Earnings Call Transcript - ARMK Q3 2025

Operator, Operator

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. We will open the conference call for questions at the conclusion of the company's remarks. I will now turn the call over to Felise Kissell, Senior Vice President, Investor Relations and Corporate Development. Ms. Kissell, please proceed.

Felise Glantz Kissell, Investor Relations & Corporate Affairs Executive

Thank you, and welcome to Aramark's earnings conference call and webcast. This morning, we will be hearing from our CEO, John Zillmer; as well as CFO, Jim Tarangelo. As always, there are accompanying slides for this call that can be viewed through the webcast and are also available on the IR website for easy access. Our notice regarding forward-looking statements is included in our press release. During the call, we will be making comments that are forward-looking. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties, and important factors, including those discussed in the Risk Factors, MD&A, and other sections of our Annual Report on Form 10-K and SEC filings. We will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found in our press release and IR website. So with that, I will now turn the call over to John.

John J. Zillmer, CEO

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 one 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 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 contributions 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 I 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 in 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 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 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.

James J. Tarangelo, CFO

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 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.

John J. Zillmer, CEO

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, Operator

Our first question comes from Ian Zaffino with Oppenheimer.

Ian Alton Zaffino, Analyst

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.

John J. Zillmer, CEO

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.

James J. Tarangelo, CFO

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 in 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.

Ian Alton Zaffino, Analyst

Could you provide some clarity on the events business? Were there any cancellations, or did events just shift to the next quarter, meaning we might see a stronger quarter ahead due to these rescheduled events? Alternatively, is this simply lost business? Furthermore, how much of a challenge did the events situation contribute to the reported 2%, especially considering you are combining the impacts from Facilities exits with events? I'd appreciate it if you could break that down for us.

John J. Zillmer, CEO

Sure. There were a couple of factors that impacted us, especially in the arena business. We saw a lower level of concert activity than expected and renovations at one of our venues, particularly the Verizon Center, which was closed for updates and couldn't be booked during that time. We had anticipated it would be back in operation sooner. Additionally, last year we hosted the DNC in Chicago, which led to significant activity at the Allstate Arena that we did not see this year. This created a slight impact, but it is not something we consider significant, and it won't be affecting the next quarter. Essentially, we experienced some business that we expected but did not materialize.

Operator, Operator

Our next question comes from Leo Carrington with Citi.

Leo Carrington, Analyst

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?

James J. Tarangelo, CFO

I'll address the last question regarding Entier. This is a relatively small acquisition that enhances our offshore oil remote services in the U.K. Overall, our M&A activity has been slightly elevated compared to the past few years. We executed the Quantum acquisition, which was a proactive deal we had pursued for many years in the GPO space, as it is one of the larger independent GPOs remaining in Europe. While this acquisition has the highest value in our M&A spending, it brings in relatively low revenue. Excluding Quantum, our typical M&A spending has been around $150 million to $200 million per year, in line with previous years. Would you like to discuss the other question?

John J. Zillmer, CEO

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 make 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 investment, 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.

Operator, Operator

Our next question comes from Shlomo Rosenbaum with Stifel.

Shlomo H. Rosenbaum, Analyst

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.

John J. Zillmer, CEO

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, proactively working to retain our existing clients, so 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.

Operator, Operator

Our next question comes from Andrew Steinerman with JPMorgan.

Alexander Eduard Maria Hess, Analyst

This is Alex Hess on behalf of Andrew. I want to discuss the implied organic revenue growth for the fourth quarter. Even when accounting for the extra week, it seems to be around 9% compared to last year, which is at the lower end of your guidance. What gives you confidence in this number? I would appreciate specific insights regarding the base business, new business, and retention factors contributing to the fourth quarter growth rate. We've just come out of a quarter where you were performing better at the start; you mentioned a 6% growth in April, but then there were some unexpected challenges during the quarter. I'm interested in understanding the visibility you have and any specifics you can share that reinforce your revenue guidance released today.

James J. Tarangelo, CFO

Yes, good morning, Alex. Let me clarify some of the figures. We're seeing about 5.5% organic growth in the third quarter. When you add 2%, that gives you around 7.5% as a starting figure. As John pointed out earlier, July was our strongest month for growth. We experienced a notable acceleration in our U.S. business. Additionally, we are rolling out several large accounts, such as Howard University in the Education sector and Everton in the sports sector in the U.K. Our retention rates have been higher than we anticipated. The base business has already shown improvement, especially in sports, with several teams in playoff contention and favorable revenue and attendance trends. Overall, I believe we have a clear view of our path forward, and these are the main factors contributing to it.

John J. Zillmer, CEO

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.

Alexander Eduard Maria Hess, Analyst

Could you provide some insight into how July performed and your expectations for margin progression in the fourth quarter, given the wide range of outcomes for implied revenue growth and margins?

John J. Zillmer, CEO

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.

Operator, Operator

Our next question comes from Toni Kaplan with Morgan Stanley.

Toni Michele Kaplan, Analyst

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.

John J. Zillmer, CEO

Yes. As I mentioned in my comments, we will be operating at 31 Division I 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 I 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.

Toni Michele Kaplan, Analyst

I would like to inquire about the recent strike at Fenway Park. It seems that employees were worried that advancements in automation might affect their pay. Do you anticipate this issue continuing across the sports sector or certain business lines? Specifically, could the efficiency gained from automation lead to labor disputes, especially given the presence of more unionized labor in the sports industry? How do you plan to address this potential challenge in the future?

John J. Zillmer, CEO

Yes, that's a great question, Toni. First of all, I would say that historically, as we've implemented new systems and technologies across the Sports & Entertainment business, we view it as a way to enhance customer service and throughput. We don't see it as a strategy for reducing labor. Our goal is to improve the fan experience so they aren't waiting in line during the game. We want them to be able to transact and return to their seats to enjoy the action. That’s what the teams desire, and it's what we aim for, as well as what the fans want. So, as I mentioned, we don't consider it a labor reduction strategy. We haven't significantly reduced the number 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. 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.

Operator, Operator

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

Neil Christopher Tyler, Analyst

I have two questions. First, when you made your confident comments about retention and net new in the medium term, is there anything that would prevent us from viewing those comments as a basis for the in-year contribution in FY '26? I'm not asking for revenue guidance for FY '26, but is there anything that might impact the timing of how that unfolds? Second, regarding this year's guidance, you've mentioned the importance of contract commencements and their dependencies. However, you also expressed confidence in the momentum you’re experiencing in the fourth quarter. Is the caution about the commencement of contracts primarily what makes it challenging for you to narrow the range at this point?

John J. Zillmer, CEO

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.

James J. Tarangelo, CFO

I just want to emphasize that while we discussed our multiyear targets and the run rate leading into fiscal '26, we are not providing guidance for '26 at this time. However, I believe we are well-positioned for significant net new business, potentially reaching record numbers for the company, especially with some of the larger wins concentrated in the second half of the year. As John mentioned, there are several large deals pending that we hope to finalize in the coming weeks. If everything goes as planned, we could certainly find ourselves at the higher end of those multiyear growth rates, as we aim to finish the year strong.

Operator, Operator

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

Karl Green, Analyst

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?

John J. Zillmer, CEO

Sure. I'll take the per capita 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.

James J. Tarangelo, CFO

Yes. Regarding the question on education, both K-12 and higher education revenues are significantly higher compared to 2019. In terms of margins, we're getting close to where we were in 2019 in the U.S. as previously mentioned. We have had to make substantial investments to drive growth and focus the organization, including significant investments in technology and cybersecurity, which have influenced the U.S. business. However, we are on track to meet or exceed the fiscal 2019 levels.

Operator, Operator

Our next question comes from Jaafar Mestari with BNP Paribas.

Jaafar Mestari, Analyst

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.

James J. Tarangelo, CFO

Yes, I'll begin. I realize we are relatively late in the year. What is unusual is that there are a few large accounts, especially in Healthcare and Corrections, which are substantial opportunities that we feel optimistic about converting. If successful, these would begin in fiscal '25. This is one factor we've discussed. Additionally, considering the core business in sports, there is quite a variability. Having several teams, around five or six, in playoff contention could significantly impact revenue outcomes. John mentioned the implementation of pricing actions and our progress in that area. Regarding retention rates, we typically plan for 95% or 96%, and each point of retention contributes to growth. Therefore, the outlook in this area remains positive. Overall, in terms of rebid activity, visibility, and full-year retention, we feel we are in a strong position.

John J. Zillmer, CEO

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 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.

Jaafar Mestari, Analyst

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

John J. Zillmer, CEO

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

Operator, Operator

Our next question comes from Faiza Alwy with Deutsche Bank.

Faiza Alwy, Analyst

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 a 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.

James J. Tarangelo, CFO

The B&I segment has performed exceptionally well over the year, showing 13% growth in Q1 and increasing to 17% in Q3. This sector encompasses both corporate and refreshment services, with both areas generating strong new business and record levels of retention. The growth is primarily driven by the rollout of new accounts, especially in the refreshment services sector. Successful partnerships and branding efforts, such as our collaboration with LifeWorks and Daniel Boulud in New York, along with increased catering activities, have contributed to this. Participation rates remain high, particularly in a market with rising prices. Notably, two-thirds of our accounts are subsidized, encouraging more consumption in corporate cafes. These combined factors are fueling the robust performance in this segment.

Faiza Alwy, Analyst

Great. To follow up on margins and the opening costs for new business, could you provide more insight or any quantification on how margins typically increase over the first three years of new business? I'm trying to understand what to expect for margins next year.

James J. Tarangelo, CFO

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.

Operator, Operator

Our next question comes from Jasper Bibb with Truist Securities.

Jasper James Bibb, Analyst

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?

John J. Zillmer, CEO

Yes, I believe our performance speaks for itself. We have effectively grown our business over time, particularly excelling in the higher education sector with an unmatched portfolio. We have strong relationships that allow us to retain our business at a high level. Some competitors have faced greater challenges in the education sector than we have, which I attribute mainly to leadership, focus, and performance. These factors influence customer decision-making and retention. I would describe our leadership team as doing an excellent job with the business, and I won't comment on the reasons behind the struggles of others.

Jasper James Bibb, Analyst

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?

John J. Zillmer, CEO

Yes, I would say that September is generally one of our strongest months, as it marks the beginning of the K-12 and higher education new wins. This typically results in higher revenues. Additionally, September coincides with peak attendance for Major League Baseball, especially for teams competing in the playoffs. Therefore, September is always an exciting time at Aramark for various reasons. I would expect September's growth rate to be higher than that of July, which is the usual trend in our business.

James J. Tarangelo, CFO

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.

Operator, Operator

Our next question comes from Andrew Wittman with Baird.

Andrew John Wittmann, Analyst

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?

John J. Zillmer, CEO

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.

Andrew John Wittmann, Analyst

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.

James J. Tarangelo, CFO

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.

John J. Zillmer, CEO

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.

Operator, Operator

Our final question comes from Harold Antor with Jefferies.

Harold Antor, Analyst

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 what 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 have 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.

John J. Zillmer, CEO

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.

James J. Tarangelo, CFO

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.

Operator, Operator

Our last question comes from Joshua Chan with UBS.

Joshua K. Chan, Analyst

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?

John J. Zillmer, CEO

Yes, we expected a bit more activity in the arena business. April's growth was at 6%, and we noticed a slight decrease in arena activity over the past couple of months, mainly due to renovations at Verizon Center and a few other venues. However, this does not significantly alter our expectations for the full year.

James J. Tarangelo, CFO

I think during the fireside, we talked about a 6% run rate. Yes, we didn't go as deep into the playoffs of the NBA and NHL as we had anticipated, in addition to the lighter contract activity.

John J. Zillmer, CEO

That's correct.

Operator, Operator

I'll now turn the call back to Mr. Zillmer for any closing remarks.

John J. Zillmer, CEO

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.

Operator, Operator

Thank you. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.