Aramark (ARMK) Earnings Call Transcript & Summary

Good morning, everyone. Hi. I'm Stephen Grambling, and I cover the hospitality sector at Goldman Sachs. And next on the agenda for the Global Retail Conference is Aramark. This is a company I've had the pleasure of covering since the IPO, but this is actually the first time that we've had our next presenters participating in their current roles at our Global Retail Conference. So it's my pleasure to have John Zillmer, Chief Executive Officer; and Tom Ondrof, Executive Vice President and Chief Financial Officer of Aramark. So thanks for joining us.

We're happy to be here. Thank you.

Since it is the first time to have you all at the conference, I'd love you all to just set the stage and just remind us of your backgrounds, what drew you to Aramark and how the current environment impacts the path that you saw the company getting on when you first came on.

Terrific. Thank you. Well I'll get started and then I'll turn it over to Tom. I rejoined the company October of last year, so just a little -- just almost 12 months ago, returning to the company after a hiatus of 15 years. It is a company that I spent 25 years with before and an industry that I know and love, have a lot of passion for. And was attracted to come back to the company through an engagement with Mantle Ridge and the Board as they began to look for leadership succession and change. And there were a lot of circumstances that kind of drove the Board's decision to go ahead and move on from the previous leadership. But most importantly, it was -- it was the quality of the business and the industry that really attracted me. It's, as I said, a company that I love and an industry that I love and has extraordinary long-term potential. And the company had just lost its way a little bit with respect to the way it was operating. The growth paradigm had shifted. People were focused on more cost management. And the Board felt that a change in approach was necessary going forward. And that's when I rejoined. My background is lots of years in this industry, both with Saga, and then a company called Szabo that was acquired by Aramark, and then a long career with Aramark before moving on to other public company and private company jobs while I was gone, and then Board directorship opportunities over the last several years before rejoining. Tom, do you want to go ahead and give a quick summary of your background?

Sure. Thanks, John. And good morning, everyone. Similar to John, I spent about 25 years in the industry with a competitor, Compass Group, in a variety of roles, financial roles, sales role, sales leadership role, operating role. Retired from Compass about 5 years ago, was drawn back to work with Performance Food Group in a professional relationship I had there after they went public. That's where John and I reconnected. John was on the Board at PFG. And John's very persuasive. When I was leaving with PFG last fall, and this -- he had stepped into the Chair at Aramark, we started talking, and here I am. He's very persuasive, but we share the same passion for the industry, for the growth potential, for just the fun of the business. It's -- this isn't an environment in which it's a whole lot of fun, but still, people go to work and they serve. And it's humbling to be a part of it. And John and I both really enjoy that aspect of it.

So one thing that maybe we can tie into thinking about the long-term opportunity that you're describing is, this week, you had an announcement where various members of the management team were given performance-based option awards that, I think, started $35 or $10 increments, all the way to $85 over -- I believe it's about a 5-year window. So that's more than double where the stock is today. How do you -- how is the Board thinking about -- how are you thinking about these levels? And what are you thinking about as the path to achieve that level of upside?

Yes. Thank you. First of all, the Board worked in very close partnership with the compensation consultants and with the management team in designing this approach. And frankly, we compared a number of different alternatives in terms of laddered maturities, if you will, or laddered stock prices. And we really felt compelled to select this one. I think it's designed -- it's a very elegant solution. It's designed in a way where nobody wins unless everybody wins. There's lots of upside for the management team in the way it's designed. I think the Board felt like, based on the current circumstances and the current equity holdings of the leadership team, that there was a need to add a significant retentive value as well as significant incentive value going forward. And so this was the model we preferred. We have a strong belief in the performance, the future performance of the company. Both Tom and I and the rest of the leadership team are very invested in making this happen. And there's a high degree of alignment, I think, with all the stakeholders. No -- we don't win unless everybody wins, and I think the messaging to the leadership team as we rolled this out was just this: It's -- this opportunity is significant. But in order to drive it, in order to make it happen, we have to achieve the results that have been established and the goals that have been established by the Board going forward. And so we're very comfortable with the design, and we think it does speak to the long-term value creation opportunity that exists for all of our shareholders.

So John, maybe going back to your background. Since you've come back to Aramark, what are some of the things that have changed and/or stayed the same from the industry and the company that informs how you implement that vision?

Yes. It's -- the industry is very similar to the way it was when I left. It really is all about hospitality and customer service. It's really about performance and doing the right things. The industry has always had very good dynamics with respect to retention and good margin growth over time, good potential growth. But for some reason, as I said, Aramark had kind of lost its way, had focused only on margin growth and had lost the growth paradigm. And so reestablishing that inside the organization, really reengaging the sales process that everybody sells team-oriented selling concepts, the focus on innovation and customized proposal development, the elimination of kind of the cookie-cutter approach, a highly standardized approach to operating and returning to the roots of the company, if you will, is really what we're doing. And all the actions that we've taken in the last year have really been oriented towards that. The reorganization of resources from the corporate organization to the field, the establishment of the new leadership in various lines of business, it's all about recreating that cultural -- recreating the hospitality dynamic inside the organization. And I wasn't here, obviously, when -- over the last several years, when the issues began to occur, but I was connected to the company through a lot of the senior leadership and people and customers. And the things that the company had done with respect to over-process, over-standardization, overcentralization were very clear to me. And so we've already taken the actions. We feel very good about the impact that we've already been able to have. And yes, the last 6 months have been challenging, but they haven't stopped us from doing what we needed to do to really change the business. And we feel very good about where we're positioned today and how we'll be able to accelerate this as we move forward, particularly as COVID abates, and we have the ability to really impact the business going forward. We feel very good about the trajectory and the opportunity.

That's great. And I have a few follow-ups there, but maybe I'll bring Tom in beforehand. If you think about your experience at Performance and at Compass, how does that inform you of that opportunity to reinvigorate the top line? And where do you need to reinvest? How do you think about that, any reinvestment that needs to happen? Maybe taking a step back before we talk about the impact that COVID has had.

Well I think the growth paradigm for any company is really about -- it starts with the culture and the focus on it. And as John said, I think in years -- recent years past, Aramark had lost that focus. The ability to grow is there. I don't think there's a structural issue. The capital is available. The sales teams are equipped. I think they're probably a little understaffed. There had been some cuts made on that margin march, so that's unfortunate. And John committed to rehiring that, and that's been happening here over the last 6 to 12 months. So I think structurally, things are there. I think it was more of the cultural focus. Sales in this business is a relationship sale. How long the contract can be, in some businesses, 90, 120 days; in others, it can be years. So it requires that focus. It requires a stable workforce. It requires discipline in the process. And it requires everybody chipping in, whether it's John and I, the finance teams, the technology teams. It's just not a salesperson's effort. And that's really what we've been working to reestablish, is that culture and that all-in mentality.

And so maybe a follow-up on this, but maybe both of you can weigh in on this. But when you think about reinvigorating that top line, really reinvigorating the sales culture, where do you see the biggest opportunities if you think about the different segments? And then also, how do you differentiate yourself relative to peers? Like what is the Aramark pitch case versus some of your biggest competitors? And has that needed to evolve?

I'll start with that. And Tom, please feel to jump in. For us, it really is all about customization and developing a unique client relationship and understanding. And that's the nature of this business, and it's historic. And it doesn't matter whether it's us or Sodexo or Compass. Typically, you win this business on the basis of really developing a unique proposal to serve that customer's needs in a way that's highly differentiated for that particular customer. And so that mass customization strategy, the ability to develop a relationship over a long period of time, so you know that customer better than anybody. If I think back to the customers and the sales wins that I achieved in various times of my leadership of the company, it was never about price. It was never about capital investment. It was always about the uniqueness that I was able to bring to that solution for them. And it's -- I go back to my days as a Regional Vice President for Aramark in Chicago when we sold the new Sears world headquarters, Ameritech, [ Kraft ], I could tick off the list of them. And it was all about the fact that we had been engaged in that region for years with the same sales team, the same operating team, the same district managers, a high-quality operating unit. And we were literally knocking off every good account in that marketplace in a segment where -- or in B&I, in a segment where historically, Marriott had been the best competitor. So it was really -- it told me and it really led me to understand what wins in this business. It is all about relationship selling. And Purdue University is a great example of that this year. That was a great win on our Higher Education business. And it's $25 million in retail revenues that we just literally are -- have just been opening. The sales manager who worked on that process has been in that territory and working on that prospect for 9 years. Now that's what you call a long-cycle sale, right? It's a -- he was devoted to that market. He understood it and has been working on that customer for a long time. And that's what really drives ultimately the success in all the segments that we operate. It doesn't matter whether it's B&I or Higher Education or Healthcare, it's really all about that relationship. Tom, I'm sure you may have a follow-on comment.

No. I agree with everything you said, John, and reemphasize the relationship sale, the stability of the sales team and the customized approach. One size doesn't fit all for our customers, and that's where we got to bring the weight of Aramark's resources to the sales teams and to our customers so that we can customize those approaches. Because we have everything we need. And like John said, price is sort of the point of entry, but it's everything else that wins the business.

As a -- one other follow-up on that one. You're talking about customization, at the -- which is kind of -- I guess it's -- it requires a decentralization that you referenced, which is different than the prior management. One of your competitors has clearly been focused more on centralization. Is there any margin impacts that we need to think about? Are there ways that you can either invest or alter the business to still magnify your scale to still compete and still have similar margins?

Yes, absolutely. There is continued margin enhancement opportunity in the business. And it really is all about taking advantage of supply chain scale. That's an area where we've been particularly focused. John Orobono, who managed supply chain for Aramark for many, many years, came back to the organization last November. He's had an immediate impact on the business. He really built the supply chain model for the industry that all the other organizations are following. And it was really the loss of those disciplines and perhaps, again, kind of a very different approach that was taken by the prior leadership that led to some, I think, confusion with our suppliers and some fractured relationships. And John has been able to really reengage all those manufacturers and suppliers in a way that's very productive for us. We've already renegotiated our master distribution agreements in North America, both in Canada and the United States, which will have a significant impact on our results going forward. So that's really where you apply the scale because that's where you can have an impact. The unit operating costs are what they are. The only -- the labor rates in a given city are the same for us or Compass or Sodexo. There's really no material difference. So it's all about the product cost and the supply chain and purchasing leverage. And that's one of the reasons the Avendra acquisition was a good one for the company. And that enhancing the supply chain scale and creating additional leverage through the bulking up those purchase dollars really can make a difference over the long term. And we'll continue to look for ways to enhance that business as part of the total Aramark portfolio.

Great. And maybe turning a little bit more towards some of the short-term dynamics that's been happening in the current environment, but also try to tie in a longer-term question. Can you just remind us or walk us through how COVID has impacted various segments within the business and how quickly those might bounce back? And then do you anticipate any long-term changes in behavior in any of these segments?

Sure. Obviously, the biggest impact was in the month of April when our revenues were off, call it, 45%. And then we've seen a gradual improvement over the course of the close of the third quarter. And we've continued to see some improvement in July. I think we talked about the sales being off roughly 35%. And we think the fourth quarter will be roughly consistent with that level or trajectory of sales, call it, below prior year, call it, around a 35% gap between last year and this year. And so we're beginning to see the impacts in Higher Education as that business reopens. But it's coming at a slower pace than historical openings because of the dislocation that's occurred in the marketplace and some schools deciding to open and then go virtual. There's a lot of variation in the opening process in Higher Education right now that people are managing through. So we think that trajectory is going to be about the same for the full quarter. The various businesses, the ones that are obvious are B&I where customers haven't returned yet to work and are -- and as they do, they're doing it slowly, particularly in large, urban environments like New York, where the return to work has somewhat slowed. And so B&I, we think, will be a relatively steady, long kind of improvement. In K-12, that business performed very well during COVID as a result of the waiver that the USDA granted. So we've been able to serve a lot of meals over the course of the last 6 months. That waiver has been extended through the end of the calendar year. So that will continue to show, I think, strong meals throughout the first quarter. But Sports & Entertainment is still significantly impacted. Obviously, no fans in most stadiums. Although tonight, I'm happy to say that Kansas City is going to have 15,000 fans in the stadium for the opening of the NFL season, so it will be good to see some people in seats. But it's -- that process is also going to unfold rather slowly. So we're still seeing the impacts and we're still managing through the individual business units. Obviously, have some businesses that are performing very well. Facilities, Corrections, Healthcare, to a large degree, those businesses are relatively unaffected. And so it's the big ones. It's Sports & Entertainment, it's Higher Education, and we're just working through the dynamics of those businesses over the next several months. And we do believe that the long-term impacts on the business will be relatively small. That -- and if you talk to university presidents, they really believe that over the course of the next several months, things will return to a higher degree of normality and that next year will be a breakout year. So yes, there's there is a lot of uncertainty, but we're trying to manage as effectively as we can in it. And I think the company is taking all the right actions, as demonstrated by the results that we've been able to achieve over the last 1.5 quarters. Tom, any further thoughts there?

No. Nope. Perfect.

I'm going to stop talking and let Tom take the next question. Sorry.

Well the next question, I guess I'll continue with some of the near-term and long-term impact from the current environment, but I'm going to change it a little bit and try to think through some of the opportunities that might be presented. So maybe you can weigh in on, one, how it's impacting the Facilities business? How, whether it's B&I or other segments, are thinking through Facilities and services? And then secondarily, how it might play out in the uniform segment as well?

Sure. Our Facilities business is doing pretty well. As you would expect in this environment, a lot of organizations are really focused on sanitation and security and safety. And so the Facilities business plays directly into that in a range of the businesses. So we've got facilities operations in higher ed, in Healthcare and in B&I. So that -- we've had the opportunity to provide additional services to a number of our customers that have reached out and asked for additional services, and we're very much focused on doing that. The EverSafe protocol that was developed in partnership with Jefferson Health applies not only to the Healthcare business, but applies to all the businesses. And the Facilities team is an active participant in that protocol and process. And so we think that there is long-term potential in that business as more and more customers are recognizing that it's something that they didn't have the resources to do and/or the technical competence, and we can bring to bear that safety and security and sanitation protocol that they desperately need. And we've been able to demonstrate that through a range of the businesses that we operate. So we see that that's got some long-term legs and will -- but I think the days of cleaning crews driving up in a van and getting out of a building and running into the building, cleaning the elevators with vinegar and glass cleaner, and then running out of the building are probably over. That the companies are going to be looking towards professional organizations like ours to go ahead and really ensure that they've got safety and security and sanitation, and can safely say to their employees, the environment is clean. And so we see it as a long-term opportunity.

As I guess a follow-up there on the Facilities side, does that require an investment in a sales force as well? Is that usually managed by the same person who's going out to those industries? Or -- and also, how do you think about the economics of that business versus...