that's the primary driver. The scope of services that we'll be offering across the communities is consistent. It's essentially hospitality, food, retail, housekeeping, facilities management, unarmed security which we will subcontract and not perform ourselves, but that's not included in our revenue estimates. So it's a full suite of amenities and services provided to those people who are residing in these communities in a remote environment. So scope is very broad. I think fitness centers, pickleball courts, basketball courts, volleyball, it's it's a community that we're building. So the best indicator of overall size of the scope of a contract is related to the number of people, or a number of beds that are affiliated with the site. We currently have essentially under contract with those first 3 locations, approximately 12,000 to 13,000 beds, and they can scale up or down based on the size of the facility that's being built.

Next question comes from Andrew Steinerman with JPMorgan.

I just wanted to maybe touch on the medium-term algo. I surely haven't heard the figures in maybe about a year's time. But for a long time, we were talking about a medium-term 5% to 8% organic revenue growth algo. Surely, you're growing faster than that now and into next year. My question is, has the whole portfolio evolved to a point where the medium-term algorithm has to be increased?

I'll start, Andrew. I mean the algo, as you mentioned, is -- has been 5% to 8%, right? That's the growth we need to fuel the 30 to 40 basis points. We're obviously operating well above that this year as we exit into '27 as well, and we're evaluating continue to update in terms of what that algorithm will be. If you look at the components of growth on that, right, the main change there is obviously the net new impact, right? If you look at the quarter, we're now realizing the 5% to 6% net new realized, right, continuing with the pricing, say, 3.5%, volume 1% to 2%, minus calendar year for this quarter, obviously, but that's generally how we're thinking about the quarters, and we're in the early stages of planning for fiscal '27. But certainly, the expectations that we'll be operating above the algorithm that we initially established as part of Investor Day.

Okay. That's good. Could I just ask a real quick second one. New bookings that you just talked about, just give an update on the mix between your kind of self-op conversions versus competitive win ways?

Yes. I think it's probably consistent with our past disclosures. We're somewhere in the range of 40% to 45% self-op conversions. And what will skew that number up is whether or not you would call Nexus, which isn't really included in those numbers yet, a self-op conversion. It's a brand-new site, first-time outsourcing, so hard to really characterize it one way or the other. But I would say in the core business, we're still seeing in that range of 40% to 45% self-Op conversion.

Our next question comes from Toni Kaplan with Morgan Stanley.

I wanted to start off on Nexus. It sounds like you have a really complete service offering there. I was hoping you could just talk about the differentiation that you're able to provide because I'm sure a number of your large competitors are also trying to go after that business. And so I was hoping you could talk about maybe what customers have really liked and what makes your offering more unique or differentiated?

Yes. Sure. I'll take that, Tony. First of all, yes, there are a couple of smaller companies that are currently competing in this space. And I think the differentiated offerings that we brought to bear when we began to work with this global hyperscaler was a significantly differentiated hospitality approach that transition from a typical, call it, [indiscernible] line, if you will, to a much more retail-oriented fine dining approach that offers a range of opportunities for those employees that are living there. So it's not just walking through a cafeteria line for breakfast, lunch and dinner, it's having multiple outlets and multiple opportunities to choose how you want to be served, whether it's a full-service restaurant, whether it's buffet-style or whether it's some other kind of retail components. So what we brought to bear was a very significant change in the approach, and that's what they recognized. And that's the kind of quality that they wanted to achieve. And the reason for doing so is pretty obvious. They want to recruit and retain high quality, high numbers of employees in remote environments. And to do that, they wanted to give them a solution that was significantly enhanced from the norm. And so we were able to deliver design and deliver and execute against that kind of an approach, including those other amenity offerings, which are consistent with what we do for our own employees in the national parks, what we do in remote mines in Chile and Canada. So it was bringing to bear that full suite of capabilities. The other companies that focus on this segment have typically been construction-oriented organizations that focus more on the build as opposed to the hospitality. We're not in the build business. We're there to support the build business through our infrastructure, but we're there to provide hospitality for the employees. And that was the key differentiator.

Terrific. And shifting gears to sports, terrific quarter there. I know you called out World Cup in the release. I wanted to also understand how much of sort of the the growth there was attributable to World Cup, but also wanted to find out about any sort of recent wins because you also talked about expanding the client portfolio in sports. So any recent wins for new teams, that would be awesome.