Q3 2024 Aramark Earnings Call

Operator: 3rd 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 on 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.

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.

Speaker Change: We will be fulfilled we will open the conference call for questions at the conclusion of the Companys remarks, I will now turn the call over to police yourself Senior Vice President Investor Relations and corporate development. Mr. <unk>. Please proceed.

Felise Kissell: Thank you, and welcome to Aramark's third quarter fiscal 2020 earnings conference call and webcast. This morning, we'll be hearing from the company's Chief Executive Officer, John Zillmer, as well as 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 FCC filings.

Mr. <unk>: Thank you and welcome to Aramark 's third quarter fiscal 'twenty 'twenty four earnings conference call and webcast.

Speaker Change: Morning, we will be hearing from the Companys, Chief Executive Officer, John Zillmer, as well as Chief Financial Officer, Jim Tarantula.

Speaker Change: 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 and actual results may differ materially from those expressed or implied as a result of various risks uncertainties and important factors.

Speaker Change: 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.

Felise Kissell: Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found in this morning's press release, as well as on our website. So with that, I'll now turn the call over to John.

Speaker Change: Additionally, we will be discussing certain non-GAAP financial measures a reconciliation of these items to U S. GAAP can be found in this morning's press release as well as on our website. So with that I'll now turn the call over to John.

John Zillmer: Good morning, everyone. Thank you all for joining us today. We continue to successfully execute on our strategic vision. I'm pleased to report another strong quarter of results for Aramark, with record revenue and profitability for a third quarter in FSS US, as well as record international revenue and profitability for any quarter. Jim and I will review the key drivers for the outperformance before turning to our financial expectations for the fiscal year with just one quarter to go.

John Zillmer: Given the substantial growth opportunities ahead and our proven ability to capitalize on them, we're confident that our business momentum will continue into next fiscal year and beyond. Aramark's third quarter revenue growth was broad-based, coming from virtually all lines of business and geographies. Revenue for the quarter was $4.4 billion, with organic growth up 11% year-over-year, once again led by base business growth from a mix of volume and pricing, as well as contributions from new client wins.

John Zillmer: The company's multiple operating levers allowed us to scale higher sales volume, manage costs effectively, and achieve supply chain efficiencies, all while benefiting from an inflation tailwind. Our actions contributed to a 22% increase in operating income compared to the prior year and a 21% year-over-year increase in adjusted operating income on a constant currency basis. Aramark's performance is a testament to the extraordinary talent within this organization, which allows us to provide world-class hospitality services to clients while we focus on our ambitious path forward.

John Zillmer: Turning now to the business segments, FSS U.S. grew organic revenue 9% versus the comparable period last year, led by continued record levels of per capita spending and greater event attendance in sports and entertainment. New wins coming on board in business and industry, meal plan initiatives, and collegiate hospitality before entering the quieter summer season, and enhanced commissary services and corrections. We saw strength this quarter using our capabilities to deliver higher revenue volumes at prominent events, including professional golf tournaments such as the U.S. Open at Pinehurst and the Travelers Championship, in addition to serving over 300,000 fans at the Indianapolis 500.

John Zillmer: We also provided retail merchandise for the Philadelphia Phillies and the New York Mets, both Aramark clients, as they participated in Major League Baseball's London Series. The sales pipeline remains extremely strong across sectors, particularly in first-time outsourcing. New clients include Tulsa Public Schools, our first entry into Oklahoma for student nutrition, Harding University, and the Southeast Georgia Health System, to name a few.

John Zillmer: We're in the process of finalizing some sizable new client opportunities which we are targeting to close this fiscal year. As part of our ongoing efforts to offer a differentiated and innovative client experience, we just entered into a partnership with renowned Michelin-starred chef Daniel Balloud, which will be focused first on expanding our B&I culinary capabilities in corporate catering, special events, conferences, and more. The collaboration will be branded Cuisine Balloud New York, with operations primarily from a centralized kitchen located in Manhattan, with services offered throughout the New York metropolitan area and beyond.

Speaker Change: The collaboration will be branded cuisine balloon New York with operations, primarily from a centralized kitchen located in Manhattan with services offered throughout the New York Metropolitan area and beyond.

John Zillmer: Lastly, in FSS U.S., a few weeks ago, we brought together the top 1,000 of our senior operating district, regional, and corporate leaders for ongoing leadership development training, educating teams on new initiatives, services, products, equipment, and technology through a partner-sponsor expo, and celebrating excellence in our hospitality culture. This type of collaboration across lines of business and job function is a clear realization of our values and will help propel us into Now to International.

Speaker Change: Lastly in FSS U S. A few weeks back we brought together the top 1000 of our senior operating district regional and corporate leaders for ongoing leadership development training educating teams on new initiatives services products equipment and technology through our partner sponsor Expo and celebrating excellence in our hospitality culture.

Speaker Change: This type of collaboration across lines of business and job function as a clear realization of our values and will help propel us into the future.

John Zillmer: Momentum in the international segment continued with organic revenue increasing 16% year-over-year. All geographies in the portfolio experienced organic revenue growth, led by the U.K., Canada, and Spain, as well as Latin America, from net new business, base business volume, and pricing initiatives. Our teams were hard at work, which included successfully driving our increased presence in sports and entertainment, particularly at highly attended and globally recognized events. In Germany, we served approximately 1.6 million visitors during the 2024 Men's European Football Championships, partnering with the majority of the stadiums in the tournament, which are Aramark clients, including for the final match in Berlin.

Speaker Change: Now to international.

Speaker Change: Momentum in the international segment continued with organic revenue, increasing 16% year over year, all geographies in the portfolio experienced organic revenue growth led by the UK, Canada, and Spain as well as Latin America from net new business base business volume and pricing initiatives.

Speaker Change: Our teams were hard at work, which included successfully driving our increased presence in sports and entertainment, particularly in highly attended and global globally recognized events.

Speaker Change: In Germany, we served approximately $1 6 million visitors during the 2024 men's European Football Championships partnering with the majority of the stadiums in the tournament, which are aramark clients, including for the final match in Berlin and.

John Zillmer: And in Spain, we served over 280,000 fans for the Formula One Grand Prix multi-day race in Barcelona. And we are already working on plans in partnership with the rapidly growing Formula One for upcoming events this summer and into next season. We're thrilled to share that Aramark has been selected as Everton Football Club's official global food and experiences partner for the new Everton Stadium at Bramley-Moore Dock in Liverpool, England. The approximately 53,000-capacity stadium, which opens ahead of the 2025-26 season, will be one of the most accessible and sustainable stadiums in Europe.

John Zillmer: This marks the company's first engagement in the English Premier League and expands on our long-standing European sports and entertainment business with La Liga in Spain and the Bundesliga in Germany. We also continue to build scale in other countries within the industries we serve, with new client wins coming from mining in Chile, healthcare in China, and government-related services in Ireland. And finally, on the international stage, we recently concluded our International Chefs' Cup in Toronto, Canada, which, after a year of in-country competition, recognized our global culinary talent and celebrated the winning chefs from each country.

John Zillmer: Our global supply chain team continues to effectively grow, leverage, and optimize Aramark's spend, which contributed to our strong performance in the quarter. By the end of this fiscal year, we expect our managed services, global supply chain, and GPO network spend to surpass $20 billion.

John Zillmer: We are pursuing GPO acquisition opportunities to complement the organic growth we are seeing to drive even faster growth and enhance capabilities in key areas. International expansion is of particular interest if we find the right fit. Domestically, we are leveraging our expertise in hospitality to expand and more deeply penetrate adjacent industries, such as wellness and entertainment. On the inflation front, we're seeing continued improvement in North America, Europe, and Asia, while Latin America has been a bit stickier.

John Zillmer: In the third quarter, we reached the low end of the range we originally estimated and expect global inflation in the threes for next quarter, as long as these favorable trends continue, with the U.S. already dropping into that range.

John Zillmer: As always, we're ensuring our supplier contracts are capturing any market opportunities, and we'll transition business appropriately to maximize these benefits. Lastly, we reached an agreement to sell the remaining portion of our ownership stake in the San Antonio Spurs NBA franchise. We anticipate the transaction will close in the fourth quarter, subject to NBA approval. We expect to use the proceeds for debt repayment as part of our deleveraging strategy.

John Zillmer: We continue to work closely with the Spurs as a valued client. Before turning the call over to Jim, I'd like to highlight a few key accomplishments and recognitions we received in the third quarter. First, we were named one of the 50 most community-minded companies in the United States, often referred to as the Civic 50, by Points of Light, an organization dedicated to accelerating people-powered change. Second, FAIR 360 highlighted Aramark as a top employer for both diversity and black executives, with 36% of our management racially and ethnically diverse, and 20% of the company's board members being women of color.

John Zillmer: And lastly, Aramark Canada was recognized as one of the country's greenest employers for 2024 by Mediacorp Canada, highlighting our ongoing commitment to sustainability and the innovative green practices now ingrained in our operation. We believe that the focus on our people and the communities we serve is a key differentiator for the company, which has led to tremendous outcomes.

Jim Tarangelo: Thanks, John. And good morning, everyone.

Jim Tarangelo: As John mentioned, we had another very strong quarter on both the top and bottom line across the business, with solid growth across nearly all sectors and geographies. We are excited about the many growth and operational efficiency opportunities ahead. In the third quarter, we reported revenue on a gap basis of $4.4 billion, up 8% compared to the prior year period, reflecting approximately $116 million of foreign currency translation. Organic revenue grew 11% versus the prior year, driven by increased business volume and the contribution from net new business along with price. Operating income in the third quarter increased 22% year-over-year to $162 million.

Speaker Change: Income in the third quarter increased 22% year over year to $162 million.

Jim Tarangelo: An adjusted operating income was up 21% on a constant currency basis from a year ago to $193 million. AOI margin grew nearly 40 basis points year-over-year on a constant currency basis, driven by those underlying operating levers, so core to our model, including supply chain efficiencies, disciplined middle-of-the-P&L management, and progression of new business majority, along with improving inflation. Turning to the business segments, FSSUS achieved AOI growth of 14% with an AOI margin improvement of 22 basis points, both on a constant currency basis compared to the same period last year. Note there was some favorability in the prior year associated with insurance-related costs.

Speaker Change: And adjusted operating income was up 21% on a constant currency basis from a year ago to $193 million.

Speaker Change: Margin grew nearly 40 basis points year over year on a constant currency basis, driven by those underlying operating levers so core to our model, including supply chain efficiencies disciplined middle of the P&L management and progression of new business majority, along with improving inflation trends.

Speaker Change: Turning to the business segments FSS U S achieved NOI growth of 14% with an Oi margin improvement of 22 basis points, both on a constant currency basis compared to the same period last year.

Speaker Change: There was some favorability in the prior year associated with insurance related cost.

Jim Tarangelo: If it wasn't for this item, the FSS-USAOI margin improvement would have been comparable to last quarter. The international segment had year-over-year AOI growth of 41 percent and AOI margin improvement of 86 basis points, also on a constant currency basis. Year-over-year AOI expansion was driven by higher base business volumes, Net New Business, and Control of Operational Costs, particularly in food, labor, and overall SG&A, led by Spain, the UK, Ireland, and Latin America.

Speaker Change: If it wasn't for this item the FSS U S margin improvement would have been.

Speaker Change: <unk> to last quarter.

Speaker Change: The international segment had year over year growth of 41% and AOI margin improvement of 86 basis points also on a constant currency basis.

Speaker Change: Year over year expansion was driven by higher base business volume.

Speaker Change: New business and.

Speaker Change: Control of operational costs.

Jim Tarangelo: Regarding inflation, trends continue to track favorably, which provided some tailwinds to our underlying margin levers in the third quarter. As John shared, we saw global inflation come in at the low end of our expected 4% to 5% range, with the U.S. Even Better.

Jim Tarangelo: We are seeing overall inflation tracking in the 3% range or so for the fourth quarter, and if current trends continue, we expect inflation to come down even more heading into next fiscal year. Turning to the remainder of the income statement, interest expense decreased 27% year-over-year, primarily due to the $1.5 billion debt repayment of the 2025 senior note. The adjusted tax rate was approximately 26%.

Jim Tarangelo: Our quarterly performance resulted in GAAP EPS of $0.22 and adjusted EPS of $0.31, an increase of over 50% versus the prior year on a constant currency basis. Regarding cash flow, net cash provided by operating activities was $141 million. And free cash flow was $62 million in the third quarter, an inflow consistent with our normal seasonal business cycle. Our free cash flow improved by almost $200 million from higher cash from operations and favorable working capital compared to the prior year. At quarter end, the company had over $1.1 billion in cash.

Jim Tarangelo: Turning to the capital structure, we improved our leverage ratio another 50 basis points this quarter compared to the prior year period. This positive trend reflects our financial discipline as we remain focused on reaching 3.5 times by the end of this fiscal year, and we are committed to continuing reducing our leverage ratio. After quarter end, we also took steps to further strengthen our balance sheet and create additional financial flexibility by extending the maturities of our revolving credit facility and term A loan by five years. Part of this action also included increasing our borrowing capacity under our revolving credit facility by $200 million to $1.4 billion.

Jim Tarangelo: We will proactively pursue other opportunities to enhance our capital structure with a focus on optimal returns for shareholders. Now, 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 as we continue to make great progress against our financial targets. As a result, we currently anticipate the following full year performance. Organic revenue growth was approximately 10%, AOI growth was approximately 20%, and adjusted EPS growth was approximately 35%.

Jim Tarangelo: And lastly, a leverage ratio of approximately 3.5 times with ongoing improvement. Our results reinforce our ability to execute on our focus strategies, which, in turn, we expect will deliver significant shareholder value. Thank you for your time this morning. And with that, I'll turn it back to John.

John Zillmer: Thank you, Jim. We continue to work hard every day and are excited about the opportunities ahead to deliver for our stakeholders. We are exceeding the financial expectations we initially set for the fiscal year and remain confident in our strategic vision. Our talented teams across the globe embody our culture, performing at a high level, and pursuing a path that will bring us to new levels of success. The operator will now open the call for questions. Thank you. We will now begin the question and answer session.

Operator: In order to accommodate participants in the question queue, please limit yourself to one question and one follow-up. To remove yourself from the queue, please press star, 1-1 again. We will pause for a moment while we compile our Q&A roster. Our first question comes from Shlomo Rosenbaum of Stiefel. Your line is open.

Operator: Thank you. We will now begin the question and answer session. If you have a question, please press star, then 1-1 on your touchtone phone. If you are using a speakerphone, you may need to pick up the handset first before pressing numbers.

Shlomo Rosenbaum: Hi, excuse me, thank you very much for taking my questions. Hey, John, can you comment a little bit about contracting in the higher education space? June is usually the most important quarter, and it runs kind of through July. Can you talk a little bit about the success the company had, whether it was in line with what you expected, how it sets you up for next year, and after that, I have one follow-up.

John Zillmer: Yes, we had a very strong selling season in higher education. We actually sold more new accounts this year than we ever have in our history. So we're feeling very good about the new sales growth. The contract negotiation process in terms of pricing for next year for board plans, you know, has gone very, very well. And so we feel very good about higher education's opportunities for next year and beyond. So yeah, all in all, a very good selling season.

John Zillmer: We obviously did have a couple of accounts that we transitioned this year, and so we're very focused on both the retention and new sales efforts in higher education and feel very strongly about that business's ability to perform at a high level.

Jim Tarangelo: Great. And then, for Jim, are we at a point where the new wins are not really going to be something that we have to be concerned about them impeding the operating margin expansion? Over the last several years, we had a situation where the new wins were headwinds to operating margin expansion, and we're starting to see margin expansion ahead of what was expected. Are we at that point where the maturing contracts are really just offsetting the new business ramps? Yeah, that's right.

Jim Tarangelo: Yeah, that's right. I mean, if you look again, the year-to-date margin expansion at 60 basis points is very strong, right? And all those underlying margin levers are working. And one of those levers is the maturity of the new business profile. And at this point, given where we are, that should no longer be a significant headwind like it was prior to the new business ramp-up.

Toni Kaplan: Our next question comes from Toni Kaplan with Morgan Stanley. Your line is open.

John Zillmer: Thanks so much. I wanted to ask about the international business, another really strong quarter of growth. Could you talk about any initiatives you've been implementing there that might have led to the success? And in prior quarters, you've attributed the momentum there to outsourcing. So I'm assuming that's still the case, but are there any particular geographies where you're seeing more of the move toward outsourcing? And is that being driven by sort of this lingering inflation or something else? And as inflation comes down, does that sort of change the dynamics going on?

John Zillmer: Thanks.

Speaker Change: Assuming that's still the case, but are there any particular geographies, where you're seeing more of the move towards outsourcing and is that being driven by sort of this lingering inflation or something else and as inflation comes down does does that sort of change.

Change the dynamics going on thanks.

John Zillmer: Thanks, Toni. You know, Frankly, we're seeing very broad-based success in international business across all the geographies. I really couldn't point to an area where we're not enjoying that success in terms of growth. I think part of it's just the longer-term discipline we've had in terms of growth for international. That team has been in place for a long time and is very disciplined and focused, and we continue to see great results across the portfolio and in virtually every country.

Tony: Thanks, Tony.

Speaker Change: And frankly, we're seeing very broad based success in international across all the geographies like really Couldnt point too.

Speaker Change: So in the area that where we're not enjoying that that success in terms of the growth I think part of it is just the longer term discipline. We've had in terms in terms of growth for international that team has been in place for a long time and is very disciplined and focused.

Speaker Change: And we continue to see great results across the portfolio.

Speaker Change: Virtually every country.

Speaker Change: So.

Speaker Change: I think we have strong expectations for continued growth in that sector I don't see any secular trends, which would really impact that one way or another outsourcing activity still remains high in the pipeline. The sales pipeline is even more robust now than it's than it's ever been and it's just a just an amazing thing so.

John Zillmer: You know, so I think we have strong expectations for continued growth in that sector. I don't see any secular trends which would really impact it one way or another. Outsourcing activity still remains high, and the pipeline, the sales pipeline, is even more robust now than it's ever been. It's just an amazing thing. So we're very pleased with the overall results in international, and we expect that growth will continue.

Speaker Change: We're very pleased with the overall results in international and we expect that that growth will continue.

Jim Tarangelo: Terrific. And then just on the margin drivers, you mentioned on slide eight, and you talked about in the prepared remarks, supply chain efficiencies. You've been sort of calling that out for a couple quarters now. Maybe just talk about how much more there is to go with regard to additional margin expansion from the supply chain or from the operating efficiencies that you've been seeing. That would be helpful. Thank you.

Jim Tarangelo: There are still significant opportunities ahead, right, with this growth-oriented model. Supply chain efficiencies are generating really nice margin accretion. We continue to see disciplined management of SG&A. The organization is fit for growth, so we're able to take on a lot more growth without adding much in the way of SG&A. You see that in our corporate results as well. And then finally, the middle of the P&L. I think as the operating environment continues to normalize, obviously, staffing is more available now. We're seeing improvement in labor and food productivity without maintaining high-quality service to our clients, with reduced agency and overtime, as an example.

Jim Tarangelo: So that will continue to provide tailwinds into next year, and those margin levers will continue to be more pronounced. That's right. And Tony,

Jim Tarangelo: That's right, and Toni, that last factor on supply chain, obviously, we continue to focus on growing the GPO spend, both domestically and internationally, and the acceleration of that spend has significant efficiency benefits for us, both in terms of new contract development and overall rates for the products that we buy. So we see that lever continuing to be a significant impact item going forward.

Toni Kaplan: Super. Thank you. Thank you. Thank you. Our next question comes from Andrew Steinerman with JPMorgan. Your line is open. Hi, you know, the 10% organic revenue growth this year.

Andrew Steinerman: Our next question comes from Andrew Steinerman with J.P. Morgan. Your line is open. Hi.

John Zillmer: That's a great question, Andrew. I think, you know, first of all, we see all the competitors have experienced growth year over year. I do think ours is industry leading. I think that's a result of a number of different factors, based on the portfolio that we have and based on the success we've had in terms of both new account acquisition and base business improvements. So I'm sure our competitors are also seeing similar opportunities going forward.

John Zillmer: I think, you know, we've talked about a long-term growth rate for us in the mid-single digits, call it 7 percent, going forward. And I would expect, I think the industry is probably growing at a rate that's slightly higher than inflation. And so I think we'll all benefit going forward. It's a very disciplined industry. I think we're all focused on managing effectively for our clients. But we love our strategy and our portfolio, and we think it'll lead to significant growth going forward.

Ian Zaffino: Our next question comes from Ian Zaffino with Oppenheimer. Your line is open.

John Zillmer: Hi, um, Ray, can you talk maybe a little bit about kind of the pipeline and what's going on there a little bit deeper? I know you gave some color, but a little bit more geography or kind of areas. And I guess I'm trying to key in on this Everton, which congratulations on getting, you know, there are other opportunities in that vertical as well.

John Zillmer: Yeah, there are definitely other opportunities in that vertical, both there and in other parts of the world. In fact, we're very close to closing on another opportunity that's both a retain and grow opportunity in that sector in the international segment. So we're very excited about the overall growth prospect of the sports and entertainment business; we're also enjoying very significant special event opportunities and concert seasons. Team performance has a big impact on the overall sales and revenue growth in sports and entertainment, so we're actually seeing very strong performance by our core teams that we serve around the world. All in all, we're very pleased with it, and we see continued good opportunities going forward.

John Zillmer: Okay, thank you. And then, can you maybe, I guess, as we're all talking about a recession now, remind us how the business performs, you know, your ability to kind of reduce any type of impact of a recession and, you know, any other color you could give there. Thanks.

John Zillmer: Yeah, I think one of the hallmarks of this business is it stands up very well during recessions. I mean, it's literally a business with over 10,000 profit centers and a diverse set of sectors across 15 countries. So there's a natural diversity in the business that stands up and is very resilient as the economy becomes more challenging. If you look back over 20 years, and you go back to the financial crisis in 2008, again, the business fared very well, with revenues just down a tad and margins relatively intact. So it's a good spot to be in when we're facing challenging economic times.

Jim Tarangelo: Yeah, I would just add that we consider the business to be very recession-resilient. I think, as Jim said, it's based on the strength and diversity of the portfolio and the businesses that we serve, and our ability to manage in a disciplined operating environment the processes that we have in place, the systems, and the technology that we have in place in terms of managing the middle of the P&L for both food and labor really puts us in a very good position.

Jim Tarangelo: You know, we manage this business literally on a weekly basis, so we can react and respond very rapidly to changing economic conditions, and we feel our people are very well-equipped. And it's been demonstrated over many, many years that the company, in particular, Aramark in particular, particularly the food part of the business, is very recession-resilient.

Speaker Change: Emissions.

Speaker Change: We feel our people are very well equipped.

Speaker Change: And it's been demonstrated over over many many years that the company in particular Aramark in particular, particularly the food part of the business.

Speaker Change: Is very recession resilient.

Ian Zaffino: Okay, thank you very much.

Speaker Change: Okay. Thank you very much.

Heather Balsky: Our next question comes from Heather Balsky with BFA. Your line is open.

Speaker Change: And our next question comes from Heather <unk> with Bofa. Your line is open.

John Zillmer: Hi, good morning. Thank you for taking my question. I was hoping you could talk a little bit more about your GPO. You talked about it surpassing $20 billion. And when you answered Toni's question, you talked about the margin opportunity there. Can you just talk about the pace of growth you've been seeing, what's driving that, and the opportunities ahead? Do you have a target in terms of how big you think you can get it? You know, when you look at your peers? I guess, how do you think about it from that perspective?

Heather: Hi, Good morning, Thank you for taking my question.

Heather <unk>: I was hoping you could talk a little bit more about your GPO.

Speaker Change: Talks about it surpassing $20 billion in when you answered <unk> question, you talked about the margin opportunity there.

Speaker Change: Can you just talk about is the pace of gross growth you've been seeing what's driven that and the opportunities ahead, you have a target in terms of how big you think you can get it when you look at your peers.

Speaker Change: I guess, how do you think about it from that perspective. Thanks.

John Zillmer: Yeah, certainly. It is obviously an area that we're very focused on. And beginning all the way back to the Avendra acquisition, you know, I think the company was embarking on a strategy not only to create a good GPO and a good business model for Avendra but also to create additional supply chain leverage that could be brought to bear against the contract business. So, obviously, we're very focused on increasing that spend.

Speaker Change: Yes, certainly it is obviously an area that we're very much focused on and beginning all the way back to the vendor acquisition.

Speaker Change: I think the company was embarking on our strategy not only to create a good GPO and a good business model for a vendor, but also to create additional supply chain leverage that can be brought to bear against the contract business. So.

John Zillmer: We've got a very active sales process and some very significant new client wins this year. We're also expanding our geographies, both domestically by rounding out the portfolio of the services we offer and the industries that we approach, as I mentioned in the script, approaching hospitality and entertainment or entertainment and wellness in a way that we haven't before. I think golf clubs and other related kinds of facilities.

John Zillmer: As well as geographic expansion, and we've had very good success in growing the GPO business outside of the United States, and we have an opportunity to expand significantly with our core customers, both domestically and internationally. So we'll continue to build it. We're not going to throw a number out there. I think, you know, frankly, we're just going to try and build it as rapidly as we can because we see the benefits on both sides, and we'll continue to give you more insight and more information as we establish the strategy and the goals for next year.

John Zillmer: Great, that's helpful. And also, with regard to the question on potential risks or sort of managing the business through a downturn, I'm just curious, currently, are you seeing anything in any of the segments of your business that point to softer demand from consumers? Any sort of change in trends? You know, I would say no, we're not.

John Zillmer: You know, I would say no, we're not experiencing that in any significant way. I would say we're seeing very strong spending trends, particularly in sports and entertainment. We continue to have consumers who are willing to spend for the experience. You know, particularly in the businesses that we serve, they're event-driven, and so people will continue to support their sports teams. Even in times of very significant recession in the past, attendance at stadiums was very, very strong because people would still make those kinds of expenditures.

John Zillmer: They may reduce the number of airline flights that they take, but they continue to do activities that are closer to home. So our portfolio is specifically designed to capture that opportunity, and we feel very good about it. But to be very clear, we are not seeing any consumer-driven trends that lead us to believe that we're seeing a downturn in consumer spending in our core business.

Neil Tyler: Our next question comes from Neil Tyler with Redburn Atlantic. Your line is open.

Neil Tyler: Good morning, John, Jim. Thank you very much. Just a couple, please.

John Zillmer: Going back to your new initiative in the US B&I business that you mentioned, I wonder if you could expand a little bit on how you see the addressable market in B&I potentially having changed, if it has at all, as a consequence of, I suppose, things like sort of unattended vending and the sort of model that you're describing through this new initiative using a single kitchen to serve lots of different customers, whether that brings down Sorry, this is a long-winded question.

John Zillmer: And then secondly, a simpler one for Jim. Your guidance looks like it's at an adjusted operating income level implying sort of mid to high single-digit growth for the fourth quarter at constant currency. Is there anything in the comp, you mentioned a couple of things for Q3, that we should bear in mind when we're considering the rate of year-on-year growth? Thank you.

Jim Tarangelo: Yeah, I'll start with that question. So that's right, the guy does imply sort of mid to high single digits for the fourth quarter. And again, that's a good cruising speed for this business. We've talked about the long-term growth model in the five to 7% range, and that's enough growth to fuel those margin levers that we talked about. That's two to three times higher than where we were in the years leading up to fiscal 19.

Jim Tarangelo: Yeah, we are lapping some significant pricing actions as we come into Q4, as inflation moderates, you know, the level of pricing will come down somewhat, but we're exiting the year at a very strong pace with good growth.

John Zillmer: Yeah, and I'll comment on the first operational issue. First of all, the marketplace that Cuisine Boulud is focused on is really the high-end catering opportunity. And so that is, we haven't established a central production facility in New York to go ahead and serve smaller facilities or the like.

John Zillmer: This is really focused on high-end opportunities for both catering and restaurant operations. So there, that's the model that it's focused on. The B&I segment continues to be very robust, and we see continued growth and the opportunity to grow that business through the addition of new accounts. We've had a very strong selling season there. And each account may be slightly different than it used to be in 2019, with lower populations, but we're serving more, and the style of service has been altered to fit the population rates and the participation rates of those accounts.

John Zillmer: So overall, the B&I model is very robust. The small account model, we serve through our refreshment services division, which is enjoying extraordinary growth through mini-markets and, or micro-markets, vending services, office coffee services, and the like, for refreshment and snack services. So we do have a service offering that's focused on those smaller site solutions, if you will. But the specific cafe or Cuisine Balloude reference this morning was related really to high-end catering and the opportunity to really serve that marketplace in a new and differentiated way with one of the world's most renowned Michelin-starred chefs.

Neil Tyler: I understand. Thank you very much.

Andrew Wittmann: Our next question comes from Andrew Wittmann with Baird. Your line is open.

Speaker Change: Question comes from Andrew Wittmann with Baird. Your line is open.

Andrew Wittmann: Yeah, great. Thanks for taking my question. Um, so I guess you guys commented on inflation a couple of times and how it came in at the low end of your Reporter, there is even a comment in your prepared remarks about how it's been trending here for the end of 24. But I think we could all benefit from a little bit more detail on that topic.

Andrew Wittmann: Yeah, great. Thanks for taking my question. So I guess you guys commented on inflation, a couple of times and how it came in at the low end of your expectations for the quarter. There was even a comment in your prepared remarks talking about if it stays here you'll get some benefit to twenty-five so Jim maybe I thought given the opportunity to expand a little bit about that it sounds like.

Speaker Change: That's your base case that inflations, probably a little bit of a help for you not only in the fourth quarter, but into next year. I was just wondering when do you think the comps are inflation comps get to a point, where it's no longer a tailwind and any idea you can help us with in terms of the quantum of that I know last quarter you said it was.

Speaker Change: Defined basis points benefit to the result, I didn't know if you wanted to kind of talk about.

Speaker Change:

Speaker Change: About how it's been trending here for the end of 'twenty four but I think we could all benefit from a little bit more detail on that.

Jim Tarangelo: Last quarter, we talked about expectations of inflation in the four to five percent range, and it came in at the low end of that range for the third quarter globally. In the U.S., we were in the high threes for the third quarter. As we trend in the fourth quarter, we're now in the threes across the organization, both in the U.S. and internationally. And we're obviously seeing favorable trends as we plan for fiscal 25.

Speaker Change: Topic.

Speaker Change: The last.

Speaker Change: Last quarter, we talked about expectation of inflation in the 4% to 5% range and it came in at the low end of that range for the third quarter globally.

Speaker Change: In the U S. We're in the high threes for the third quarter as we are.

Speaker Change: It's trending in the fourth quarter, we're now into threes.

Speaker Change: Across the organization both in the U S and internationally and we're off.

Speaker Change: Obviously seeing favorable trends.

Speaker Change: As we plan for fiscal.

Jim Tarangelo: It continued to be a moderate tailwind to the organization in Q3. I think it will continue to be a moderate tailwind into Q4. We've talked about, you know, we don't price for profit, right? In the long run, pricing and inflation will sort of be neutral to the organization, but I think it will continue to provide a moderate tailwind over the next couple quarters.

Speaker Change: 25.

Speaker Change: It continues to be a moderate tailwind to the organization in Q3, I think will continue to be a moderate tailwind into Q4, we've talked about we don't price for profit right in the long run price pricing and inflation will sort of be neutral to the organization, but I think it will continue to provide a moderate tailwind over the next couple of quarters.

Andrew Wittmann: That's helpful. And then, maybe, John, for my follow-up.

Speaker Change: That's helpful and then maybe John for my follow up.

Andrew Wittmann: I know that at the year end, you always give the retention for the year, but I'm guessing you've got a pretty good sense of where it's falling in. You've talked a lot about net new. I was just wondering if you could just talk about the retention side of net new, how it fared in the quarter and how you expect that to come in. Yeah, I think we expect

John Zillmer: I know that at the year end, you always give the retention for the year, but I'm guessing you've got a pretty good sense of where it's falling and you've talked a lot about net new I was just wondering if you could just talk about the retention side of net new how it fared in the quarter and how you expect that to come in for the year.

John Zillmer: Yeah, I think we expect to be right on our historical averages, really nothing significant up or down, and you're right, we will comment at the end of the year on our net new and overall retention in the business, but right now, we feel very good about the track we're on, and I would say historical averages are right in line with our expectations.

Speaker Change: Yes, I think we expect to be right on our historical averages really nothing significant.

Speaker Change: <unk> are down.

Speaker Change: And you are right, we will comment at the end of the year.

Speaker Change: Our net new and overall retention in the business, but right now we feel very good about the tracker on.

Speaker Change: And I would say is historical averages are right in line with our expectation.

Speaker Change: Thank you very much.

Jasper Bibb: Our next question comes from Jasper Bibb with Truist Securities. Your line is open.

Andrew Wittmann: Thanks, Andrew.

Speaker Change: Next question comes from Jasper Bibb with true Securities. Your line is open.

Jasper Bibb: Hey, good morning, everyone. You reiterated the leverage target for this year. It seems like next year is set up pretty well too. And just any updated thoughts on when it might be appropriate for the company to increase capital return and whether it might improve the balance sheet?

Jasper Bibb: Hey, good morning, everyone.

Speaker Change: Reiterating the leverage target for next year it seems like next year.

Speaker Change: So that pretty well too.

Jasper Bibb: Any thoughts on when that might be appropriate for the company to increase capital return improving balance sheet.

Jim Tarangelo: So we have a clear line of sight at this point to about three and a half times by the end of this fiscal year. That will represent the lowest leverage this organization has had since the 2017-2018 period. As we plan for fiscal 25, if there's a path to leveraging the threes, low threes, which again will be the lowest we've had, I think, going back to the LBO in 2007. We have had discussions already at the board level with respect to a potential share repurchase program, and we're expecting to give you another update on that at the next earnings call. But with the leverage ratios tracking favorably, that's something we are strongly considering.

Speaker Change: So we have a clear line of sight at this point to about three and a half times by the end of this fiscal year that will represent the lowest leverage. This organization has since 2017 2018 period as we plan for fiscal 'twenty five.

Jasper Bibb: Our path to leveraging the threes low threes, which again will be the lowest we've had I think going back to the <unk>. In 2007, we have had discussions already at the board level with respect to potential.

Jasper Bibb: Share repurchase program and we expect to give you another update.

Andrew Wittmann: At the next earnings call on that but with the leverage ratios tracking favorably that's something we are strongly considering.

Jim Tarangelo: Yeah, the board continues to recognize our strong free cash flow recognition and generation. And, you know, it has it has.

Speaker Change: Yes, the board continues to recognize our strong free cash flow recognition.

Speaker Change: Recognition.

Speaker Change: Generation.

Jasper Bibb: It has.

Jim Tarangelo: We've had discussions around, you know, how do we optimize shareholder returns? And so, and the company is strongly considering what that approach should look like. And as Jim said, we will update you on the next earnings call in terms of our intentions and plans for that.

Andrew Wittmann: Yes.

Speaker Change: Have discussions around.

Andrew Wittmann: How do we optimize shareholder returns and so.

Andrew Wittmann: And it is strongly considering what that approach should look like.

Speaker Change: And as Jim said, we will update you at the next earnings call in terms of our intentions and plans for that.

Jasper Bibb: And so then, I know you're not guiding for fiscal 25 today, but I wanted to take your temperature on how you feel in terms of your annual net new contribution and retention targets for next year based on what you see, I guess, in the sales pipeline today and some of your existing client conversations.

Speaker Change: And then I know youre not guiding for fiscal 'twenty hard today, but I wanted to take your temperature on how youre feeling in terms of your annual net new contribution and retention targets for next year based on what you see I guess the sales pipeline today in some of your existing client conversations.

Jim Tarangelo: So yeah, the sales pipeline remains very robust, you know, and as we plan for fiscal 25, we've already remained committed to our ALI target of about a billion dollars, as we've talked about previously, exiting the year in the mid to high single digits in terms of revenue. So, you know, we have a lot of confidence in the multi-year targets that we establish and remain committed to achieving those targets. And we see good momentum in the business to get there.

Speaker Change: So yes, the sales pipeline remains very robust and as we planned for for fiscal 'twenty five we've already.

Andrew Wittmann: We remain committed.

Speaker Change: Sure.

Speaker Change: A target of about $1 billion, what we've talked about previously.

Speaker Change: Exiting the year in the mid to high single digits in terms of revenue. So we have a lot of confidence in the multiyear targets that we establish and remain committed to achieving those targets and we see good momentum in that business.

Speaker Change: There.

Jasper Bibb: Makes sense. Thanks for taking the questions, guys.

Joshua Chan: Thank you. Our next question comes from Josh Chen with UBS. Your line is open.

Joshua Chan: Hi John, Jim. Thanks for taking my questions.

Joshua Chan: I think, Jim, you mentioned that the U.S. margin was held back a little by some favorabilities last year and that excluding those, the margin improvement would be similar to last quarter. So I guess, is the last quarter's margin improvement rate the right rate to think about going forward? How should we think about the kind of U.S. margin improvement given some of your productivity and internal action?

Jim Tarangelo: Yeah, the underlying margin improvement in both the U.S. and international remains strong, right? So, in the 50 to 60 basis points.

Jim Tarangelo: So I know that the insurance, you know, comparability, we had some favorable insurance experience. In the prior Q3, coming out of COVID, there was simply less activity and less liabilities required there with some actuary true-up work that occurred. So we're now in a more normalized run rate with respect to insurance, but the underlying margin improvement remains consistent and strong. And we'd expect the same for Q4 as well.

Joshua Chan: Perfect. Thank you for that. And then on your comment about inflation possibly being lower for next year, is that mainly a labor comment? Is that a food comment? Could you just kind of break down the different components that lead you to believe that we'll have lower inflation next year?

Joshua Chan: And thank you so much.

Jim Tarangelo: Yeah, well, we have very detailed information, obviously, building up our food inflation and labor, both of them are trending favorably. I think labor overall is still low; we talked about a four to 5% range, and labor is trending closer to four. At this point, we have good visibility with respect to the inflation outlook for food. And just the trend that we're seeing gives us a lot of confidence in that it will continue to come down as we enter fiscal 25.

Joshua Chan: Great, thank you for the color and congrats on a good quarter.

Stephanie Moore: Our next question comes from Stephanie Moore with Jeffries. Your line is open.

Harold Antor: Hello, this is Harold Antor on behalf of Stephanie Moore. You know, we wanted to key in on the GPO space. It sounds as though you are, you know, considering tomorrow. So just any particular geography, geographies where you see the most opportunity that you'd like to acquire to grow in that space.

John Zillmer: Yeah, we're specifically focused on the European marketplace, where we already have existing GPO infrastructure, and adding scale to that is very, you know, enhancing both margins and our ability to serve our customers well. You know, some of those acquisitions are multi-geography; they have the ability to impact our operations, not only in Europe but in Latin America as well.

John Zillmer: And we're also focused on doing work with our current partners in other parts of the world where we have pilots underway to establish GPO networks in markets where they've never had a GPO. So, overall, the opportunity is significant. We're, you know, very focused on it. I want to make sure that people understand that we are not looking at a material investment strategy for the GPOs. This is really bolt-on kind of additions to the organization that will have an outsized impact based on our ability to capture both the spend and the capabilities in certain markets. So that's, that's our approach and strategy.

Harold Antor: Got it. And then, um, just on, you know, some of the other levels on the margin, right? I know you said that you think insurance costs are a fair vote. Should we expect this to impact margin favorably and, um, for Q as well? And then on corporate costs, you know, how should we think about that in 2025? Is there a 2024 rate, uh, the run rate we should expect? And I guess how many more of those sets are there?

Jim Tarangelo: Could you repeat the first part of your question? We just had a little trouble hearing you. I said insurance costs were a benefit too. So I just wanted to give you a sense of how we should think about that and for you as well. And then on corporate costs, you know, when we think about 2025, is the rate that we're seeing in 2024 the new rent rate, and I guess how much more room is there to run? Yeah, just to confirm that

Jim Tarangelo: Yeah, just to confirm, the insurance costs or savings was a benefit in Q3 of 23, so we're pointing out that we're overlapping a period of unusually low insurance costs, so the insurance run rate is now normal, so it would neither be a headwind or a tailwind to the margin going forward. With respect to corporate costs, I think we're planning sort of a moderate increase overall. We target corporate costs growing at about half the rate of our revenue growth, so the 2% to 3% range is what you can model for fiscal 25.

Speaker Change: Insurance costs. So the insurance run rate is now normal so neither be a headwind or a tailwind to the margin going forward.

Speaker Change: With respect to corporate cost.

Speaker Change: This plan is sort of a moderate increase overall, we target corporate costs growing at about <unk>.

Speaker Change: Half the rate of our revenue growth in the 2% to 3% range is what you can model for fiscal 'twenty five.

Speaker Change: Thank you.

John Zillmer: And I'm not showing any further requests at this time. I'll now turn the call back over to Mr. Zillmer for any closing remarks.

Speaker Change: And im not showing any further question at this time I will now turn the call back over to Mr. Zillmer for any closing remarks.

John Zillmer: Terrific, thank you very much, and thank you everybody for your questions and for the support of the organization. We feel very good about our third quarter results. The opportunities ahead for the organization are bright, and I want to thank all the Aramark employees around the world for their diligence, hard work, and their continued dedication to the growth of this company. So again, thank you very much and enjoy the rest of the day.

Mr. Zillmer: Terrific. Thank you very much and thank you everybody for your questions and for the support of the organization, we feel very good about our third quarter results. The opportunities ahead for the organization are bright.

Speaker Change: And I want to thank all the aramark employees around the world for their diligence hard work and their continued dedication to the growth of this company. So again, thank you very much and enjoy the rest of the day.

Operator: Thank you for participating. This concludes today's conference. You may now disconnect. Have a wonderful day.

Speaker Change: For participating. This concludes today's conference you may now disconnect and have a wonderful day.

Speaker Change:

Speaker Change: [music].