Aramark (ARMK) Earnings Call Transcript & Summary

Good morning, everyone. And thank you for joining us for the 2020 RBC Capital Markets Global Consumer and Retail Virtual Conference. I'm Seth Weber, RBC's business services analyst, which is a category that includes many consumer-facing names including Aramark. So it's with great pleasure that we welcome Marc Bruno, Aramark's Chief Operating Officer for the U.S. Food & Facilities. Marc joined Aramark close to 30 years ago and has led virtually all of Aramark's U.S. Food & Facilities businesses, so he clearly has a very good perspective on the various end markets, particularly as Aramark navigates the current environment. So Marc, welcome. I hope you're keeping well in the current state.

Absolutely. Thank you, Seth. Nice to be here today. And appreciate the opportunity to talk.

So the world has clearly changed in the time since you and the new Aramark management has laid out a new strategic course for the company, one that's particularly focused on improving organic revenue growth. Can you talk a little bit about the strategic pivot, how it differs from the prior mandate and what are some of the key tenets of the strategy and whether that's been disrupted at all with the current environment? And then maybe walk through what you're seeing in some of your key end markets.

Sure. Sure. Sure. Thanks, Seth. Well, as you said, I've been a long-time veteran of Aramark and seen a lot over the 3 decades that I've been at the company in a variety of different roles. But I'd say the new management team as well as our direction is probably the most excited I've been about the opportunities in front of the company. And I think it's really -- there's an element of a couple of different things that we've done, and then we can talk about the impact of COVID to it. But really, the tenets are pretty basic, right? It's a philosophy of building back the culture of hospitality in the organization. Secondly, it's really about putting the resources that we've got as a global organization close to the customer and much closer than we've had in the past. Of course, you talked about the fact that we've got some new leadership and had some folks that have been put into key roles that we believe will be excellent for the performance of the business and the relationships that we carry in each of our verticals. And then finally, as you said, we've really pivoted around the growth engine that we see in front of us and making sure that all of our resources are pointed toward that. COVID has, of course, impacted several different fronts of it. But I would say that for the most part, we haven't had to change the focus. I think we've done what is a hallmark of Aramark, which is kind of running into challenges and crises and bringing the resources, namely our people, right to the forefront of dealing with what's at hand and really focusing on helping our clients navigate through what challenges are in front of them. So I expect that as a result of that, and we've already seen this in many cases, the strength of our relationships with our clients definitely escalates during these times and well positions us for the gradual return to normal in the different verticals. So I'd say that we would -- as the economy begins to reopen, I think there'll be some favorable tailwinds for us. I think our -- throughout this time, our focus on growth has not wavered. We've kept the -- we've kept not only the resources and the focus in place. And I think that we're seeing, while certain activities have, I would say, been paused during the time from a client side, there's also continued to be significant activity. And I think that will -- as I said, there'll be a lot of tailwinds in the coming days and weeks and months ahead as it relates to growth opportunities for the organization. So I'm pretty bullish on the trajectory of the organization, the focus of the team and the resources that we've got in place that I think will propel us despite the interruption here with COVID, I think, for many more years to come.

Terrific. I think one of the components that the company has talked to is adding sales staff, kind of more feet on the street. There may -- I think there have even been some changes in incentive compensation, things like that, all designed to sort of help close the revenue growth gap to some of your peers. Can you just update us on your traction with hiring people and adding more sales staff? And do you see anything structural that would prevent Aramark from sort of operating at a pure revenue growth level in the future once you get all your strategies set?

No, good question, Seth. So look, I think with regards to the reinvestment in growth, I think a lot of it was largely completed in the first quarter. We specifically realigned resources in the areas of client retention, sales, marketing, finance and HR and, as I mentioned, put those far more directly in support of our field organization who serve the clients and our end consumers. We also reinvested in adding more field-based resources for both new account sales efforts as well as client retention. So that has not only -- while I say it was largely completed in the first quarter, we continue to do that today and through this current environment. We're really, obviously, focused on reactivating the business in the near term and continuing the growth path in the longer term. But we have not really touched or we've left untouched most of the -- and many of the costs required to maintain and grow the underlying business and in particular the sales and client management resources. So those are still in place and still very active. So I think between that and combined with our very engaged response and the commitment that I mentioned to our clients, I see the path maintaining a good trajectory. I think that we will -- we've already seen some new and expanded relationships, and I would expect that, that will continue as different verticals come back online and look to companies like ours to either expand the relationships that we have or potentially bring us in given the strength and resource base that we've got.

Okay. There's been a lot of interesting debate around kind of the post-COVID world, and the 2 sides to it are, one thought is that this could trigger more outsourcing just as a way to kind of standardize, clean, healthy environment, things like that. And on the other side, there's some concern that increased work from home could be a detraction to your business. Could you just tell us how you're thinking about those 2 dynamics?

Sure. Sure. That's -- they're both valid points, but I would say that we will absolutely expect a greater shift toward outsourcing. And the primary reason is clients want to focus on safety and hygiene. And people who currently do that on their own, they certainly recognize the value-add that we can bring with the experience and the people and the vast capabilities and scopes of services. So we've seen this before where there's been events or changes in the world. We've seen self-op conversions tend to increase, and we would expect that to happen. We've been having conversations like that. So I would expect that, that's something that naturally happens as a result of this. And there's still a lot of opportunity for self-op conversions given that almost half of the market is self-op today. So I think that there's further opportunity to gain share from the self-op as well as other providers in the industry. Look, I think that the return and the notion, as you mentioned, of return to work and work from home, I think there'll be a little more linear as employers are going to slowly bring back employees. And I think the trends to work from home will increase on a temporary basis. But we certainly see that humans are social creatures. They have a desire to get back to their environments and engage. And I think that part of our model is that we've got a mix of business, particularly in the B&I client base, that helps insulate from that. So about 20% of our business is white collar, 20% is blue collar, and I'd say the remaining 60% is kind of a hybrid of both. So if we were 100% white collar, obviously, we'd have an issue. But I think we have several locations that are up and running. And we, I would say, open more each day as businesses come back and either reopen headquarters or reopen our operating locations, and so I think there'll be a gradual uptick in this. And the work from home scenario is certainly likely in the short term to continue to be an issue in a particular segment of the business. But I think longer term, there'll be somewhat more of a return to normal. And combining that with the opportunities for self-op conversions, again, I think there'll be some relatively positive momentum overall from my lens.

Okay. Do you see any opportunity to take share from some of the -- from some smaller regional operators that may be financially impacted by COVID or just smaller operators that just decide to exit the business?

I believe there may be. Yes, I think that that's a natural phenomenon. And I think that there is a benefit to seeing the response that we're able to mobilize as an organization with the resources we've got to really reestablish a safe environment for employees and fans and patients and whatnot. So having that breadth and really learning from experiences from our global operations and bringing insights back from different parts of the globe as they've been out in front of this. So for example, our learnings from really being patient 1 in Wuhan with our health care team in China and through Europe and other parts of the globe and seeing what's out in advance of that, learning from that and being able to bring holistic and robust approach to allowing all of our clients to operate in a safe way and utilizing our food and facilities businesses to help them in that endeavor.

Terrific. Can you talk about -- I know Aramark has introduced the EverSafe platform. Can you just talk about some of your reopening strategies in some of these new service models that you're preparing to help your customers with as they go forward?

Absolutely. So we're excited about the launch of EverSafe. It's really an opportunity that we developed in partnership with Jefferson Health and obviously in accordance with all of the leading health organizations. And really it's geared at the safe -- supporting the safe reopening and the sustainable ongoing management of our client locations around the globe. It really focuses on 5 things, which is health and hygiene practices; spatial separation; enhanced cleaning, sanitation and disinfecting; the available and emerging technology needs to help adapt to the environments we're in; and then, of course, expanding and introducing new service offerings and capabilities. So when you add those up, I think it's a great opportunity for our clients and consumers and our employees to actively reopen and actively manage the ongoing needs in a very safe and hygienic way. So our employees are obviously fully trained and will be wearing all the appropriate PP&E (sic) [ PPE ]. We'll be doing all of the important things to make sure that our environments are safe. And again, we have a significant part of our business that is operating today and another part that will be reopening, if you will, at some point in the future or is in the process of doing so today. So we've got this active today. We've got certainly great learnings and insights and confidence in what we'll be able to do in the future. And I think the environment that will help create for all the different constituents we serve, I think, is going to be one that people can feel very confident and will help bring the normality back to the work and environments that people operate in. So I'm excited about what we've launched here, the dedication to having all of our operations operate safely is going to be table stakes in the new norm for everybody, and our ability to be well out in front of that, given our experience here and wealth of knowledge, is something that I think is going to be very beneficial for all of our people and our clients and sets us up pretty well to make sure that the operating world that we'll be in is something that we'll do very well in.

Right. So you mentioned parts of your business are operational, well operating, and then parts -- and I think you mentioned to kind of have some line of sight to maybe things getting -- coming back online. Can you just expand on that a little bit? Is that the Sports & Leisure vertical? Is it -- do you have anything you could share with us from any of the more impacted categories that may -- you feel like you may have line of sight to things getting a little bit better? Are you having conversations...

Sure.

Anything to handicap some of the timing of the restart?

Yes. Yes. Well, look, like all of us, I wish we had a full crystal ball on some of this. But I will tell you that every day, today is a new and, I would say, more encouraging. There is more encouragement that I have each and every day that goes by here as it relates to, in particular in the United States, the different verticals having a line of sight to reopening, right? So we've got businesses that are clearly in motion right now. Our Healthcare business, our Corrections business, our Facilities business are really business -- I don't want to say business as normal, but there's a lot of activity there because they never really closed. Our Education businesses, both Higher Ed and K-12, continue to be very active, in particular our K-12 business, which has been doing incredible work serving meals to students and the communities really across the country, I mean millions of meals a week. That has been really fantastic and been a source of great pride for our people, our clients, the communities we serve in. So that's been something that they've been very active. I mean they're at -- while they're serving the meals in a different way as opposed to in the cafés with the students there, they're doing the pickup and delivery and grab and go, we're still serving millions of meals a day, and those meals equate to almost a normal cycle for K-12 that will extend into the summer in many jurisdictions around the country. For our Sports & Leisure business and B&I, they're at different stages. I'd say that B&I has a significant level of activity today. And as I mentioned earlier, there are -- kind of each day, there are more and more locations that are opening in one way, shape or form, and we're able to flex and help them all open and operate very safely. Sports is obviously the big one that everybody talks about. And while there's a lot of activity and we're optimistic that Sports will come back on and the time line differs by sport, but the notion of engaging and having a live event business that has fans in place is very high on everybody's radar in terms of getting that back as quickly and safely as possible. So again, Seth, I wish I could tell you that this is going to open on that day. But with regards to the Sports business, again, even in that one, have optimism that there's a path that's just going to be a little ill-defined until things become a little bit more clear about large event gatherings. Finally, our Leisure business, that business is -- for the most part, there is a level of activity in almost every national park and cultural attraction. Many of them opened this weekend, and we had a higher-than-expected demand. So we're bullish on that. There are a few more properties that are -- Yosemite, for example, that are still -- haven't announced their plans in terms of when they will reopen. But we expect that essentially here in the coming weeks, all locations will be open, and we'll be increasing business volume. So if you add it all up, it's optimism, right? A month ago, we were really down at the trough. And each day since then, we've been able to see an uptick in business volume across all verticals. And again, while I don't have the exact date that everything will be open and back to normal, I certainly have optimism that there's a path in each one of these verticals that is going to continue to get better and better each day.

That sounds great. On the last couple of conference calls, you guys have talked to some confidence and the ability to capture new business on the education side. Can you just talk to that? What's driving that confidence? Is it new strategy? Is it new offerings? Just what's underpinning that?

Yes. Yes. Well, I think we're starting from, as you know, a negative net new that kind of carried through from the last selling season. And that is not going to be the case this year, I believe, certainly moving forward. And it's really for a variety of reasons. One is the leadership changes that we made across the organization, most specifically the employment of Jack Donovan as our President of the Higher Education business. I think his experience and leadership and ability to drive that business and be very active with the client in the education space is going to help drive a better engagement level across that business. I think that our performance in this COVID environment and the active engagement that we've made and helping our clients focus on starting in the fall and creating an environment for the campuses where it's able to -- schools be able to get back in motion in a safe and productive way. And I think, lastly, the kind of specific focus that we've made on that business, we talked about the fact that we've had field-based resources to support new account sales efforts and client retention, we've spent a significant number of effort on enhancing our product and services offerings that appeal to, I think, a very broad audience, particularly in higher education and brought some innovation and technology that improves our productivity but also brings that to the customers directly. So I think that we're still currently in the selling season of higher education. We've made some nice wins this year, and we have some more that we'll be able to announce here shortly when we're able to, that's still confidential, that I think is going to be another testament to the fact that we believe very confidently in our Education business moving forward and see good things ahead for the foreseeable future.

Terrific. I think one of the things that has surprised people positively has been the company's variable cost model, sort of the 15% to 20% decremental margin framework. I think it's been better than people, I think, feared. And so can you just talk to managing food inventory, managing staffing levels, just how you're able to kind of get to that 15% to 20% level and just your confidence in operating within that band going forward?

Yes, it's a great question, Seth. And I do see that we have an opportunity here that I think has been already played out pretty well for us. I'm very confident in our ability to manage today to the really kind of 15% to 20% AOI drop-through rate. And the reason I say that is because we're already doing it today. Our ability to drive it even lower over the extended period of time as certainly conditions and the duration warrant is there. But while we're certainly operating the business with a long-term perspective, we've kept many costs in place and making sure that, that will help us focus on growth. But we've taken significant actions at the end of the second quarter in March into April that allows us to flex down dramatically. It includes taking out the semi-variable costs, renegotiating some client contracts, we've made some salary and other compensation adjustments and obviously made some reductions to our general corporate expenses. But clearly, as a lot of these businesses shut down, our ability to ratchet down immediately food and labor in particular, that just brings a high level of those variable costs that come out immediately. And we've done a nice job of making sure that we ramp those back up as appropriate as businesses come back online. But overall, we remain very bullish, I think, given our mix of business across the enterprise, the different services that we operate in, the high level of variability that we have within each business unit, with many in operation today. We feel very confident in our ability to deliver that AOI drop-through rate and particularly get it potentially even a little bit better here if this continues for some more time.

Terrific. I think we have time for maybe 1 or 2 more questions. So just maybe just quickly to squeeze 2 in here.

Sure.

Anything to update on the Good Uncle acquisition? I know that's on-demand food delivery that in theory -- it's obviously relatively new for you guys, kind of a start-up situation but obviously very topical. Have you been able to leverage that in the current environment?

Yes. Well, look, I mean, the Good Uncle acquisition for us is a great one. And as you know, it primarily operates in the Higher Ed sector, which is offering on-demand food delivery to students across campus. Certainly, we didn't foresee acquiring it a year ago that we could repurpose it to a delivery mechanism solution that offers safe and hygienic services to expanded opportunities across a number of different sectors, including B&I. So while we had it as a Higher Ed offering, we have now expanded it into other, both B&I and Healthcare. And again, it brings a delivery service in a very safe with very strict safety protocols that really adds to the comfort level of consumers. So we obviously see it continuing to scale and being a perfect offering for the new world of having safe and efficient delivery mechanisms to students. But beyond that, we're seeing bullish opportunity for beyond into other verticals. So we're very glad that it's a part of Aramark, and we're happy to have it as a part of our service offerings that is going to continue to expand as we move forward. So it's a great acquisition in and of itself. It's even more beneficial for us given what we're now operating -- the environment we're now operating in.

Terrific. I think that actually takes us about to the end of the discussion. So Marc, really appreciate your getting on the call with us this morning, and hope you're keeping well and keeping safe. And we're all looking forward to business getting back to normal as soon as possible. So thank you, and hope everybody stays safe.

You too, Seth. Thanks so much.

Okay. Take care.