Heritage Global Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2024

There are 12 speakers on the call.

Operator

Good morning, and welcome to Aramark's 3rd Quarter Fiscal 20 24 Earnings Results Conference Call. My name is Kevin, and I'll be your operator for today's call. At this time, I'd like to inform you this conference is being recorded for rebroadcast and that all participants are in a listen only mode. We will open the conference call for questions at the conclusion of the company's remarks. I will now turn the call over to Felise Cassell, Senior Vice President, Investor Relations and Corporate Development.

Operator

Ms. Cassell, please proceed.

Speaker 1

Thank you, and welcome to Aramark's 3rd quarter fiscal 2024 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 Turangelo. 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 and A and other sections of our Annual Report on Form 10 ks and our other SEC filings.

Speaker 1

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 2

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 results for Aramark with record revenue and profitability for a 3rd quarter in FSS U. S.

Speaker 2

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 1 quarter to go. 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 3rd quarter revenue growth was broad based coming from virtually all lines of business and geographies. Revenue for the quarter was $4,400,000,000 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.

Speaker 2

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. Turning now to the business segments, FSS U. S.

Speaker 2

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 in collegiate hospitality before entering the quieter summer season and enhanced commissary services in 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. 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.

Speaker 2

The sales pipeline remains extremely strong across sectors particularly in first time outsourcing. New clients include the Tulsa Public Schools, our first entry into Oklahoma for student nutrition, Harding University and the Southeast Georgia Health System to name a few. 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 Boulud, which will be focused first on expanding our B and I culinary capabilities in corporate catering, special events, conferences and more. The collaboration will be branded Cuisine Baloo New York with operations primarily from a centralized kitchen located in Manhattan with services offered throughout the New York metropolitan area and beyond.

Speaker 2

Lastly, in FSS US, a few weeks back, 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 our 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 the future. Now to international. 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 2

Our teams were hard at work which included successfully driving our increased presence in sports and entertainment particularly in highly attended and globally recognized events. In Germany, we served approximately 1.6 1,000,000 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 in Spain, we served over 280,000 fans for the Formula 1 Grand Prix multi day race in Barcelona and we are already working on plans in partnership with the rapidly growing Formula 1 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 20 25, 2026 season will be one of the most accessible and sustainable stadiums in Europe.

Speaker 2

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 industries we serve with new client wins coming from mining in Chile, healthcare in China and government related services in Ireland. And finally, in international, 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. 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 $20,000,000,000 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.

Speaker 2

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 are seeing continued improvement in North America, Europe and Asia, while Latin America has been a bit stickier. In the Q3, we reached the low end of the range we originally estimated and expect global inflation in the 3s for next quarter as long as these favorable trends continue with the U. S.

Speaker 2

Already dropping into that range. 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 Q4 subject to NBA approval. We expect to use the proceeds for debt repayment as part of our deleveraging strategy.

Speaker 2

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 Q3. First, we were named as 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. 2nd, Fair360 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. 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 operations.

Speaker 2

We believe that the focus on our people and the communities we serve are a key differentiator for the company, which has led to tremendous outcomes. Jim?

Speaker 3

Thanks, John, and good morning, everyone. 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 Q3, we reported revenue on a GAAP basis of $4,400,000,000 up 8% compared to the prior year period, reflecting approximately $116,000,000 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 pricing.

Speaker 3

Operating income in the Q3 increased 22% year over year to $162,000,000 and adjusted operating income was up 21% on a constant currency basis from a year ago to $193,000,000 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 and L management and progressive new business maturity along with improving inflation trends. Turning to the business segments. FSS U. S. 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.

Speaker 3

Note, there was some favorability in the prior year associated with insurance related costs. It wasn't for this item, the FSS U. S. AOI margin improvement would have been comparable to last quarter. The International segment had year over year AOI growth of 41% and AOI margin improvement of 86 basis points, also on a constant currency basis.

Speaker 3

Year over year AOI expansion was driven by higher base business volume, net new business and control of operational costs, particularly in food, labor and overall SG and A led by Spain, the UK, Ireland and Latin America. Regarding inflation, trends continue to track favorably which provided some tailwinds to our underlying margin levers in the Q3. 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.

Speaker 3

We are seeing overall inflation tracking in the 3% range or so for the 4th 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 from the $1,500,000,000 debt repayment of the 2025 senior notes. The adjusted tax rate was approximately 26%. 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.

Speaker 3

Regarding cash flow, net cash provided by operating activities was $141,000,000 and free cash flow was $62,000,000 in the 3rd quarter, an inflow consistent with our normal seasonal business cadence. Our free cash flow improved by almost $200,000,000 from higher cash from operations and favorable working capital compared to the prior year. At quarter end, the company had over $1,100,000,000 in cash availability. Turning to the capital structure. We improved our leverage ratio another 50 basis points this quarter compared to the prior year period.

Speaker 3

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 continue 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 5 years. Part of this action also includes increasing our borrowing capacity under our revolving credit facility by $200,000,000 to $1,400,000,000 We will proactively pursue other opportunities to enhance our capital structure with a focus on optimal returns for shareholders. 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.

Speaker 3

As a result, we currently anticipate the following full year performance: organic revenue growth at approximately 10%, AOI growth at approximately 20%, adjusted EPS growth at approximately 35% and lastly, a leverage ratio at 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.

Speaker 2

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. Operator, we'll now open the call for questions.

Operator

Thank you. We will now begin the question and answer Our first question comes from Shlomo Rosenbaum with Stifel. Your line is open.

Speaker 4

Hi. Excuse me. Thank you very much for taking my questions. Hey, John, can you comment a little bit about the contracting in the higher education space? June is usually the most important quarter and it runs kind of through July.

Speaker 4

You talk a little bit about the success the company had, whether it was aligned with what you expected, how it sets you up for next year? And after that, I have one follow-up.

Speaker 2

Yes. We had a very strong selling season in higher education. We actually sold more new accounts this year than ever 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 has gone very, very well.

Speaker 2

And so we feel very good about higher education's opportunities for next year and beyond. So yes, all in all, a very good selling season. 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

Speaker 4

for Jim, just are we at a point that 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 something as you ramp them 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?

Speaker 3

Yes, 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.

Speaker 5

Great. Thank you.

Speaker 2

Thanks, Loma.

Operator

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

Speaker 6

Thanks so much. I wanted to ask about the international business, really strong quarter of growth again. 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 towards outsourcing?

Speaker 6

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? Thanks.

Speaker 2

Thanks, Tony. Frankly, we're seeing very broad based success in international across all the geographies. I really couldn't point to an area that where we're not enjoying that success in terms of the 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.

Speaker 2

And we continue to see great results across the portfolio and in virtually every country. So I think we have strong expectations for continued growth in that sector. 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.

Speaker 2

So we're very pleased with the overall results in international and we expect that that growth will continue.

Speaker 6

Terrific. And then just on the margin drivers, you mentioned on Slide 8, and you've talked about in the prepared remarks supply chain efficiencies. You've been sort of calling that out for a couple of quarters now. Maybe just talk about how much more is there to go with regard to additional margin expansion from supply chain or from the operating efficiencies that you've been seeing? That'd be helpful.

Speaker 6

Thank you.

Speaker 3

There's 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 and 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 estrogen. You see that in our corporate results as well.

Speaker 3

And then finally, the middle of the P and 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 over time as an example. So that will continue to provide tailwinds into next year and those margin levers will be continue to be more pronounced.

Speaker 2

That's right. And Tony, 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.

Speaker 6

Super. Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from Andrew Staderman with JPMorgan. Your line is open.

Speaker 7

Hi. The 10% organic revenue growth this year stands out to me as above industry growth. And I just want to know if you had a sense of what you think industry growth is for Food Services right now? And given what you see in the industry, not just Aramark's book of business, what do you think the growth products for Food Services industry growth is for the next couple of years?

Speaker 2

That's a great question, Andrew. I think, 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.

Speaker 2

I think we've talked about a long term growth rate for us in the mid single digits, call it 7% 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.

Speaker 2

But we love our strategy and our portfolio and we think it'll lead to significant growth going forward.

Speaker 7

Thanks, John. That's great.

Speaker 2

Thank you.

Operator

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

Speaker 8

Can you just talk maybe a

Speaker 7

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 maybe geography or kind of areas. And I guess I'm trying to key in on this Everton, which congratulations on getting. There are other opportunities in that vertical as well and in that country. Thanks.

Speaker 2

Yes, 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 in that sector in the international segment. So we're very excited about the overall growth prospects of the sports and entertainment business. We're also enjoying very significant special event opportunities, concert seasons. Team performance has a big impact on the overall sales and revenue growth in sports and entertainment.

Speaker 2

So we're actually seeing very strong performance by our core teams that we serve around the world. So all in all, we're very pleased with it and we see continued good opportunities going forward.

Speaker 7

Okay. Thank you. And then can you maybe, I guess, I'll talk about a recession now. Remind us how the business performs, your ability to kind of reduce any type of impact of a recession and any other color you could give there? Thanks.

Speaker 3

Yes. I think one of the hallmarks of this business is it stands up very well during recession. I mean, it's literally a business with over 10,000 profit centers in a diverse set of sectors across 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 were relatively intact. So it's a good spot to be and when we're facing challenging economic times.

Speaker 2

Yes. I would just add, 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 and L for both food and labor really puts us in a very good position. 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.

Speaker 2

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 7

Okay. Thank you very much. Our

Operator

next question comes from Heather Balsky with BofA. Your line is open.

Speaker 9

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 $20,000,000,000 And when you answered Tony's question, you talked about the margin opportunity there. Can you just talk about the pace of growth you've been seeing?

Speaker 9

What's driven that? And the opportunities ahead, do you have a target in terms of how big you think you can get it when you look at your peers? I guess how do you think about it from that perspective? Thanks.

Speaker 2

Yes, certainly. It is obviously an area that we're very much focused on And beginning all the way back to the Avendra acquisition, 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. 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 through 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.

Speaker 2

I think golf clubs and other related kinds of facilities, as well as geographic expansion. And we've had a 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.

Speaker 2

I think 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 strategy and the goals for next year.

Speaker 9

Great. That's helpful. And also with regards 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?

Speaker 2

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 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.

Speaker 2

They may reduce the number of airline flights that they may 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 businesses.

Speaker 9

Thank you very much.

Operator

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

Speaker 10

Hey, good morning, John, Jim. Thank you very much. Just a couple please. Going back to your new initiative in the U. S.

Speaker 10

B and I business that you mentioned, I wonder if you could expand a little bit on how you see the addressable market in B and 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 the bar, the commerciality bar for the size of customer that's worth serving and therefore whether that how that's changed the size of the market? Sorry, long winded question. And then secondly, a simpler one for Jim. Your guidance looks like it's at an operating adjusted operating income level implying sort of mid to high single digit growth for the Q4 at constant currency. Is there anything in the comp?

Speaker 10

You mentioned a couple of things for Q3. Anything in the comp base that we should bear in mind when we're considering the rate of year on year growth? Thank you.

Speaker 3

Yes. I'll start with that question. So that's right. The guide does imply sort of mid to high single digits for the Q4. And again, that's a good cruising speed for this business.

Speaker 3

We've talked about the long term growth model in the 5% to 7% range, and that's enough growth to fuel those margin levers that we talked about. That's 2 to 3 times higher than where we were in the years leading up to fiscal 2019. We are lapping some significant pricing actions as we come into Q4 as inflation moderates that the level of pricing will come down somewhat. But we're exiting the year at a very strong speed with good growth.

Speaker 2

Yes. 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 it's not we haven't established a central production facility in New York to go ahead and serve smaller facilities or the like. This is really focused on high end opportunities for both catering and restaurant operations.

Speaker 2

So that's the model that it's focused on. The B and 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 got a very strong selling season there. And each account may be slightly different than it used to be in 2019, 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. So overall, the BNI model is very robust.

Speaker 2

The small account model we serve through our Refreshment Services division, which is enjoying extraordinary growth through many markets and our micro markets, vending services, office coffee services and the like refreshments 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 balloon 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 1 of the world's most former owned renowned Michelin Star Chefs.

Speaker 10

Understand. Thank you very much.

Speaker 2

Thank you.

Operator

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

Speaker 11

Yes, 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 25%. So Jim, maybe I thought give you an opportunity to expand a little bit about that.

Speaker 11

It sounds like that's your base case that inflation is probably a little bit of a help for you not only in the Q4, but into next year. I was just wondering when do you think the comps or 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 defined basis points benefit to the result. I don't know if you wanted to kind of talk about how it's been trending here for the end of 2024, but I think we could all benefit from a little bit more detail on that topic.

Speaker 3

The last quarter we talked about expectation of inflation in the 4% to 5% range, it came in at the low end of that range for the Q3 globally. In the U. S, we were in the high 3s for the 3rd quarter. As we're trending in the 4th quarter, we're now in the 3s across the organization, both in the U. S.

Speaker 3

And internationally. And we're obviously seeing favorable trends as we plan for fiscal 2025. It continued to be a moderate tailwind to the organization in Q3. I think we'll continue to be a moderate tailwind into Q4. We've talked about we don't price for profit, right?

Speaker 3

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 of quarters.

Speaker 11

That's helpful. And then maybe John for my follow-up. 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 for the year?

Speaker 2

Yes. I think we 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. I would say historical averages are right in line with our expectation.

Speaker 11

Thank you very much.

Operator

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

Speaker 5

Hey, good morning, everyone. You reiterated 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 why it would be improving balance sheet?

Speaker 3

So we have a clear line of sight at this point to about 3.5 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 2025, there's a path to leverage in the 3s low 3s, 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 potential share repurchase program and we expect to give you another update at the next earnings call on that. But yes, with the leverage ratios tracking favorably, that's something we are strongly considering.

Speaker 2

Yes. The board continues to recognize our strong free cash flow recognition and generation and it has had discussions around how do we optimize shareholder returns. And so and it is strongly considering what that approach should look like. And as Jim said, we will update you at the earnings call in terms of our intentions and plans for that.

Speaker 5

Thanks. And then I know you're not guiding for fiscal 2025 today, but wanted to take your temperature on how you're feeling in terms of your annual net new contribution and retention targets for next year based on what you see and I guess the sales pipeline today and some of your existing client conversations?

Speaker 3

So yes, the sales pipeline remains very robust. And as we plan for fiscal 2025, we've already remain committed to our AOI target of about $1,000,000,000 what we talked about previously, 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 established and remain committed to achieving those targets and we see good momentum in this business to get there.

Speaker 5

Makes sense. Thanks for taking the questions guys.

Speaker 2

Thank you.

Operator

Our next question comes from Josh Chen with UBS. Your line is open.

Speaker 8

Hi, John, Jim. Thanks for taking my questions. I think, Jim, you mentioned that the U. S. Margin was held back a little by some favorability as last year and that excluding those, the margin improvement will be similar to last quarter.

Speaker 8

So I guess is the last quarter's margin improvement rate the right rate to think about going forward? How should we think about kind of the U. S. Margin improvement given some of your productivity and internal actions?

Speaker 3

Yes. The underlying margin improvement in both the comparability, we had some favorable insurance experience in the prior Q3. Coming out of COVID, there was just simply less activity and less liabilities required there with some actual 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.

Speaker 8

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 it a food comment? Could you just kind of break down the different components that lead you to believe that you'll have lower inflation in the next years?

Speaker 8

Thanks so much.

Speaker 3

Yes. We have very detailed information, obviously, building up our food inflation and labor. Both of them are trending favorably. I think labor overall still low. We talked about 4% to 5% range.

Speaker 3

Labor is trending closer to 4 percent. At this point, we have good visibility with respect to the inflation outlook for food. And just the trends that we're seeing give us a lot of confidence and that will continue to come down as we enter fiscal 2025.

Speaker 8

Great. Thank you for the color and congrats on a good quarter.

Speaker 2

Thanks. Thank you.

Operator

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

Speaker 5

Hello. This is Harold on for Stephanie Moore. I wanted to key in on the GPO space. It sounds like you are contributing to my positions. So does any particular geographies where you see the most opportunity that you like to acquire to grow in that space?

Speaker 2

Yes. We're specifically focused on the European marketplace where we already have existing GPO infrastructure and adding scale to that is very is enhancing both margins and our ability to serve our customers well. 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. And we're also focused on doing work with our current partners in other parts of the world where we've got pilots underway to establish GPO networks in markets where they've never had a GPO.

Speaker 2

So overall, the opportunity is significant. We're very focused on it. I want to make sure that people understand 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 our approach and strategy.

Speaker 5

Got it. And then just on some of the other levers on the margin, right? I know you said, I think insurance costs were favorable. Should we expect this to impact margin favorably in 4Q as well? And then on corporate costs, how should we think about that in 2025?

Speaker 5

Is it 2024 rate the gun rate we should expect? And I guess how much more you want to settle on there?

Speaker 3

Could you repeat the first part of your question? We just had a little trouble hearing you.

Speaker 5

I said insurance costs was a benefit. So I just want to get a sense for how we should think about that in 4Q as well. And then on corporate costs, when we think about 2025, is the rate that we're seeing in 2024 the new run rate and I guess how much more room is there to run? Understood. Yes.

Speaker 3

Just to confirm, the insurance costs or savings was a benefit in Q3 of 2023. So we're just we're pointing out that we're lapping 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 seeing this plan sort of a moderate increase overall.

Speaker 3

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 2025.

Speaker 5

Thank you.

Operator

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

Speaker 2

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 Q3 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.

Speaker 2

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 and have a wonderful day.

Remove Ads
Powered by Quartr
Earnings Conference Call
Heritage Global Q3 2024
00:00 / 00:00
Remove Ads