Morning. I'm Josh Chan, and I cover our business services here at UBS. We are pleased to have Aramark with us today. They are a $10 billion market cap provider of food and facility services, in the US and some other international countries.
With us from Aramark is Jim Tarangelo, CFO. We have a fireside Q&A discussion, but I will open up the floor from time to time for any Q&A as well. Feel free. You can also send your questions on the iPad here. With that, Jim, glad to have you at the conference.
Yeah, thank you. Thanks for hosting us this morning. Just way of sort of opening comments. You know, we're off to a really good start this year. We're really pleased with the results we generated in the first quarter, generating 5% organic growth, 6% organic growth in the underlying food business, 13% growth in AOI, and about 25% growth in earnings. You know, we're really pleased with the trajectory of the business. We're off to a really good start with our new business wins. We think we're well positioned from a retention standpoint. On top of that, we've done a number of refinancing activities lately, including issuing a European bond a couple weeks ago. Actually, the lowest coupon printed for a high-yield issuer, US issuer out of Europe since 2021. We're really pleased where we are and the outlook for the business.
That's good to hear. Yeah, thanks for that, that overview. We are at a consumer conference, so I know that you serve a certain segment of the consumer. Based on the consumer that you interface with, how would you describe the state of consumer, any differences in terms of confidence, spending levels, things like that?
Yeah, I'll start off. I mean, for us, unlike a traditional retailer or fast casual restaurant, our consumer segment is much more resilient, right? We operate in segments like education. You know, the number of students is pretty predictable, even in an economic downturn. In higher education, enrollment tends to actually go up during periods where people downturns, where folks go back to school. Healthcare, think about senior living and hospitals, very predictable and resilient consumers. Even in segments that might be viewed as somewhat more discretionary, like sports, as an example, we're still seeing very favorable trends overall with record average checks, good transaction levels, and what I call the experience-based consumer still looking to spend in sort of that environment. A lot of that performance tends to be more team-driven.
For us, the consumer remains resilient and strong overall.
Great. Yeah, thank you. You've been CFO for just over a year now. What's been kind of the highlight over the past year, from your seat, and what are some areas of attention that you're kind of paying attention to going forward?
Yeah, sorry. I think it's been a remarkably smooth transition into the role, having been at the company for 20 years and working very closely with John and Tom, my predecessor, in leading up to the role. I think we're very proud of the results we delivered last year. It was really about execution, right? As you know, we put this transformation of the company toward a growth-oriented, hospitality-focused company. With that model firmly in place, for me, it was really about executing last year and delivering the results that we wanted to deliver. I look back, we had guided to 7-9% organic growth in fiscal 2024. We delivered 10%. We got to 15-20% AOI growth. We delivered 20%.
We're proud of achieving or exceeding the results that we set out to deliver. On top of that, improving the financial flexibility, enhancing the capital structure. We significantly improved the leverage profile of the organization, improving leverage from about four times last year and working our way towards three times leverage by the end of this fiscal year, which will be the lowest leverage the company has had in nearly 20 years.
Great. Yeah, okay. As we look into 2025, I know that you're already into your fiscal year. What are some of the key priorities for management this year? You know, what are some things that you really want to get right for this year?
Mm-hmm. It is consistent with, you know, the highlights I just talked about. That is what is good. It is a relatively simple business model for our organization. It really starts with growth. Again, the focus in 2025 and beyond is going to be driving that growth-oriented model, achieving the net new target of 4-5%. That is really core to our model. It is something we are very focused on. With that, we are off to a really good start. We have announced a number of large new wins, including University of Nebraska Athletics, Loyola Marymount in our higher education portfolio. We like that the pipeline remains robust. We are very encouraged by the trajectory we see with respect to new. On the retention side, again, we are well positioned.
There just simply are not the size and scale of accounts that there were out for rebid as there were last year. Statistically, we are just in a better position. We have already secured our largest higher education account, not only with Arizona State University, not only secured it, but we added athletics and concessions. We added the faculty lounge to that program as well. With that, we think we are very well positioned from a net new standpoint. And as you know, our net new really drives the output, the output of this business in terms of margin levers and really fuels the long-term performance.
That's great. That's encouraging. Anybody has any questions before we dive into more of the business? Great. Okay. So, so for this year, you're guiding to 5.5-7.5% organic growth, excluding the 2% you get from the extra week. So how are you thinking about the different components that add up to organic growth between the net new, pricing-based business, and things like that?
Yeah, I think, you know, core to the, the algorithm of financial model for the business, it starts with what we call gross new business, which, we target 8-10% on an annualized basis with new. We target retention rates in excess of 95%. With that, you get the net new target of, of 4-5%. On top of that, you get some, some pricing and some base business or volume growth. That gets us to our long-term algorithm, which is a 5-8% growth target for the organization. In re-relation to the components of growth, that's basically it. This year, you know, pricing is in the, the 2-3% neighborhood. Again, we continue to target net new in the 4-5% range. That's how we think about the components of growth.
Okay. All right. Before we go into the verticals, there is a question from the audience. What's your strategy for the next one to two years in terms of M&A? Where are you seeing the acquisition opportunities? Are you competing with private equity buyers potentially?
Our M&A strategy is focused on primarily small and medium-sized acquisition targets that are consistent with our strategy, generally falling in three areas, I'd say. Really, at the top of the list is adding onto our GPO capabilities and increasing the size and scale of the spend that we manage because that's really critical for our economic model. You saw us execute that with the acquisition of Quantum in Europe back in December. That was one of the largest remaining independent GPOs in Europe. It was an asset that we had cultivated the relationship for many years. It really rounds out and enhances our global capabilities to serve clients like Marriott and Hyatt more globally. That's a differentiating asset for us. Refreshment services or convenience retail is another area of the business.
You think about there's sort of a route-based business with a fixed cost. So anything you could add on to those routes becomes very margin accretion, margin accretive to the organization. Again, we executed an asset called First Class Vending, which is one of the top vending businesses based in California, more recently, so consistent with that strategy, and finally, enhancing the brand. We've done a number of sort of small bolt-on type deals to bolster brands and sort of enhance our capabilities to serve premium segments of the market. An example there would be Graysons or Wilson Vale in the U.K., which allows us to serve more premium clients, really adding on to the Aramark core brand.
Okay. How are you thinking, since we're on M&A, how are you thinking about balancing the path to three times and then M&A? I think you recently have a repurchase authorization as well. How are you kind of balancing all those priorities?
Sure. So, you know, first of all, this is a company that generates a lot of cash. It's very resilient. So we have good visibility and predictability into our cash flow generation. In terms of capital structure, you know, we're working our way towards three times levered by the end of this fiscal year. As I noted earlier, that's the lowest leverage we've had since 2007. You know, optically, I think we do want to get under three times as we work toward fiscal 2026. We find that particularly with sort of European, Asian, and Australian investors who are expressing a lot of demand in our, or interest in our equity, optically being under three times or the path under three times is important. That's something we can or we're focused on.
In conjunction with that, you know, we announced the $500 million share repurchase program back in November, I think a testament to the confidence the management team and the board has in the outlook of the business. And we started commencing with buybacks, you know, at the end of Q1. We're active buyers today. We see a lot of value, in terms of where the stock is trading versus where we see the intrinsic value. We will be active when we see opportunities and balancing that with working our way toward three times levered as well.
That's great. Yeah, great to see the different options. In terms of your business, looking at the different verticals, sports has been one of the very strong growers within your portfolio, could you talk about kind of the spending backdrop and whether you see this strength being sustainable over the coming years?
Yeah, sports and entertainment has remained a strong segment for the business. We continue to see record per caps being generated for the organization. We've been able to leverage technology very effectively in this sector. If you think about adding in automated checkout point of sales where you can have one attendant monitoring, you know, multiple point of sale systems, you see this in a lot of the stadiums. That increases the number of transactions that can flow through with enhanced labor productivity. Specific tactical thing we do there. I think more higher level, in particular in sports, the opportunities we see within collegiate and university. While the professional market might be more mature from an outsourcing standpoint, we see lots of opportunities with collegiate athletics, many of whom self, self-op.
You see some of the wins we've announced with Arizona State adding athletics, University of Nebraska. Colleges and universities are increasingly seeing athletics as a source or need for funding, right, with name, image, and likeness, essentially athletes being paid, l eads to enhanced funding requirements. They want to elevate that fan experience, elevate the average checks, and sort of more replicate what we do on the professional sports side of the business. Many of these stadiums are in football and basketball, they're larger than their professional stadium counterparts. They are introducing alcohol. This is a really exciting opportunity for the business.
Yeah. Are you seeing that building a pipeline in terms of potential new win opportunities down the line?
We are. I mean, I think it represents a significant opportunity for the organization. I think we serve something like 500 colleges and universities today. Less than 50% of those do we do athletics and sports. Even cross-selling within the business is a big opportunity for us. Like I said, it is something that we are actively pursuing, reacting to the needs of the market.
Okay. Okay. Education is another sizable part of your business within the US. How does your exposure break down between K-12 and higher ed? What trends are you seeing there?
About 80% of the education sector is what we call collegiate hospitality, which is colleges and universities. We continue to see favorable trends in this sector as well. I know sort of from a macro perspective, there's some concern about, you know, an enrollment cliff. Within the Aramark portfolio, we have a heavy presence and exposure to warmer climate schools in the south and southeast. Think about like SEC-type schools. There's been a migration from students to those warmer climate, larger universities. We are seeing and continue to see favorable enrollment trends across the business. That's sort of on the macro side. From a tactical standpoint, the business has done an excellent job enhancing our retail capabilities, what we call meal plan optimization. A big piece of the higher education business are residential meal plans, right?
Your freshman, sophomore year, fall and spring, board plans, as you might say. We have done a nice job basically moving folks up the value chain, moving from, say, a silver plan to a gold, gold standard plan. In some cases, introducing a platinum plan, recognizing there is always a portion of the population that will migrate to something that is even higher there. That in conjunction with getting more upper-class and juniors and seniors under these plans, we call them voluntary meal plans. Typically, after freshman, sophomore year, students tend to sort of cook on their own. There are certainly opportunities that are sizable to get those juniors and seniors onto Aramark-sponsored plans.
Okay. Great. And then on the business and industry side, you've had very strong double-digit growth since the pandemic recovery, really. I'm sure back to office is a tailwind. Do you see that continuing to help, growth over, you know, over time? And, yeah, what are you seeing in terms of potential new wins opportunities too in, in B&I?
The B&I segment has been performing, you know, very well, double-digit growth for a number of quarters. The return to work is certainly a moderate, you know, sort of tailwind to the business. I think you see it here in financial services here in New York, right? What was three days a week became four days a week. Four days a week became, you know, five days a week for many of our clients, including J.P. Morgan, Goldman Sachs as some examples. Not only that, but when folks are in the office, we're seeing participation rates being elevated because two-thirds of our B&I segment is subsidized, which means we can offer more attractive and lower-priced meals than going out to retail or the high street.
That in combination with, I think, employers liking the collaboration of keeping folks in the building more productive have been some of the tailwinds that we're seeing benefiting that business.
Okay. Maybe a couple of topical questions. I guess looking across your entire business, you know, how are your leaders thinking about your exposure to federal government spending? You know, could you size for us what potentially could be at risk from a federal spending perspective?
Sure. Yeah, good, good question. I think there's a bit of a misperception out there. I'd like to sort of clarify. You know, our exposure to federal contracts overall is only about 2.5% of our revenues. And about 2% of that is with the National Park Service. Within the national parks, our contracts are all individually negotiated. Our contract for Denali is separate terms, conditions, and length and investment than our contract with Yosemite. Yosemite's very different than Lake Powell. They're not negotiated on an aggregate basis. They're sort of all unique assets that are negotiated on a one-by-one basis. I know there's been some negative press in general with those. The bottom line is we've seen good outlook in the business in terms of room bookings.
The government has announced they're hiring 3,000 seasonal workers in the national parks. The national parks are a source of great pride. It is also a source of funding for the government where there's typically a commission that's paid back to the government as a percentage of the sales. We see the outlook in that business good. In total, only about 2.5% of Aramark's revenues are coming from federal contracts.
Sure. You feel like the state and local piece of your business is more insulated from these movements?
Yeah, the state and local is primarily going to be on the correction side and on the K-12 side of the business. Our corrections business has been performing very well. The net new business there has been very strong. That's a business where the outsourcing trends are very favorable. You see many states, significant opportunities for those states to outsource. We see that business continuing to grow. K-12 is much more of a local decision. That's not a federal decision, right? That's all local school boards and municipalities. Again, I think more than 50% of that sector is still self-op. We see significant opportunities to improve efficiencies for those municipalities that are continuing to self-op and creates opportunities for Aramark.
Great. Yeah. Thanks for the color there. The other topic that we've been getting questions on is the tariffs. Could you kind of ballpark for us what's the imported food component, and then also what happens if your costs with the tariffs included kind of goes up?
The vast majority of our products that are used and consumed in the U.S. are produced in the U.S. Over 85% of our product and consumption is produced in the U.S. You know, where we have some imports, Mexico, maybe a few percentage points, it's primarily seasonal fruits and vegetables. As we come into the spring, most of those fruits and vegetables are actually produced in the U.S., are actually less reliant on Mexico over the next, you know, next few months. Some additional product comes in from China, but that's primarily textiles and linens, and those products generally are more on the Avendra, on the GPO side of the business. Obviously, we want to mitigate any cost pressure there, but it doesn't affect our P&L or our cost of sales directly. With China, you know, this is nothing new.
We've been looking for, and there are alternative sources with Malaysia and Vietnam. We do see some of that production shifting. The takeaway is really our exposure on the tariff fronts is limited because, again, the vast majority of our consumption and production are in the countries that we operate.
Okay. Okay. That's great. When I think about your guidance, your top-line guidance for the year, I guess, the 5.5-7.5%, excluding extra week, so organic growth was just under 5% in Q1. Could you talk about the cadence through the year and what drives that acceleration from Q1 as we kind of go through the rest of the year?
I think the simple way of looking at it, you talked about the 5% organic print in the first quarter. We also talked about, you know, 2% headwinds from exiting those facilities contracts. If you sort of add that in, you're sort of 7%, which is at the high end of the algorithm we've always talked about, 5%-8% organic growth is the model that we need to sort of fuel the margin lever. That in conjunction with lapping the facilities exits, onboarding new business that we've already won, or not relying on, you know, business on the come, it's business that we already know about. In conjunction with the favorable outlook we have on retention, right? Our business is contractually based. It takes time if you were to switch contracts.
We have very good visibility for the second half of the year at this point. We are confident in that ramp-up in revenue, revenues that's implied from the guidance.
Okay. What would drive the difference between whether you hit the low end or the high end of that range?
Yeah. We have, there's a number of fairly sizable contracts that are in the pipeline. To the extent we are able to convert, you know, more of those and sort of accelerate when those commence, that could potentially be where there would be upside. Like I said, we have good visibility into the outlook. We're, we are, for us, the consumer has remained resilient to the extent that that changes in terms of sort of number of folks coming to concerts or events. That could affect it as well. Like I said, we have good visibility. What we're seeing is favorable trends in the business overall.
All right. Yeah. That's good to hear. On the net new side, you target 4-5%, like you said. It sounds like you feel good about hitting it this year. I guess, could you just talk to the pluses and minuses of, you know, how you feel about getting to 4 or 5 or maybe even above that this year?
Yeah. On the new side, the company has had consistent performance in generating new business. Last year, we generated $1.4 billion of new business, which was a record for the food and facilities organization. This year, if we look at the pipeline, what's been pending and what's been proposed and expected conversion rates, we are on track. We have announced, I said, a few large wins already with University of Nebraska, Loyola Marymount. We expect to announce a few more in the coming earnings call.
That in combination with the outlook we have on retention, which again, we have good visibility into what's out to bid, it just, there's just less in terms of number and size and scale than there were in prior years, gives us a lot of confidence into both the new and the retention that we're on track to achieve the 4-5% net new for the organization.
Okay. Where what verticals do you see the most opportunities for net new over the next, like, one to two years?
Yeah. The great thing about our business is it, it's broad-based, right? I mean, as we look at the sectors and we sit down with the different businesses and target net new, I mean, they're all in that range of sort of 8-10% in terms of net new or greater. Not only sectors but geographies, right? The countries that we operated in have significant runway, as well. You know, particularly, you know, in corrections, business dining, as an example, higher education are some that we've highlighted up to particularly strong starts this year. The bottom line is we expect that net new target to be really consistent across all the sectors that we operate in.
Mm-hmm. That's great. There has been an outsourcing push since the pandemic. Where are you seeing first-time outsourcing? Do you feel like that slightly elevated trend can kind of continue?
If you look at where we win our new business, I think, you know, historically, about a third would come from first-time outsourced conversions. About a third would come from the large, global players and about a third from small regional players. During COVID, we saw first-time outsourcing conversions, about 40% of our new business coming from there. And that's remained elevated in particular. I think, just the, you know, the overall labor challenges and inflation historically, I think, something we do every day. We do, we're effective at managing. Technology, I think, has become an important part of how we provide value to client in terms of improving productivity with things like unattended, you know, micro-markets or self-checkout. Those sorts of things allow us to increase productivity. And it's something we're good at and requires technology investment.
I think those are some of the reasons we've seen the percentage of first-op conversions being higher than it has historically.
Okay. From a retention perspective, you know, how has that been trending and what drives fluctuations in retention from your perspective?
We've elevated our retention game, right, over the past few years. If you look at the underlying food business, we've been operating in the 95-96% retention levels for the past few years. I think we've done a nice job, improving retention as part of this transformation that the company has executed. We're heavily incentivized, the management team, the sector teams. In terms of retention and net new, we generally use about 40% of our incentive, compensation. We've decentralized the organization. We've heavily invested in sales resources and retention resources to both elevate the consumer experience and elevate, you know, how we serve our clients. As I said, off to a nice start with already retaining what was the largest account we had out to bid this year with Arizona State.
Yeah. That's great. Anybody has any questions from the floor?
Yes. [audio distortion]
Mm-hmm. Yeah. I'll start. The market in general is rational. And the large players, they're all growing. They're all showing margin improvement. Capital levels have remained relatively consistent. I always like to start with the market, right? It's an attractive market. It's a $300 billion market that is still relatively fragmented. I think I'll start with the industry overall, which we continue to see as favorable and rational. You know, we like how we stand versus our competitors. We've elevated our game over the past few years. If you compare our organic growth rates to our competitors, we think we're in a good spot. The percentage of business that we're taking has, like I said, been about a third. That hasn't really changed.
The new model is, is really driven by, you know, tailored solution, client by client, empowering the field. They're closer to the decision-makers, closer.