ARMK - NYSE

Good morning, and welcome to Aramark's Third Quarter Fiscal 2025 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. [Operator Instructions] 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.

Thanks, Felise, and thanks to all of you for joining us today. This morning, Jim and I will review our third quarter performance, which reflected record revenue for any quarter in Global FSS history, along with record profitability in a third quarter resulting in adjusted EPS growth of nearly 30%. We will then turn to our expectations for the fiscal year with just 1 quarter to go. Since our last earnings call, we have achieved a number of significant milestones for the company, including, first, we were recently awarded one of the largest new client wins ever in terms of revenue, specifically within Sports & Entertainment, in addition to winning several other high-profile accounts. Second, we maintained our unprecedented client retention rate now exceeding 97% in both FSS U.S. and International. And lastly, we continue to position ourselves to exit this fiscal year above our long-term revenue growth expectations. In the third quarter, Aramark's revenue grew to $4.6 billion, representing an increase of 6% with slight FX favorability. Organic revenue increased more than 5% driven by base business growth and contribution from new client wins. Notably, this was the last quarter where the prior year Facilities account exits affected revenue, as previously disclosed. Moving to the business segments. FSS U.S. organic revenue increased to $3.2 billion or over 3% in the third quarter, led by strong performance in workplace experience and refreshments from higher participation rates, new client wins and additional micro market and vending services; Education, which benefited from additional volume and meal plans and a calendar shift within Collegiate Hospitality; Sports & Entertainment from higher per capita spending in Major League Baseball stadiums and sizable new business in Corrections. This growth more than offset the Facilities exits and less activity at arenas, primarily from the timing of concerts. Revenue growth would have been more than 2% higher if not for these factors. The U.S. segment is experiencing strong success from the team's strategic focus in driving vertical and cross line of business opportunities. By leveraging the synergies across our diverse portfolio, we've unlocked additional revenue growth. A great example of this effort is the partnership between Collegiate Hospitality and Sports & Entertainment within Collegiate Sports. This upcoming college football season, we will be delivering exceptional food and beverage experiences now at 34 Division one stadiums, serving nearly 2 million fans during every home game weekend. Last week's announcement about our partnership with the A's, as they move to Las Vegas is very exciting, taking ballpark foodservice to the next level and represents one of the largest wins in the company's history. Our ability to have Will Guidara, the acclaimed restaurateur and author of Unreasonable Hospitality on our team is groundbreaking. Aramark will be taking minority ownership interest in the A's franchise, deepening the relationship and underscoring a shared commitment to innovation, hospitality, and building an iconic fan destination in Las Vegas. Our new sales pipeline remains robust across the business. Most recently, we were selected by Howard University, a leader among Historically Black Colleges and Universities, to implement a transformative new campus vision called Howard University Hospitality. This collaboration marks a significant step in enhancing the campus experience through culinary innovation, cultural celebration, and community empowerment and increases our growing HBCU presence as we now serve 15 of these historic academic institutions. Additional new business includes expanding our long-standing partnership with Citi in workplace experience, the Dorchester School District and Academy School District in Student Nutrition as well as Marquette University and Facilities. There is extraordinary momentum within FSS U.S. and we expect to capitalize on the many opportunities ahead. Once again, International delivered double-digit organic revenue growth, increasing 10% in the third quarter to $1.4 billion. Every geography experienced growth led by the U.K., Chile, Canada, and Spain driven by net new business and base business growth. Our team in the U.K. made Health & Safety history this quarter by becoming the first foodservice and hospitality company to win the prestigious Royal Society for the Prevention of Accidents, Sir George Earle Trophy, the Society's highest honor and a testament to our unwavering standards of excellence. Aramark U.K. also received the coveted Hotel & Catering Industry Sector Award, reflecting our strong leadership, innovative workforce and a relentless focus on continuous improvement across client locations. We recently concluded our International Chefs' Cup in Shanghai, China which, after a year of in-country competition, recognized our global culinary talent and celebrated the winning chefs from each country. Our Aramark chefs from Chile took top honors. In the third quarter, Aramark Chile also hosted its Annual Innovation Summit, featuring some of the industry's most innovative solutions, providers and thought leaders. Over 1,000 attendees across multiple industries experienced the latest innovation in hospitality within mining, health care and facilities management, among others. More than 100 unique capabilities were presented this year, including nearly 50 technology-driven advancements focused on enhancing the client experience. Similar to the U.S., we continued our strong success in new business wins throughout the International portfolio, which excluded expanding -- which included expanding our presence in Germany with the addition of Westpfalz Kliniken Healthcare, Samyook Seoul Medical Center in Korea and Valencia CF, a top football club in the Spanish La Liga League, with the team entering a new stadium, Nou Mestalla, with capacity now exceeding 70,000 fans. Our International seasoned -- our seasoned International team has been a competitive advantage through aligning strategic priorities, partnering across borders, thoughtfully building scale and implementing best practices. Turning now to global supply chain. We're effectively managing the tariff environment and continue to believe our business model is well insulated from any heightened volatility. If there is a broader market change, we will implement sourcing alternatives where appropriate to benefit both our managed services business as well as GPO clients. Global inflation remains around 3% for us as we anticipated. We're focused on GPO expansion and are aggressively pursuing opportunities to build upon our double-digit growth. This strategy includes investing in international geographies to increase our current footprint with multinational clients and others. We recently introduced additional AI-driven technology and supply chain with expanded contract intelligence capabilities. Beyond client spend insights and back-office efficiency tools, we now have automated agents that power next-generation contract intelligence. These agents enable our sourcing team to instantly synthesize supplier requests, compare them to contract terms, assess compliance and opportunities as well as generate responses within seconds, delivering unmatched efficiency and visibility across our global spend and sourcing processes. Our supply chain optimization strategies have driven significant incremental value for our clients and the company. Lastly, we continue to advance our disciplined capital allocation strategies, which Jim will review in more detail, benefiting from a strong and flexible balance sheet designed to maximize shareholder returns. Our commitment remains focused on strategic investment in the business to drive and propel growth, ongoing debt repayment expecting to reach leverage around 3x by the end of this fiscal year and even lower thereafter, paying quarterly dividends and utilizing excess cash generation to opportunistically repurchase Aramark shares. In summary, I'm proud of what we've achieved at the company and firmly believe there is tremendous value-creating potential in the business going forward. I'll now turn the call over to Jim.

Thanks, John, and good morning, everyone. As John mentioned, we had another record-breaking quarter, reflecting the commitment to our strategic priorities and focus on operational execution across the organization. We delivered strong growth in both revenue and profitability, reinforcing the power of our business model and our ability to consistently create value. We are well positioned to build upon this business momentum. Regarding third quarter profit growth, Operating Income was $183 million, up 13% versus the prior year period. Adjusted operating income was $230 million, up 19% compared to the same period last year, and AOI margin increased 60 basis points. The strong profit growth and margin expansion resulted from higher revenue levels, expanded supply chain capabilities and disciplined above-unit cost management. Turning to the business segments. The U.S. reported AOI growth of 16% with AOI margins increasing more than 60 basis points compared to the same period last year. Profitability growth and margin expansion were driven by higher base business volume, effective above-unit cost management and supply chain efficiencies, including leveraging AI-driven technology for purchasing compliance and contract productivity. Profitability growth in the U.S. was led by the Education and Business & Industry sectors. AOI growth in the U.S. would have been even higher in the quarter, if it not for some additional medical expenses. The International segment had AOI growth of 11% with margins up slightly year-over-year on a constant currency basis. AOI growth was a result of higher base business volume and strength in supply chain economics, which more than offset labor expenses from additional observed holidays in the quarter, including in China, and the prior year benefit from the Men's European Football Championships in Germany. International AOI growth was led by Chile and Canada. In addition to leveraging AI-driven technology and supply chain, we're also continuing to integrate AI across our core operations from dynamic menu planning to labor management, enhancing speed, accuracy, and scalability. Developing these additional capabilities is unlocking productivity while enabling our teams to focus on client innovation and engagement. These efforts have delivered greater value to our clients as well as driving efficiency and profitability throughout the business. Turning to the remainder of the income statement. Interest expense was $86 million in the quarter and the adjusted tax rate was approximately 26%. Our quarterly performance resulted in GAAP EPS of $0.27 and adjusted EPS of $0.40, an increase of nearly 30% versus the prior year, demonstrating our focus on profitable growth and operational execution across the organization. With respect to cash flow, the company generated cash inflow from operations in the quarter, consistent with our normal seasonal business cadence. Net cash provided by operating activities in the third quarter was $77 million and free cash flow was a use of cash of $34 million. This performance reflected stronger net income as well as increased working capital and capital expenditures from growth in the business with CapEx still running at approximately 3% of revenue. As always, we expect to generate a significant cash inflow in the fourth quarter, primarily from our Collegiate Hospitality and Sports & Entertainment businesses. During the third quarter, Aramark proactively repaid approximately $62 million of Term Loan B due in June 2030 and repurchased approximately $31 million of its common stock. Since the authorization of the company's share repurchase program in November 2024, Aramark has repurchased nearly $4 million of its shares for an aggregate purchase price of approximately $140 million. We will continue to proactively enhance our capital structure, focusing on optimal returns for shareholders. At quarter end, the company had over $1.4 billion in cash availability. And finally, let me wrap up with our performance expectations for the remainder of fiscal '25. We are seeing very strong business momentum from our prominent new client wins, to expanding base business volume, to client retention rates exceeding 97% across both FSS U.S. and International. The sales pipeline continues to be broad-based and first-time outsourcing remains elevated. Revenue performance in the fourth quarter is expected to benefit from this acceleration with ongoing base business expansion and net new business across all sectors in the FSS U.S. segment and every geography in the FSS International segment. Additionally, we are pleased with the continued expansion of our profitability and the consistent execution of our key operating levers, including supply chain capabilities, operational cost management and the majority of new business. As John mentioned, we are effectively managing the current tariff environment. With our extensive capabilities and diversified portfolio, we remain confident in our ability to effectively navigate the broader marketplace. With that, we continue to anticipate our previously stated financial performance outlook for fiscal '25 based on the expected timing of commencing operations from new business, including certain large clients. As you know, our fourth quarter contains an extra week or a 53rd week. In summary, we're pleased with our performance this quarter, delivering strong results, securing major business wins and maintaining exceptional client retention rates across our portfolio. These achievements reflect the strength of our operating model and the dedication of our team. With continued discipline and focus, we remain highly confident in our ability to deliver long-term value for our shareholders. Thank you for your time this morning. John.

I'm immensely grateful for our employees across the globe who are creating our accelerated business momentum heading into the fourth quarter and beyond. Thank you, everybody, for your participation. And operator, we'll now open the line for questions.

[Operator Instructions] Our first question comes from Ian

So I want to ask you guys, great job on all the new business wins. Maybe, John, can you give us a perspective on kind of the revenue acceleration expected in the fourth quarter? Maybe help us understand like the sequencing of all these big wins that have been awarded and expect to achieve. Any other kind of flow or color you could give us would be helpful.

Sure, you bet. Jim and I will both comment on this. First off, we're off to a very strong start to the fourth quarter. We're very comfortable with the implied ramp that's projected in the guidance. So let us just reiterate that we have a very strong belief in our ability to hit the guidance as we've projected, and we feel like we're in a very good position after the start of the fourth quarter. So there are a number of new contract wins that will be coming online. School districts obviously begin operation in August and in September. The Collegiate operations that we've sold this year begin operations in August and September contribute significantly to the year-over-year variance and growth trajectory. So I would say we're very comfortable given what we see in the business, what we've been able to achieve with the run rate in terms of new account sales and net new business and with the high retention rate. Coupled along with normal pricing activity, we are very comfortable with the implied ramp that we've described.

Yes, John, I'll just echo that sentiment. And again, obviously, the sort of 5.5% organic in the third quarter is prior to the 2% lapping of the Facilities exit and then, on top of that, all the items John just mentioned. In addition, if you think about the Major League Baseball outlook, we have a number of teams that are -- the playoff hunt performing very well. So we're expecting continued solid performance with respect to our sports business and base business acceleration as well.

And then if I could just ask one more question. Just on the events business, what exactly happened? Were there cancellations? Did things just get pushed into the following quarter and then we expect a bigger quarter coming up because of events being pushed out? Or is this just sort of lost business? And how much actually did events -- how much of a headwind was that of the 2%, right? Because I know you're combining Facilities exits with events. So I was just wondering if you could disaggregate that for us, too.

Sure. There are a couple of areas that were affected, particularly in the arena business, a lower level of concert activity that was not projected and renovations in one of our facilities, particularly the Verizon Center, which was down for renovations and wasn't able to get booked and scheduled during that time period. We actually expected it to come up a little bit faster than it did. And then last year, you may remember we had the DNC at the -- in Chicago. And so our Allstate Arena had significant operations last year that didn't repeat this year. So it was just a little bit of a drag, not something that we would think was significant but in the long term and really not pushing it out to the next quarter. It's really just business that didn't -- that we anticipated would occur, but did not.

Our next question comes from Leo Carrington with Citi.

So I may first ask on the A's contracts. Some press outlets reported that you could be making an equity investment. If so, do you see co-investment as potentially increasingly a norm with these types of deals? And is that investment reflected in the contract duration or sort of other attributes of the quality of that deal? And then secondly, I noted that you're looking at an acquisition in the U.K. of Entier catering. Can you outline the appeal of this and potential scale? And more broadly, as you are now deleveraging and buying back shares, is M&A becoming increasingly a focus for you in terms of capital allocation?

I'll start with that last question with respect to Entier. Again, this is a relatively small bolt-on acquisition in our offshore oil remote services capabilities in the U.K. On M&A overall, this was a little bit elevated compared to the prior few years. I mean, and recall we executed the Quantum acquisition, which is a proactive deal we had targeted for many years in the GPO space, one of the larger remaining independent GPOs in Europe. So -- and again, while that deal comes with, it was the largest in terms of the consideration for our M&A spend comes with relatively low revenue. So if you sort of exclude Quantum, I think that we're -- basically the normal track is $150 million to maybe $200 million of M&A spend per year, consistent with where we were in prior years. Do you want to comment on the other question?

Yes. And I would just add to that, that we don't expect M&A to be a more significant part of our approach to growing the business. Our primary approach is organic growth, but we do opportunistically look at opportunities when they present themselves in certain segments to either bolt-on additional capabilities or increase scale in countries where we're already operating. So I wouldn't look at M&A as being a more significant part of our capital strategy going forward. It should be relatively consistent. With respect to Entier, as Jim said, a relatively small bolt-on, not material to the company in any meaningful way, obviously, brought some additional scale in the North Sea. And we remain committed to getting that deal closed. We'll work through the Phase 2 process. And if remedies are needed, we'll figure that out. But again, even if we weren't able to close the transaction, it's not material to the company's operating results or strategy in the long term. With respect to the A's, yes, we did make them a small investment in equity in the team. That's not our preferred approach, but it's something the team felt strongly about and we were willing to do given the unique nature of the stadium and the build in Las Vegas. And so we did make that decision to move forward with a small equity investment. As you know, we've had equity investments in other teams before, the Red Sox being one of them that was probably most significant, the San Antonio Spurs, Pittsburgh Penguins at one time. So it's not unusual for us to making investments and ultimately monetize those later. We've always done extraordinarily well when we've monetized those investments in the future. Our contract is not tied to that equity investments, and we have flexibility with it. So again, not our normal practice, but one we were pleased to do because we really believe in this partnership with the A's and in the future of that Las Vegas opportunity.

Our next question comes from Shlomo Rosenbaum with Stifel.

John, can you just comment a little bit about how the selling season played out in the Education segment? Because we should be pretty much done over there. Was it better than expected, as expected? How should we think about the education revenue growth going forward based on what you're seeing over there. And then I'll just throw in my second question right now. Just the retention has been very high. And could you just talk, is that the proactiveness that you guys are doing in terms of servicing the customer? Are you having to be more competitive on your pricing in order to achieve this retention? Is it some kind of combination? Maybe you could talk about that as well.

Sure. I think Jim and I will both comment on those. First of all, the education selling season is still underway, believe it or not. We still have contracts we're working to sign and close with anticipated openings a little bit later this year. So we feel very good about the results. Obviously, I feel very strongly about Howard University. We'll be making an announcement soon about another significant win in Loyola Marymount and many, many others. So the teams had a very good selling season in the higher education sector. And in K-12, they've had a very successful net new business year as well. So we feel very good about the overall growth to both segments of the Education and Business, and both had very strong retention rates as well. So overall, very good net new business results for Education. With respect to retention, it is an absolute everyday focus of the company. We're all engaged in it, proactive retention of our existing clients, so working together with our customers to improve services, to create great value and to continue to build partnerships and relationships that allow us to operate that business for a long time to come. We don't use pricing as a lever. We don't use investment as a lever to retain business. We do it on the basis of our performance and on the basis of our relationships with our customers, and we're proud of what we've been able to achieve. It is part and parcel. Net new business is part and parcel to the incentive compensation structure in our company. So all of our people from the operators in the field, all the way to senior leadership are [indiscernible] to do a great job on net new, which implies retention in the equation. So it's a focus. And we feel very good about the results, but we're always striving to do better.

Our next question comes from Andrew Steinerman with JPMorgan.

This is Alex Hess on for Andrew. Just wanted to dive in a little bit more to the implied fourth quarter organic revenue acceleration which, even if you strip out the extra week, it still looks like it's something like up 9% year-on-year, at the low end of the guide. And how you -- what sort of gives you confidence? And sort of I'm asking you guys to be as specific as possible as it is with respect to the base business, new business, and retention drivers of the fourth quarter growth rate. Clearly, we just exited a quarter where you guys were doing a bit stronger at the start of the quarter. I think you guys had said up 6% in April, then you guys ended up for the quarter and there were some sort of unreal -- or unexpected items during the quarter. So just trying to see like what sort of visibility you have and sort of -- any sort of specificity you can give us around the -- what gives you such a conviction in the revenue guide that you guys have out today?

Yes, Alex, good morning. l'll start again in terms of just some of the -- in the math, right? We're running about 5.5% organic in the third quarter. Adding 2%, you get to about 7.5% sort of as your starting point. As John mentioned earlier, July was the strongest print we had in terms of growth. We saw a significant acceleration in the U.S. business. On top of that math, we have rolling out a number of large accounts, including Howard University in the Education sector, Everton over in the sports in the U.K. We have elevated retention rates that are running higher than what we would have planned for the business. We've seen the base business pick up already, particularly in the sports business, as I mentioned, a number of teams -- handful of teams that are in playoff contention with good revenue trends and good attendance trends on top of that. So I think we have a pretty good line of sight to the path, and those are the key factors driving it.

Yes, I would just add, as I said, we're off to a very strong start after July. That gives us a high degree of confidence in achieving that ramp that you just described at the rates that you described. So as Jim said, very high retention rates. Keep in mind that retention in parts of our business like K-12 and higher education is felt most in August and September. Those accounts that we did not lose impact our results more effectively in those months in the new business, the net new business comes on. So a very high retention rate is most impactful in August and September in those lines of business. Then you have pricing that gets layered in, in the K-12 and higher education sector in the fourth quarter as the new terms begin and you have pricing that accelerates in the Corrections business as well. So all of those individual discrete elements add up to the trajectory that we've described and give us a very high degree of confidence in our ability to hit the numbers that we've outlined.

And just to clarify, because the fourth quarter implies such a wide range of outcomes both sort of on implied revenue growth step-up and margins, can you maybe give us a little bit of color on how you guys are how -- how July was and how you guys think the margin might progress in 4Q?

Well, I think we've given the full year guidance. I think that's where we're going to leave it. We have a strong belief in our ability to hit that full year guidance. And so I don't think I would add more color on the margin or profit side at this point. Only to say that, again, we've reiterated the guidance, we believe in it, and we're off to a strong start in July.

Our next question comes from Toni Kaplan with Morgan Stanley.

First, I wanted to ask about where you stand with the Universities and their sports teams. I know there's a really big opportunity for cross-sell across those different pieces of sort of a similar customer base. So I wanted to see if you've been making any progress there or how that stands right now.

Yes. As I mentioned in my comments, we will be operating at 31 Division 1 schools this year and obviously, in a lot of D2 and D3 schools as well from an athletic perspective. So it's a very strong business for us. We've established leadership that's focused on that business, and we've got a great partnership between Collegiate Hospitality and our Sports business to really bring the right talent and execution to bear against those initiatives. As you can guess, some of those Division 1 schools produce more revenues on a game day basis than some of our pro teams do. So it's a significant focus for us. Moving forward, we expect to continue to grow that segment, and we clearly are the leader in it now, and we'll be continuing to build it.

And then wanted to ask about the recent Fenway Park strike. I think there was part of the situation where employees were concerned about the automation advancements in the park impacting their compensation. And I was wondering, just broadly, would you expect to be -- this to be a continued issue across sports in particular, or some business lines, where if you do have sort of more efficiency from automation but it does sort of impact the labor, especially I think there's a little bit more unionized labor with the sports segment, should this potentially be a labor disruption issue going forward in some cases and how to deal with that?

Yes. That's a great question, Tony. First of all, I would say that historically, as we've implemented new systems and new technologies across the Sports & Entertainment business that we see it as a way to enhance customer service and customer throughput. We don't see it as a labor reduction strategy. What we want to do is improve the fan experience so they're not waiting in line while the game is going on. We want them to get to the stands and to be able to transact and be back in their seats to see the action, if you will. And that's what the teams want to have happen, and that's what we would like to have happened. And frankly, it's what the fans want. So as I said, we don't see it as a labor reduction strategy. People -- we haven't reduced significant numbers of employees as a result of deploying technology throughout sports. And so I really don't believe that, that is a significant issue facing us going forward. I think we'll work very carefully to resolve the concerns of the workforce at Fenway. We're actively engaged in good faith negotiations and we'll find a way through as we have many times before. And -- but we are fully prepared to operate in the face of what could be a labor action. So our commitment is to be there to service the fans and the team and we'll do that. But I think the technology implementation is, as I said, not designed to reduce labor, but designed to enhance the fan experience. And if you've been to Fenway, you know that, that is a park that is aged. It's difficult to move around. All we want to do is get the fans back in their seats a little bit faster and let them enjoy the game.

Our next question comes from Neil Tyler with Rothschild & Co and Redburn.

Two from me, please. Firstly, when we think -- I mean, you obviously made some confident comments around retention and your net new medium term. Is there anything preventing us from thinking about that -- those comments around net new as the sort of blueprint, if you like, for the in-year contribution in FY '26? I'm not asking you to give us revenue guidance for FY '26. But in terms of the sort of timing of how that lands, so is there anything that would prevent that from being the case? And then secondly, around this year's guidance, you've obviously added those comments around commencement of contracts and the sort of dependency on those. But equally, you've expressed confidence in the momentum you're enjoying in the fourth quarter. So is the -- I suppose, is the sort of caveat, if you want to call it that, around the commencement of contracts really just -- I suppose, the influence that's preventing or that leads you to potentially not be able to narrow the range at this stage?

Yes, I think that's a good point, and Jim can comment on this as well. I think we do have a range of outcomes, and the range is a little bit wider than normal as a result of anticipated activity in potential new account start-ups that could drive us to higher levels of the range. And that could also impact the AOI range as we open those new accounts and experience the opening costs associated with them. So as I said, we're confident in the range, and that's why we've reiterated the guidance. There are a few puts and takes with respect to the revenue side and there's a few puts and takes potentially on the AOI side depending upon the speed and rapidity of new openings, some of which could be very impactful in the long term. So some big opportunities in the pipeline that we're hoping to close here in the fourth quarter. And so it's an exciting time. We feel very good about our prospects and we feel very good about delivering the guidance as we've talked about.

Yes, I'd just add in terms of the -- you talked about the sort of multiyear targets and the run rate headed into fiscal '26. We're not going to give a guide for '26. But absolutely, I think the -- we're positioned for these really high net new potentially on pace for record net new for the company and some of the larger wins we've had more weighted towards the second half of the year. And as John mentioned, there's a couple of large ones outstanding that we hope to close over the next couple of weeks. And if things go as expected, we could be positioned to certainly be at the higher end of that multiyear growth rates. And as we said, exiting the year at this higher end of that range.

Our next question comes from Karl Green with RBC Capital Markets.

My first question is just about the fact that you called out the profitability improvements in Education and B&I in the U.S. Could you just remind me how the profitability in those divisions is tracking versus fiscal '19 before all of the lockdowns? And then notwithstanding the drag from new openings in the short term, what you think the potential in those divisions is from here, please. And then the second question, much more straightforwardly, perhaps I missed it. Could you just indicate what the per cap spending increases were in the U.S. in Sports & Leisure?

Sure. I'll take the per cap question first. Per capita is in Major League Baseball are running ahead of our expectation. What drives Revenues and Sports is attendance and per capita spending. Per capita spending, very strong. Attendance in those teams that are performing well, very good, meeting expectations. We do have a couple of teams that are struggling in terms of their records. Obviously, their attendance is impacted. But on balance, the portfolio performing very well. So I feel good about the consumer, their level of spending, and the per capita spending continues to support very strong results. So with respect to the margins in those business from '19, I think they're actually outperforming. But Jim will comment on that.

Yes. In terms of the question on education, I think at this point, compared to '19, both K-12 and higher ed, the revenues are significantly above where we were in '19. On margins, overall, I think in the U.S., we're approaching -- we were in '19 as we've talked about. We've had to make significant investment in terms of net new and focusing the organization on growth. We've made significant investment in technology and cyber, some of the costs that have sort of affected the U.S. business. But we're on track toward being on or exceeding the fiscal '19 base.

Our next question comes from Jaafar Mestari with BNP Paribas.

I've got two, if that's all right. So just again on this full year '25 guidance and the implied range for Q4, just trying again. You're reiterating, does that mean, yes, probably towards the midpoint? Or is the full range of outcomes still really on the table? I mean, the low end of 9% looks pretty much guaranteed with that bridge you've discussed. But at the top end, 16% organic revenue growth in Q4, that's ex accounting. What's the scenario where you deliver that? Is that more signings and an immediate opening of anything extra you sign from here? And just related to that, to help us believe in that very big acceleration you've given some useful ad hoc updates on retention, 97% year-to-date. Just curious if you have something equivalent in terms of signings, so something along the lines of the sort of $1.4 billion of full year '24, where are you year-to-date would be very useful.

Yes. Again, I'll start. And again, I know we're relatively late in the year. What's unusual here is there are a few large accounts, particularly in Healthcare and Corrections, some very sizable accounts that we're -- if we're able to convert and we're feeling pretty good about those accounts. They would start up in fiscal '25. So that's one variable we've talked about. If you think about -- I've mentioned a few times now, the base business within sports, there is a quite a range, right? When you have a number of teams, 5 or 6 teams that we have that are in a playoff pursuit, that could lead to significant range and outcome on revenues as well. John mentioned the pricing actions going into place and executing those. And then again, the retention rates, typically, if we plan at 95% or 96% and 1 point of retention is a point of growth, right? So the outlook there remains pretty favorable as well. I think we -- in terms of rebid activity and visibility and retention for the full year, we're feeling in a good spot.

Yes. And I would just reiterate that given where we are today and given our understanding of the business, what is potentially to come, that the range of outcomes is pretty wide and we understand that. And we believe there is an opportunity to get to the high end of the ranges based on the visibility that we have if certain circumstances occur, most of which we can't talk about because we're in active negotiations with clients and potential customers. And so I'm -- We're confident. We've said it as many times as we can and repeated ourselves as often as we can to go ahead and hopefully convey that confidence. We're strong believers., We're all aligned shareholders here. We all want the same outcome. And so we're confident in the ramp. We're confident in the guidance, and that's about all the detail we can give you.

That makes sense. And apologies for laboring the points, but just to...

No, no, no.

[indiscernible] is there any suggestion, for example, that if you were to land at the top end of the organic revenue range, then we would need to assume immediately the bottom end of the profit growth range because of mobilization costs? Or is that not what you're saying? It's open-ended on both sides?

They're linked. But no, I don't think I would characterize it that way.

Our next question comes from Faiza Alwy with Deutsche Bank.

I see that you've had some really nice acceleration in the B&I segment this quarter. And I know you mentioned new business, higher participation rates and micro market lending services. So curious if you could help disaggregate some of that for us and sort of how sustainable that acceleration is. You've also talked about sort of proactive approach to leveraging the strategic value and business timing. So maybe give us a bit more color in terms of what you're doing there.

The business -- yes, the B&I segment has performed really well throughout the year. And I think it printed 13% growth in Q1, Q2, ramped up a little bit to 17% in Q3. It's -- as you know, that sector includes both corporate with B&I and refreshment services. Both businesses are generating very solid new business, I think, record levels for both groups, elevated retention rates for both groups as well. The acceleration really from continuing to rolling out new accounts, particularly in the refreshment services business. They've been particularly effective within B&I, the partnerships, the branding they've done. We have a LifeWorks brand, the partnership with Daniel Boulud in New York, additional catering activities. Participation rates continue to remain elevated, particularly in an environment where some high street pricing is elevated. 2/3 of our accounts are subsidized, which I think is resulting in folks eating more in their corporate cafe. So all those factors, I think, are driving the strong performance that you're seeing in that sector.

Great. And then just to follow up on margins and the point that you raised around opening costs for new business. Maybe give us a bit more perspective or any quantification that you can sort of is there a rule of thumb? Just how margins typically will ramp for new business, your years 1, 2, 3? Just trying to get a sense of -- just level set on expectations for margin next year.

Yes, sure. So again, great, really good margin progression this year, right? First quarter, 40 basis points, Q2, 30 and 60 basis points this quarter. So again, the ramp-up of large accounts, we've always talked about. Typically, margins are flat in that first year and then they progress to our steady-state margin over the course of 3 years. So occasionally, you have a significant amount of new business ramping up in a quarter. It could have a sort of a temporary drag on margins. But again, not a bad problem to have. And the other factor that we're monitoring with respect to margins, if we do have a record year with net new, and that's 40% of our compensation. So the incentive comp may be a little higher than a typical year. Again, not a bad problem to have, sort of rewarding folks for the great work that they've done.

Our next question comes from Jasper Bibb with Truist Securities.

Hoping you could talk about competitive dynamics in education, clearly bullish here on the pipeline of opportunities. Got some new wins picking up in the fourth quarter. Conversely, one of your large competitors has actually talked about growth issues in their own U.S. Education business. So just curious if you've seen any changes in the market which might be driving what looks like market share gains for your own business?

Yes. I think, first of all, I think our performance speaks for itself. We've been able to grow that business very effectively over time. It's -- we have particular strength in the higher education sector and our portfolio is unmatched. We've got very strong relationships and continue to retain that business at a very high level. And yes, some of our competitors have struggled more in the education sector than we have. I think it's primarily a result of leadership and focus and performance, ultimately. That's what drives customers to make decisions and drive retention. So I would characterize us as just having a great leadership team doing a terrific job in the business. And I wouldn't comment on the reasons that they're not performing as well.

And then maybe this is a little bit repetitive, but just hoping you could maybe talk about the run rate in the '26 again. I mean it sounds like with one of the drivers of the sequential step-up in the fourth quarter being some of those new education wins starting late in the quarter, that September should be better than July, I imagine. I guess, is that fair? And then can you talk about what's driving your confidence? And I think it's an 8% plus run rate organic growth into '26?

Yes. I would say, in general, and Jim can comment here as well, September is always one of our strongest months because it is the opening season for the K-12 and higher education new wins. So it does tend to drive -- our revenues tend to be the highest. And it's also the time when Major League Baseball attendance is at its peak, particularly for those teams that are in the playoff fund. So September is always an exciting time at Aramark for lots of different reasons. And -- but yes, I would anticipate that September's growth rate would be higher than July's in general, but that's kind of the normal step function that exists in the business.

Yes, I think that's right. And again, as sort of John mentioned earlier, that's a great thing about when you have high retention in education, both K-12 and higher ed, and you have a successful year of new, that primarily hits in August and September. So a key reason for why we expect some elevation or acceleration there. And again, as I mentioned earlier, the sports season, when you have a number of good teams performing and attendance and base business is looking good, that really hits August and September as well. So I think with some of the key drivers of the acceleration we expect toward the end of the year. And again, position us into the high end of the multiyear targets that we have established for the organization.

Our next question comes from Andrew Wittman with Baird.

I spoke about the A's being a large contract. Is that kind of the large contract that you referenced? I just want to be clear on this one because if I'm not mistaken, that new stadium isn't slated to open until 2028. And I wanted to make sure that investors thought were thinking about that one contributing with the right timing?

Yes. Thanks, Andrew. Yes, absolutely, that won't open until 2028. And it is a very large win, one that we're very proud of, but won't impact and is not included in our fourth quarter projections or next year's projections. But it is an exciting win for us. So thanks for clarifying that.

I just want to make sure on that one. And then I guess there was a comment on medical expenses in your U.S. segment. Just mentioning that, that margins would have been higher. I don't know, Jim, if you want to put any meat on that bone for us. But just for context, I thought it might be helpful.

Yes. No problem. Medical costs were about sort of $15 million higher in the quarter is what I was referencing. And really two factors driving that, just an unusual number of high-cost claims in the quarter as well as prescription drug costs with some of the GLP-1 drugs being up a little bit as well. So it's something we are monitoring closely. It's one of the things, as we said, a range of outcomes for the full year. So something we noted that was a moderate drag on margin in the third quarter.

Yes. And I'll just add a little bit of color commentary on the GLP-1s. Obviously, that is a benefit we provide our employees. There are long-term benefits to having your employees get healthier over time. And so as they use the opportunity to take advantage of that benefit. Hopefully, that leads to longer-term better health and better outcomes and lower health care costs. But the prescription costs early on when they're taking that medication are fairly high. And we're looking at ways to try to mitigate that over time. But yes, the medical claims costs can be a little bit lumpy. Typically, we don't have that kind of impact on a quarter-to-quarter basis. But in this particular quarter, we did have a couple of large claims come through. And as you know, we're self-insured. So that was the impact.

Our next question comes from Harold Antor with Jefferies.

This is Harold Antor on for Stephanie Moore. So I guess just two quick ones for me. One, just on Avendra, I guess, could you give us an update on what's the spend there, client receptiveness to you guys being able to provide the service, and then just with the margins look like in that business and how you expect to contribute in 2026. And then just on my second one is, I know you have some co-pilot and some hospitality IQ and some other AI-driven initiatives that has assisted in the supply chain improvement. So if you could just discuss anything you're doing on the AI and the supply chain. Both of those would be helpful.

Yes, you bet. First of all, on Avendra, we continue to grow the spend in that business. And currently we're, call it, somewhere between $21 million and $22 billion of spend under management, which includes all of our contract catering spend as well as our third-party spend that we manage for companies like Marriott and others. So very proud of the growth in that business. They've had very good results year-over-year in terms of net new business and improving profitability throughout the year, contributing to our earnings potential and improved profits as well. So the margins in that business, as you know, are very strong, depending on whether it's a third party or whether it's contributing to our discount structure and our negotiated cost structure, a very big contributor to our profitability as a company and they've had very good results this year. Jim, do you have any other comments?

You asked about, I think, AI and supply chain. We continue to elevate our capabilities with respect to AI. We've talked previously about leveraging AI to aggregate our spend. One of the tools we've recently introduced is actually a tool that can literally read and interpret correspondence from our suppliers. As an example, if a supplier is trying to implement a price increase. It will scan that letter, interpret it and then literally find the contract and read the contract and determine whether that supplier is eligible for a price increase or not and then generate the correspondence. So you can think about the efficiency that's gained when you're managing thousands and thousands of contracts over thousands of profit centers. So just an example of some of the efficiencies we're seeing with our supply chain and AI capabilities.

Our final question comes from Joshua Chan with UBS.

Just a quick one, I guess, on Q3. I think you had previously given the April growth rate and the quarter came in where it is. So I guess, did something slow down in May or June? Or how would you characterize that? Or is that normal fluctuation?

Yes. No, I think we anticipated a little higher level of activity on the arena -- in the arena business. April came in at the 6% level, and we had a slightly lower level of activity in the arenas over the course of the last couple of months, primarily related, as I said, to the renovations at Verizon Center and a couple of other arenas. So not a significant change in the trajectory of the -- our expectation for the full year.

Not the other -- I think during the fireside, we talked about 6% run rate. The other -- yes, we didn't go as deep into the playoffs of the NBA and NHL as anticipated as well on top of the lighter contract activity.

That's correct.

I'll now turn the call back to Mr.

Terrific. Well, thanks again, everybody, for your interest and participation this morning. Again, we feel very good about the third quarter results. I want to thank the Aramark team for their extraordinary performance and keep pushing for those high retention rates and the net new business. We have a great fourth quarter in front of us, and we look forward to talking to you when it's complete. Thank you. Take care.