Aramark (NYSE:ARMK) Q2 2024 Earnings Call Transcript May 7, 2024
Aramark misses on earnings expectations. Reported EPS is $0.2015 EPS, expectations were $0.26. Aramark isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to Aramark’s Second Quarter Fiscal 2024 Earnings Results Conference Call. My name is Kevin, and I’ll be your operator for today’s call. At this time, I’d like to inform you this conference is being recorded for rebroadcast and that all participants are in a listen-only mode. We will open the conference call for questions at the conclusion of the company’s remarks. I will now turn the call over to Felise Kissell, Senior Vice President, Investor Relations and Corporate Development. Ms. Kissell, please proceed.
Felise Kissell: Thank you, and welcome to Aramark’s second quarter fiscal 2024 earnings conference call and webcast. This morning, we will be hearing from our Chief Executive Officer, John Zillmer as well as our Chief Financial Officer, Jim Tarangelo. As a reminder, our notice regarding forward-looking statements is included in our press release this morning, which can be found on our website. During this call, we will be making comments that are forward-looking. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties and important factors, including those discussed in the Risk Factors, MD&A, and other sections of our annual report on Form 10-K and our other SEC filings. Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these items to US GAAP can be found in this morning’s press release as well as on our website. So with that, I’ll now turn the call over to John.
John Zillmer: Good morning, everyone. We had another great quarter of results, driven by our commitment to growth across the company. Aramark hit record total company revenue for any second quarter in our history as well as record second quarter profit in international. The vast majority of our profitability improvement in the quarter came from strategies we’ve taken to drive performance, while also benefiting from some inflation tailwind. Once again, substantial base business growth, pricing and net new business contributed to organic revenue growth, which was up 9.4% in the second quarter, compared to the prior year. We continued to experience consistently strong retention rates along with sizable new business potential. Organic revenue in the U.S. segment increased by 7% in the second quarter versus last year, led by three areas of the business.
First, we’ve seen continued momentum in Collegiate Hospitality due to enhanced culinary partnerships and new business wins as well as innovation leading to increased participation. Sports and entertainment had another great quarter with impressive per capita spending rates and higher attendance levels, especially during the NFL season, as well from our growing presence in the NCAA. We expanded our grab-and-go micro-markets and self-checkout offerings and launched additional local restaurant partnerships, which continue to resonate with fans. We’d also like to congratulate the South Carolina Gamecocks, the Iowa Hawkeyes and the Purdue Boilermakers for their achievements in reaching their respective NCAA basketball championship games, all Aramark clients.
And lastly, workplace experience gained momentum across all regions as the quarter progressed, led by new business coming on board, increased employee participation rates and additional catering activity. The U.S. segment continues to deliver new business wins. Most recently, we were very excited to add Oracle Park, the home of the San Francisco Giants to our baseball portfolio. I was at the stadium for opening day and experienced firsthand the enthusiasm of our Aramark team, proudly serving fans with new innovative culinary creations combined with iconic fan favorites. Other new client additions include the University of New Mexico, Denison University and Clark University, and Collegiate Hospitality, as well as Dublin City Schools and Student Nutrition, to name a few.
Corrections also continued to expand the portfolio taking great pride in the success of our IN2Work program as a second chance employer, a program that is now in over 300 of our locations. In the international segment, every country and region within the Aramark portfolio saw organic revenue growth in the second quarter, led by mining services in Latin America, increased business dining volume in the U.K. and continued strength in education across Canada, resulting in a year-over-year increase of 16%. Our Aramark Korea team served fans at a pair of Major League Baseball opening day games for the National League West rivals the San Diego Padres and the LA Dodgers, who played in Seoul towards the end of the quarter, leading to new opportunities in sports.
New business has been strong in international, which most recently included expanding our presence with Merlin Entertainment in the U.K. offering additional B&I services to Continental AG in Germany and building upon our remote camp capabilities in Canada, adding Woodfibre LNG and Ledcor group as clients. The international team has been awarded numerous new wins, collectively providing us the ability to build scale in the countries we serve. In the second quarter, we hosted our first International Innovation Summit in Santiago, Chile, which included participation from our country leaders, global clients and technology partners with approximately 700 attendees. We used our time together to explore food and facility service models of the future focused on innovation around customer experience, safety, sustainability and artificial intelligence.
Now let’s turn to global supply chain. Our overall objective continues to be focused on consistently growing and leveraging our managed services global supply chain and GPO network spend of $19 billion and providing quality products, services and analytical insights to our clients. International expansion is an area of focus on our strategy with several of our multinational clients offering us the opportunity to broaden our procurement services on a global scale. As I previously mentioned, we saw some continued improvement on the inflation side, which helped product costs in the second quarter. Jim will be providing additional detail on the benefits we’re experiencing. Our AI work in global supply chain is creating additional efficiencies with enhanced data harmonization and analytics for our operators and clients, particularly in sourcing, optimization and reporting.
As an example, we’re leveraging these capabilities to share insights with our clients in further understanding their community impact with local, regional, diverse and sustainable spend to achieve their ESG goals. Finally, we continue to strengthen our balance sheet and are in active discussions to sell the remaining portion of our ownership stake in the San Antonio Spurs NBA franchise. We expect to sell the remaining interest prior to the end of the fiscal year, and we will provide additional detail on a potential transaction soon. I’ll now turn the call over to Jim.
Jim Tarangelo: Thanks, John, and good morning, everyone. Over the past several months, I have spent time with many of you reviewing the business and outlining my immediate priorities since becoming CFO in January. I have focused on two primary areas, continuing to drive profitable growth with the goal of reaching new levels of financial performance and leveraging that growth to capitalize on our underlying margin levers. With that, we had another very strong quarter, building on the momentum we generated in the first quarter, reinforcing that our model is working and producing the results we expect. With this framework now firmly in place and the operating environment normalized, the company is at an exciting inflection point as we execute on our strategies, all with a mindset of creating significant value for our stakeholders.
As John reviewed, in the second quarter, we reported organic revenue growth of more than 9% versus the prior year, driven by strong base business growth and the contribution from net new business along with pricing. Operating income in the second quarter grew by 27% year-over-year to $159 million and adjusted operating income was up 29% on a constant currency basis from a year ago to $187 million. AOI margin grew by nearly 70 basis points year-over-year on a constant-currency basis with approximately 50 basis points driven by those underlying levers so core to our model, including scale and SG&A, supply chain efficiencies, disciplined middle of the P&L management and progression of new business maturity with the remainder coming from improving inflation trends.
Turning to the business segments. FSS U.S. achieved AOI growth of 21% with an AOI margin improvement of 65 basis points on a constant-currency basis compared to the same period last year. Education, business and industry and sports, leisure and corrections all had particularly strong quarters due to disciplined middle of the P&L management combined with higher base business growth, especially in our Collegiate Hospitality and correction businesses from our ability to recover the price inflation lag we’ve previously discussed. The International segment had year-over-year AOI growth of 29% and an AOI margin improvement of nearly 45 basis points both on a constant-currency basis. Year-over-year AOI growth was driven by higher base business volume, net-new business and supply-chain efficiencies led by the UK, Germany and Latin America.
Regarding inflation, we are seeing trends tracking similarly to what we experienced in the first quarter and providing some tailwinds to our underlying margin levers. We still anticipate inflation to be around 4% to 5% for the fiscal year consistent with our expectations we conveyed last quarter. Turning to the remainder of the income statement. Interest expense decreased by almost 25%, primarily from the $1.5 billion debt repayment of the 2025 senior notes. The adjusted tax rate was approximately 26%. Our strong quarterly performance resulted in GAAP EPS of $0.20 and adjusted EPS of $0.29, an increase of 79% versus the prior year on a constant-currency basis. With respect to cash flow, the company generated a cash inflow in the quarter consistent with our normal seasonal business cadence.
Cash flows from operating activities in the second quarter was $221 million and free-cash flow was $140 million. The current quarter was impacted by payments of approximately $25 million for the remaining fees associated with the completion of the spin transaction as well as higher income tax payments from the increased profitable growth and slightly more capital expenditures. At quarter-end, the company had over $1.1 billion in cash availability. We also took steps to enhance our capital structure by repricing our 2028 and 2030 term loans at lower interest rates. This repricing is expected to generate annual interest expense savings of approximately $10 million. We will continue to proactively pursue opportunities to further strengthen our balance sheet.
I’ll wrap up with our outlook expectations for the remainder of this fiscal year. We are very pleased with our year-to-date performance and the trends we are seeing in the business. As a result, we are updating our fiscal ’24 outlook for organic growth to be at 9% or better and reaffirming our expectation for AOI growth and adjusted EPS growth, which we indicated would be toward the higher end of the range last quarter. With that, we currently anticipate the following full year performance: organic revenue growth at 9% or better, AOI growth of 17% to 20%, adjusted EPS increasing 30% to 35%. And lastly, a leverage ratio of approximately 3.5 times by the end of the fiscal year. Our strong performance reinforces that our profitable growth strategies are working.
With the foundation for success firmly in place across the organization, we couldn’t be more excited about our future. Thank you for the time this morning. And with that, I’ll turn it back to John.
John Zillmer: Thank you, Jim. Our teams around the globe are the driving force behind our success and a key reason I remain confident to our ability to — in our ability to go to and through our financial targets, focused on organic revenue growth, margin expansion, adjusted EPS growth and capital structure enhancement. We’re working hard each day to build upon our momentum and deliver on our promises for all stakeholders. Very specifically, the point I’d like to convey with respect to our strong quarter is that we feel very good about the quarter that’s in the books. We believe that the macro-environment continues to cooperate and we’ve raised our revenue guidance and our AOI expectations for the second half of this year have both risen.
Having already pointed towards the high end of the quality — of the quantitative AOI guidance range on the last quarter, we plan to update the quantitative AOI guidance range as the year progresses. Operator, we’ll now turn the call over to questions.
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