Earnings call transcript: Aramark Holdings beats EPS forecast in Q2 2025

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Overview

The earnings call highlights record revenue, a strong new business pipeline, and partnerships with major companies like Walmart. The management's guidance indicates robust growth expectations for revenue, AOI, and EPS, despite some uncertainties in specific verticals. The Q&A session reveals confidence in managing inflation and supply chain challenges. However, the lack of clarity on certain risks slightly tempers the overall sentiment. Given the strong financial performance and optimistic outlook, the stock price is likely to see a positive movement of 2% to 8%.

Key Financial Performance

Organic Revenue $4,300,000,000, representing an increase of 3% year-over-year. The growth was strong despite the exit of some facilities accounts last year and temporary weather-related client site closures.

FSS U.S. Organic Revenue $3,100,000,000, or roughly 1% increase year-over-year, affected by approximately 3% due to the exit of facilities and calendar shifts.

International Organic Revenue $1,300,000,000, an increase of 10% year-over-year, with growth reported in virtually all countries, particularly in the UK, Spain, Chile, and Canada.

Operating Income $174,000,000, up 9.5% year-over-year.

Adjusted Operating Income $205,000,000, up 11% on a constant currency basis compared to the same period last year.

AOI Margin 4.8%, increased by 33 basis points year-over-year, driven by supply chain efficiencies and higher revenue levels.

GAAP EPS $0.23.

Adjusted EPS $0.34, an increase of 22% year-over-year on a constant currency basis.

Net Cash Provided by Operating Activities $256,000,000.

Free Cash Flow $141,000,000, stronger by $64,000,000 compared to the prior year period due to higher earnings and favorable working capital.

Share Repurchases Nearly 4,000,000 shares or about $140,000,000 since the program initiation.

Cash Availability Over $1,600,000,000.

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Operating Highlights

New Client Wins: New client wins totaling $760 million this fiscal year to date, with significant new business immediately ahead.

International Revenue Growth: International organic revenue reached $1.3 billion, an increase of 10% year over year, with countries like the UK, Spain, Chile, and Canada leading the growth.

Organic Revenue Growth: Organic revenue grew to $4.3 billion, representing an increase of 3%.

Client Retention Rate: Strong client retention rate above 98% in the U.S. and international markets.

AOI Profitability: Record AOI profitability for any second quarter in global FSS history, with over 20% adjusted EPS growth on a constant currency basis.

Supply Chain Efficiencies: Utilization of AI-driven technology for purchasing compliance and contract productivity.

Acquisition of Quantum: Recent acquisition of Quantum is integrating well, expected to drive significant growth through procurement synergies.

Expansion of GPO Footprint: Actively pursuing several international geographies for further expansion of global GPO footprint.

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Risk or Challenges

Market Fluctuations: The company is managing fluctuations in the marketplace, both on Wall Street and Main Street, which introduces uncertainty.

Supply Chain Challenges: Recent U.S. tariff activities have created uncertainty in the market related to pricing levels and inflation expectations.

Economic Environment: The company is closely monitoring the current economic environment, which could impact their operations and financial objectives.

Client Retention: While the company has a high client retention rate, there is always a risk associated with client exits and the need for proactive retention strategies.

Healthcare Sector Risks: Potential cuts to Medicaid and university funding could impact the healthcare vertical and overall client budgets.

Consumer Behavior: There is a concern about potential shifts in consumer behavior due to economic stress, although currently, no significant changes have been observed.

Operational Friction: Market volatility may create opportunities for first-time outsourcing, but it also introduces operational friction that could affect client decisions.

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Guidance & Outlook

New Client Wins: New client wins totaling $760 million this fiscal year to date, with significant new business ahead.

Retention Rate: Strong client retention rate above 98% in the U.S. and international sectors.

Revenue Growth: Monthly acceleration of revenue growth, with April showing a 6% increase.

Acquisition of Quantum: Integration of Quantum is expected to drive significant growth through material procurement synergies.

AI-Driven Technology: Utilization of AI technology for purchasing compliance and contract productivity.

Revenue Growth Expectation: Expecting revenue growth to accelerate in the third quarter, driven by higher base business volume and net new business expansion.

Net New Business: Anticipating net new business growth of 4% to 5% for fiscal 2025.

AOI Growth and Margin Expansion: Expecting continued AOI growth and margin expansion due to strong supply chain efficiencies and effective cost discipline.

Capital Expenditures: Expecting capital expenditures to be around 3% of revenue for the full year.

Leverage Ratio: Leverage expected to be around three times by the end of the fiscal year.

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Shareholder Return Plan

Share Repurchase Program: Repurchased nearly 4,000,000 shares or about $140,000,000 since the initiation of the program in November.

Shareholder Return Strategies: Ongoing ability to generate strong cash flow provides flexibility to invest in the business while executing shareholder return strategies, including dividends and share repurchases.

Share Repurchase Program Total: The total share repurchase program is valued at $500,000,000.

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Key Q&A

Q:Jim, I wanted to maybe hold you a little bit, some of your comments about the exit rate for entering 2026. I want to hold you a little bit to this. I’m looking at these numbers kind of second half looks really strong, 98% retention rate. I mean, you think there’s potential to be above kind of where you are, like maybe above 5% or something along those lines for net new?

A:Sure, as we talked about, we saw revenue accelerate throughout the course of the second quarter. The April print was 6%, right, so that sort of takes into account some of the effects John mentioned earlier and the factors that have affected the quarter. And that’s pre the facilities lapping, which had another 2% impact on the business. So we talked about our multi year range in the 5% to 8% growth as we talked about our multi year growth targets. And think as we look toward the exit rate, we’ll certainly be north of that or expect to be north of that in the fourth quarter.

Q:How do we basically think about Avendra here, the GPO, in call it, a higher inflationary environment. Is it going to actually benefit from inflation? Are you able to pass that through? How do we think about that?

A:With respect to Avendra, Certainly we see Avendra has a very strong capability of managing through supply chain disruptions and is managing very effectively. We see inflation at this point being relatively benign around 2.9% in The U. S, slightly higher internationally. We’re able to price to recover those inflationary cost increases.

Q:When you sort of think about the acceleration you saw into the quarter and the second half needing to be at double digit, it sounds like you have a lot of momentum there, and I understand you know, the acceleration that you’ve seen. Maybe just go through specifically the operating metrics that need to continue to accelerate, maybe which verticals in particular also, you’re expecting to accelerate in in that second half of the year.

A:So Tony, I think the run rate that we have, as I mentioned, if you think about April at 6% or so, so we’ve seen acceleration in the base business in higher education. We’ve seen continued good performance with new business in corrections in our B and I business as well.

Q:Can I ask, in terms of Avendra contribution to revenue growth, you called out the net new and base business effect, but nothing on the margin impacts? Can you given the investments and success with the GPO, just outline the profit, all three that we might expect going forward and in the quarter for that matter?

A:We don’t break out the profit for Avenger separately. We’ve talked about it being obviously very attractive margins, margins north of 55%, sixty % in that business. We don’t quantify the exact amount, but it certainly has contributed to ArrowMark’s overall objectives to increase spend.

Q:On the outlook, I’m not sure I’m reading this correctly, but you’ve inserted a statement on the guidance being based on trends currently occurring in the business. I appreciate there’s lots of noise on some of your verticals. So first question on risks and your approach to them. What are some of the things that sound the most credible when you hear some of the noise on university funding cuts, on potential cuts to Medicaid and what that does to the healthcare vertical?

A:I would say that, this market volatility and uncertainty always has a positive impact on our ability to convince first time outsourcers to move forward with their decisions, which many times is a philosophical organizational decision rather than an economic one.

Q:Have you already started to see any chatter from clients on expanding domestic production shifts or industrial clients opening new sites?

A:The I would say it’s very early in the expansion cycle, if you will, in terms of increasing production in The U. S. Although I would say that we operate significantly in the heavy industrial space in our B and I sector and serve many of the customers that are talking about expanding their production capacity.

Q:Just a question on CapEx. If I can ask for your latest thoughts on how that’s likely to progress over the next twelve to eighteen months. Obviously, cognizant that CapEx spending leads net new business ramp ups generally.

A:So I think it’s about 3.7% of sales for the quarter year to date. That’s weighted a little bit higher due to some new business weighted toward sports and higher education. For the full year, we would still anticipate capital expenditures being at about 3% of revenue.

Q:On inflation, I I guess if we were to hit a higher level in inflation later this year or next year, how would you think that that environment compares to the inflation that we saw a couple of years ago coming out of COVID?

A:I would say I don’t believe that we anticipate a significant shift up in inflation. We think that it will trend in these areas, call it the 2.5% to three percent range.

Q:Review of Unclear Management Responses

A:Management appeared to avoid giving a direct answer regarding the specific margin impacts from Avendra's contribution to revenue growth, stating that they do not break out the profit for Avendra separately for competitive reasons. Additionally, there was a lack of clarity on the potential impact of university funding cuts and Medicaid cuts on the healthcare vertical, with management indicating that they are monitoring the situation but not providing specific details on how it might affect their operations.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

ARMK Transcript

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Earnings call transcript: Aramark Holdings beats EPS forecast in Q2 2025

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The earnings call summary and Q&A session reveal several positive indicators: record revenue, strong international growth, and improved operating income and margins. The company is effectively managing supply chain challenges and inflation, and anticipates double-digit revenue growth in upcoming quarters. The $500 million share repurchase program and partnership with Michelin-starred chef Daniel Boulud are additional positives. However, competitive pressures and regulatory issues pose risks. Overall, the positive elements outweigh the negatives, suggesting a positive stock price movement over the next two weeks.

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