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Aramark (ARMK) Q1 2024 Earnings Call Transcript

Aramark (ARMK)

Q1 2024 Earnings Conference Call

Company Participants

Felise Kissell - SVP, IR & Corporate Development

John Zillmer - CEO

Jim Tarangelo - CFO

Conference Call Participants

Lizzie Dove - Goldman Sachs

Harry Martin - Bernstein

Andrew Steinerman - J.P. Morgan

Shlomo Rosenbaum - Stifel

Jasper Bibb - Truist Securities

Heather Balsky - BOA

Toni Kaplan - Morgan Stanley

Neil Tyler - Redburn Atlantic

Ashish Sabadra - RBC Capital Markets

Josh Chan - UBS

Andrew Wittmann - Baird

Harold Antor - Jefferies

Faiza Alwy - Deutsche Bank

Ian Zaffino - Oppenheimer

Presentation

Operator

Good morning, and welcome to the Aramark's First Quarter 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 conduct a -- we'll 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 first 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; who started in this role in January. We at Aramark are excited for Jim's appointment.

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 U.S. GAAP can be found in this morning's press release, as well as on our website.

With that, I'll now turn the call over to John.

John Zillmer

Good morning, and thanks for joining us.

Before we get started, I first want to acknowledge our team in Chile as they are dealing with devastating wildfires near Santiago. Although, our operations are not affected, scores of our employees have been impacted. We're working with our leadership team on the ground to ensure everyone's safety, and we'll be coordinating a thorough response with the appropriate relief organizations.

Now to the quarter, I am really pleased with a great start to the new fiscal year, generating broad-based revenue and AOI growth with solid margin improvement across the business. The strong performance resulted in record revenue for both the FSS U.S. and International segments, along with record first quarter profit in International. Our growth-focused strategies are working and we're seeing favorable margin trends driven by prior year's new contract maturities, scale efficiencies in our purchasing and tight SG&A cost management, and which has been helped by moderating inflation. We're extremely encouraged by what we are seeing in the business and Jim will be reviewing in greater detail shortly.

We're excited to have Jim as Aramark's newly appointed CFO. As you know, Jim is a 20-year veteran of the company with a proven track record and he's worked closely with Tom over the past four years. His depth of knowledge about the company across the Board and across borders, having served as CFO for International segment is a tremendous asset in his new role.

Tom is also joining us today as he continues to serve as a Trusted Partner and Strategic Advisor to help ensure a seamless transition over the next few months. Tom leaves a strong legacy that is both broad and deep, focused on accelerating net new business, optimizing supply chain economics, containing above unit cost and instilling a value creating mindset throughout the organization.

Our top-line momentum continued in the first quarter with year-over-year organic revenue growth of 13%, which was driven by especially strong base business growth net new business and pricing. A combination of higher sales volume and pricing contributed to the favorable trends that are positively driving the top-line.

The U.S. segment increased organic revenue 10% compared to the prior year, starting with Collegiate Hospitality which experienced strong performance in residential dining, retail and catering, as well as improved pricing with the start of the academic year. We're having early success with our recently launched Eat to Excel health and wellness program, which is focused on providing student athletes with a balanced nutrition regimen to support peak competitive performance, personalized to each athletes training schedule, goals and biometrics. The dietary recommendation is fully integrated with our Collegiate Hospitality dining program and is easily accessible through a digital app.

Sports & Entertainment demonstrated strong per capita spending and high attendance levels from the NFL and NCAA regular seasons along with more concert events. Our culinary team had great success partnering with well-known NFL mom Donna Kelce during the holidays at Lincoln Financial Field and Arrowhead Stadium, adding the famous cookies she makes for her sons in support of the Eagles Autism Foundation and Kansas city-based Operation Breakthrough, a win for everyone involved. I also want to congratulate the Kansas City Chiefs for reaching this weekend's Super Bowl.

And workplace experience benefited from the startup of significant new client wins and strong base business growth as our services provide a compelling solution for employers, with revenue in this business now fully recovered from pre-COVID levels.

International organic revenues increased 21% year-over-year. Performance was driven by consistently strong net new business combined with an active events calendar in Europe, particularly in the UK and Germany, continued strength in education in Canada and greater mining activity in Chile.

New business wins at this early stage in the fiscal year have been broad-based across the company. This includes adding Tulane University and Collegiate Hospitality, expanding our services for the European Central Bank in Germany, and more locally being awarded the Philadelphia Zoo among others. We believe our new business pipeline is robust and we continue to see high retention levels across the client portfolio.

Now let me turn to global supply chain. Our overall focus continues to be growing and leveraging spend to generate value for the enterprise, while also providing quality product and services to clients and our customers. We've seen inflation moderating over the past quarter, and while some areas of the globe are slower to show this trend, overall inflation is running better than originally expected and the first quarter benefited from this tailwind in improved product costs. We believe the current supply chain landscape presents enormous opportunities and we are actively seeking to take further advantage of this potential, working closely with our manufacturing and distribution partners.

Last week we released our Be Well. Do Well. progress report highlighting our commitments on responsible business practices, specifically on people, which includes enabling equity and wellbeing for millions on the planet, including promoting planetary health on our path to net zero and on governance by assuring robust ethics and compliance in everything we do. We're proud of our efforts in these areas and encourage you to review this in depth update.

Before turning the call over to Jim, I'd also like to welcome Brian DelGhiaccio as our newest member of Aramark's Board of Directors following our annual meeting last week. Brian is currently Executive Vice President and Chief Financial Officer of Republic Services, a company I know well from my time at Allied Waste. Brian's extensive executive experiences will provide valued perspectives, particularly in strategic planning and M&A.

I want to also thank Art Winkleblack for his immense contributions to our Board. Art announced his retirement and did not stand for re-election. On behalf of all of us at Aramark, we're extremely grateful for Art's service to the company. Jim?

Jim Tarangelo

Thanks John, and good morning, everyone.

I wanted to start by thanking Tom for his tremendous leadership and partnership over the past four years. Combined, we have over 50 years of industry experience. It's been a real pleasure and privilege to be on this transformational journey with you. We look forward to continuing to have you as a Strategic Advisor and wish you well as you transition toward a full retirement in May.

We are off to a terrific start in fiscal 2024. The company generated strong financial performance with broad-based revenue and profit growth. In the first quarter, Aramark reported consolidated revenue of $4.4 billion, representing organic growth of 13% versus the prior year period, driven by strong base business growth through a combination of volume and pricing as well as a contribution from net new business. Both the U.S. and International segments reported double-digit top-line growth in the quarter.

Operating income in the first quarter was $167 million, up 10% versus the prior year. Adjusted operating income was $231 million, up 28% on a constant currency basis compared to the same quarter last year. AOI margin was 5.2%, increased 64 basis points year-over-year on a constant currency basis. The higher profitability was from leveraging higher sales volume, disciplined cost management at both unit level P&L and SG&A as well as supply chain efficiencies. We also did experience favorable inflation trends overall, which benefited the quarter.

Our results were aided by our innovative yet practical approach to technology. We continued to leverage technology, including most recently utilizing AI throughout our supply chain, to aggregate spend more effectively and get better pricing from our suppliers and manufacturers.

Turning to the business segments, the U.S. reported AOI growth of 19% with an AOI margin improvement of almost 50 basis points compared to the same period last year. Education, B&I, and sports, leisure and corrections all had particularly strong quarters, driven by effectively leveraging higher revenue, especially in our Collegiate Hospitality and correction businesses, from our ability to recover the price inflation lag we've previously discussed.

On a constant currency basis, the International segment had year-over-year AOI growth of 37% and an AOI margin improvement of 54 basis points, led by the team's efforts in the UK, Germany and Canada....

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