Aramark (ARMK) Earnings Call Transcript & Summary

All right. Good morning, everyone. Thanks so much for being here. I am incredibly excited for this next session of our Global Retail and Consumer Conference with Aramark, which has so much going on. I feel like we're going to pack so much into this next 35 minutes. But my name is Lizzie Dove. I cover gaming, leisure lodging here at Goldman. And it's my pleasure to have here Jim Tarangelo, Executive Vice President and CFO of Aramark; Pat Liebler, CEO of Nexus, and we have Felise Kissell here in the audience, too, Head of Investor Relations and Corporate Development.

So welcome, Jim and Pat, thanks so much for being here. And Pat, I think this is your debut with Wall Street Investors. So very, very excited to hear all of what you have to say about Nexus, which we'll get into very shortly. But maybe just to start off, if we kind of just step back and see Aramark today, it feels like broadly is growing faster, retaining clients at a higher rate. Margins are kind of firing on all cylinders, a lot of new contracts that you've been winning. And that's before we even talk about Nexus, which we absolutely are going to talk about. But what do you think has kind of structurally changed over the last few years when it comes to the core business? And how sustainable is that higher growth algorithm?

Well, it's a culmination of years of work after the company implemented a new transformation toward a growth-oriented model and really reigniting the hospitality culture that always existed in our DNA. With that, we implemented a number of specific actions to enable that. We realigned the incentives for the organization where growth, composing of both new business wins and retention is a significant part of our incentive-based comp. We decentralized the organization. We made sure we had seasoned leaders with extensive industry experience, like Pat here on my left to be running those businesses, and we invested significantly, nearly doubling the size of our growth and retention organizations as part of that as well. And with this growth model firmly in place, we've been delivering the results that you've seen. And we think that the elevated retention levels, record levels of new business, double-digit underlying growth that we've seen, we do think is very much sustainable.

Definitely. And just on the core business as it pertains to the U.S., it feels like things have really been firing on all cylinders this year to use that phrase again and really on track this year with kind of momentum really across the board. What are you seeing overall in terms of demand? Are there particular kind of subsegments or industries that have been driving that? Or how would you categorize the U.S. overall this year?

Yes. I mean the good news is that growth is broad-based across really all the sectors within the U.S. portfolio, the retention levels, the new business wins and base business, which is our term for same-store sales has remained robust throughout the U.S. portfolio. The businesses that have been growing very rapidly, including B&I, which includes refreshment and micro markets -- this is Pat's, usually, has grown double digits now for 20 or 21 quarters in a row. Our sports business -- 21. He is counting, Pat. Our sports business and entertainment business continues to show very strong growth as well with a really good performance of the playoffs, the World Cup, underlying performance of Major League Baseball in the third quarter. And now on top of that, I think it is really the exciting thing, 2 of our larger businesses, health care and collegiate hospitality, which is our higher ed business, have really accelerated their growth as well. In health care, we've had 2 of the largest wins in the company's history with Penn Medicine last year and RWJBarnabas this year, and that's ramping up. So we had double-digit growth in health care. So that's really the some of the key contributors to the U.S. growth accelerating.

Yes, makes sense. So let's maybe move on to Nexus, which has certainly been highly topical over the last 6 months to say the least. And the kind of speed of progress has been astounding since you only announced it just a few months ago and already you have multiple sites in mobilization and planned in another announcement today, which we'll get into in a little bit. And so Pat, maybe you can start with the basics for us. I mean, firstly, for those not familiar, maybe you could take a second just to kind of give a little bit of your history with the company. And then for anyone that's not familiar, what -- can you explain what exactly Aramark does for a data center site or a colocator? And why is a hospitality company the right partner in these types of segments?

Yes. So I've been with Aramark now 20 years, spent the last 5 as President and CEO of Aramark Refreshments and was given the opportunity to lead Nexus about 6 months ago. It's been in the works about a year that we've been talking about what this is going to look like. But we're excited about change in the industry and what's happening. So you think about what typically was known in the oil and gas business as land camp or man camps. We really have intended and have begun to bring an elevated service when it comes to hospitality. So when you think about on-trend food concepts and hotel-like amenities, activities similar to what you see at colleges and universities with intramural-type sports, wellness centers, fitness centers, will be golf courses, really to create an environment for those who are building these data centers, which are being tasked to build at a high rate of speed and quickly to really make sure that they are feeling comfortable and appreciated when they go back to their place to live at the end of the day. And our focus is really driving that experience for them and really, again, I would say, setting us apart. So we've kind of shifted that mindset from what was, hey, we just want a hot food option and a place for somebody to sleep to really creating an environment for a person to live on a day-to-day basis. It's important for a couple of reasons. And the biggest one is statistics are saying that the country will be short about 500,000 skilled laborers by 2028. So the competition for those skilled labors, whether electricians, plumbers or whatnot, is going to be key. So it's important for the speed at which these data centers are to be built. It's important to make sure that the hyperscalers are bringing the best people and giving them the right environment to work within to be excited about coming in. And the other statistic that we're excited about and being able to impact day-to-day is statistics will say 68 -- an employee who is satisfied with their workforce community, their housing environment, where they eat, where they sleep, is 68% more productive. So we're tasked with bringing that level of satisfaction to the community, to the data center to make sure that they're building up the speed they are. So if you can't tell, I'm excited about it.

Yes. No, it seems great. It definitely is very premium, very elevated experiences, so definitely differentiated there. And I'm curious, when we think of the TAM, one of the top questions I get is like what is this addressable market over time? And also more specifically, what is Aramark's realistic kind of share of that? And so how do you think about that? And has that changed even over the last 6 months as you've been kind of going through this and seemingly winning a lot of contracts in the process?

Yes, I'll kick it off. I mean we know it's an enormous market. I think your research shows $40 billion to $50 billion in market size. I think it's probably larger than that to some estimates at $100 billion market. So Aramark is well positioned. Very few players have the size and scale that we do. And to be able to roll this out in sort of a first-mover advantage positions us very well to sort of capitalize on that. We've announced a number of significant wins already this year. But there's no reason this can't be a $2 billion to $3 billion business over the next few years that we think about the size.

Yes. No, it's very impressive. And even just this morning, it was great timing. I was happy we're doing our fireside today because you just announced that you've been selected as the premier hospitality partner for another workforce community at a new data center in Texas. And my understanding, correct me if I'm wrong, is this is a completely new client. And in the press release, it says there's opportunities for more. So could you maybe just talk a little bit about that? This was news to me this morning, so I'd love to kind of hear more.

Yes. So when you think about the ways to penetrate the opportunity, really come through -- directly through the hyperscaler, through what is a colocator land developer and this latest one through housing partners. So this housing partner opportunity partnership that we were talking about this morning is where they had brought us in a lot of the hyperscalers will delegate the responsibility to find hospitality providers to the general contractor through the colocator and/or the housing company. So they tapped into us hearing about our expertise and what we're intending to do in this space and have given us the opportunity to partner with them. So what we're excited about is the -- like I said, the areas to penetrate the opportunity really are coming in different buckets, and we feel pretty bullish on where we sit in each one of those and how we're tackling it.

Yes, definitely. And at least last earnings, maybe this has changed with this new contract, but at least last earnings, it was -- you talked about a $400 million to $500 million opportunity ramping through 2027 and 2028. And so when you think about that number, what are the kind of biggest variables of where -- what determines where you hit within that range? Is it just number of sites or if they get upside? Is it timing or pace of construction or what quarter they open? How do we kind of think about the variables within those?

Yes. I think just again, to level set on the earnings call, we talked about sort of 3 sites, 2 related to the hyperscaler and the third related to the colocator that are in various stages of mobilization, one where we're actively serving meals today. Each of those 3 sites represents about $150 million of annualized revenue. So that's sort of the $400 million to $500 million we referenced on the call. The new win today is still developing, but likely larger than $100 million as well. So exciting news for us, ramping up probably in the first half of calendar year '27 and maybe sooner. So with that, we have this active annualized development pipeline sort of in the $450 million to $550 million range. A portion of that obviously being recognized in fiscal '27. So that gives you a sense for the overall trajectory.

Yes. And one thing I thought was super interesting on the last earnings call, you said that those initial 2 of the contracts, I believe it was, the scope of it had increased by 40% in terms of the revenue that you were going to be ramping up to that. Could you maybe talk more in detail about what exactly kind of drove that between your first estimate and then how that has kind of increased over time?

Yes. It really comes down to beds and the number of workers that are on site. So as these businesses ramp up, the need for more workers given the size and scale of these facilities. In addition, additional service amenities, as Pat said, they're looking to make sure they get a premium experience, a combination primarily driven by more beds and more residences at the camp is the main driver for the increase in the outlook as well as additional services that they're asking Aramark to perform.

You think about the schedule itself, it's -- that drives a lot of what happens. So once things are in a position to move forward. What isn't changing is the end date. The end date is they still want it done. They want it done as fast as possible. So in the case that you're referencing on the increase, it was more about, hey, we've got to accelerate the growth of this to make sure that we're ready. So they doubled down on the speed at which they were going.

Yes, makes total sense. And the other thing I think that's so appealing about this new segment is it seems like from what you said, the margins are just structurally higher than the existing kind of core Aramark business today. Could you maybe share more about why exactly that is? Is it something structural about it, the scale, the scope of services, the labor productivity? I'd love to hear more about why those economics are more attractive than some of the other segments.

Yes, I'll start with the economics. Pat will comment on how we differentiate our services. But you're right, these are primarily structured as what we call fee contracts, which are cost reimbursable with margins higher than the Aramark margin in particular. It's a low capital intensity, capital-light model as well. So that leads to a nice return on these projects as well. In addition, the working capital is generally more attractive than the remainder of our business. So it's a nice economic proposition. For us, it's really -- Pat can comment, it's the elevated premium complexity of these projects where the providers want to make sure those employees are being retained and being offered really top-tier products, which allows us to have those margins higher than the average.

Yes. I mean cost is always obviously important. That said, what's more important today is having the boots on the ground to build the data center. So in order to do that, we have to build the right experience. And that's what we're doing, and that's how we're looking at this. So that warrants them to -- for us to get the fees that we get to provide that level of service and really be differential. So that hyperscaler can say, "Hey, you come work at this site, here's the amenities and services that you're going to get, and it will be drastically different than what they're used to.

Yes. And I think one of the things you kind of touched on it earlier, the beauty of this is the opportunity in the TAM is so large. But also even despite that, you've kind of been the first mover. To me, it feels like you certainly have a lot of experience with these kind of remote sites with what you do in Chile with the mines and whatnot. But so could you talk to me about that and how you think about the competitive environment and why kind of Aramark is positioned to take its fair share or more than its fair share.

I'll start. I mean, just given compared to some of the smaller players, which historically really focused more on the lodging and infrastructure part, just the scale we have, right? Aramark spends over $20 billion of spend that we manage. And historically, that spend -- remember, rooted in Avendra, which is a hospitality-focused organization. So all the things that Pat is procuring is something that we're sort of market leaders in doing. We've been really experts and leaders in rolling up large complex projects in general. We've operated 17 Summer Olympic Games, gives you a sense of the scale and the capabilities we have. Within North America, we're a leading provider in destinations and leisure. We operate 1,000 people, 10,000 feet up in the mountains at Yosemite National Park. We're a leader in remote services, which means the mines in Chile, the tar sands in Canada. So that capability to lead large complex projects, right, in an expedited time line, often in the middle of nowhere at the scale that we have, I think, is a key differentiator for Aramark. On top of that, this is something we've been working at for over a year now with this opportunity publicly announced sort of a few months ago with Nexus. It's a complex market. So unlike maybe traditional B&I, where it's clear who the buyer is here, this complexity actually leads to the first mover having even more advantage in working out the routes and building up the sales organization. So that positions us particularly well.

Yes. And standing up Nexus as its own line of business was clearly the right thing to do because you take a company celebrating 90 years right now this year in hospitality, but through facilities, through hotel, through our amenities, through our sales, we were able to build and find the best from each one of those lines of business to bring in under one umbrella. So it's not where you're being asked to deal with 4 or 5 different CEOs and driving the strategy. It's really one strategy, bringing the best expertise and tap it into Aramark, which is, again, that's making us from a competitive advantage is really important. And the biggest one is scale. I mean the conversations that we're having, it's inevitable that the question quickly becomes how fast can you scale and how many can you do? And that's what we're focused on. And that answer is comforting to them knowing that we've got the backing of a company like Aramark.

Definitely. And I guess with some of the ones that you've announced, they have many more projects kind of in the pipeline, and so you kind of have that as more share to go after over time. I want to touch on what do you think about the risks for this. I started to get questions just on the politics of AI and data centers and some of the kind of moratoriums that we've seen put out there. Could you kind of help us just separate like back from fiction here and how you -- what you think of this and how it impacts Aramark, if at all?

I'll start. Sure. I think if you look at the computational needs of data centers, that will continue and that will advance regardless of sort of there's sort of maybe a sort of slowdown in how we develop the algorithm. So yes, what we're seeing on the ground is the continued advancement of these projects. There's going to be a need for these data centers that are likely going to continue to grow in terms of size and scale. We've -- the first few sites that we're launching are in Texas and Wyoming, generally states that are conducive to data center expansion. Even within Texas, there's some talk of a moratorium. That's only for new projects that are tapping into new electrical needs that might disrupt communities. Our projects are already approved and progressing from there. So I think the reality on the ground is that there will continue to be an enhanced need for data centers and hyperscalers regardless of whether there's a slowdown in sort of how those algorithms work, and they will continue to progress.

Makes sense. And so when I kind of put all of this together, it sounds incredibly exciting over the next few years. And so there's -- you've already been doing this very successful algo of, call it, 5% to 8%, 6% to 9%, whatever you want to call it, of the core business in terms of organic revenue growth. Now you're going to be exiting this year, I believe, in the -- somewhere in the low double digits, and that's before a lot of these kind of new projects have ramped and you keep adding more. And so does Nexus structurally change this long-term algo? I know this is early to be asking, but I'd love to high level hear your thoughts on it.