Aramark (ARMK) Earnings Call Transcript & Summary

So good afternoon to those in Europe, good morning to those in North America. My name is James Ainley. I'm Head of the European Travel and Leisure Team here at Citi. And I'm absolutely delighted to have the Aramark management team here, John Zillmer, CEO; Tom Ondrof, CFO. We're going to run through lots of questions with John and Tom. But for those watching, if you do have additional questions, there's a speech bubble in the top left-hand corner of your screen. If you want to type in your questions there, they will come through to my e-mail, and we will pick those up. But John and Tom, I'm delighted to have you with us. I wondered, maybe by way of kind of getting the ball rolling, whether perhaps you could both give us a bit of background as kind of where you came from, why you joined Aramark quite recently, and the attractions you saw at the business.

Sure, I'll get started and then turn it over to Tom. I rejoined the company in October of last year as a result of the leadership change that the Board determined had to be made. I spent 25 years with Aramark earlier in my career before moving on to become CEO of a couple of different public companies, and rejoined Aramark because I have a passion and a love for the contract catering business. It's an industry I grew up in and really have a passion for it. And Aramark is a company that I was very closely connected to even in the time that I was away. A lot of the leaders of the organization are people that I've worked with and mentored and developed over the years. And was really excited to come back and rejoin and kind of restart the company, taking it back to the future, if you will, of reinvigorating the growth culture and the hospitality culture and the culinary focus inside of Aramark. So it's been a great 9 months, certainly unexpected happenings during this time period. But really, really good to be back. Tom?

Thanks, John. Good morning, good afternoon to everyone. Same story, the same reasons. All the things, the passion for the industry, the runway, the ability to continue to grow this business. John and I shared a similar vision, and he can be very persuasive in bringing me back. So I joined in January, 2 months after he did, and happy to be here alongside of John and helping Aramark get to where it was and where it can and should be. I spent about -- nearly 24 years with Compass Group in North America, a bit of time in London as well, and then spent about 3 years with Performance Food Group, a food distributor here in The States which is where John and I reconnected. John was on the Board at the time and I was CFO. So it's great to be here, great to partner with John and the team at Aramark. And we're looking forward to taking it forward.

Excellent, excellent, thank you. And John, can you talk about kind of what was the opportunity that you saw? And where do you think you can make the biggest impact?

Yes, I think there were 2 areas that were really evident to me as I talked through the business case and what needed to be changed to Aramark and as I talked with the management team. One was really the growth focus. The company had really refocused itself and had really focused on cost management, margin improvement, had kind of lost the growth focus. And they made a number of decisions with respect to organization that were suboptimal from both a leadership perspective as well as a growth perspective. So that was very, very obvious to me. And the company, the former leadership had a different view of the world, if you will. It wasn't a hospitality view, it was more of a consumer products orientation, more of a process orientation. And they had looked to over-standardize the business and eliminate what has historically been the decision touch point, which is customization for individual clients regardless of what business they're in. And so it was clear to me that there were -- that we could quickly reinvigorate the culture, kind of reorganize the business rather rapidly. We had great people who really wanted to do the right thing, but had some impediments put up in front of them as a result of the organizational approach and the cultural approach. So it was evident. And frankly, all the actions that we've taken over the last 9 months have been focused on those 2 areas, really reenergizing the growth culture and reinvigorating the hospitality culture. So the leadership changes we've made, bringing people back into the organization that had historical understandings of the business and great, intimate connections with the industry has really been very helpful as we lead this transformation. And we've got a lot of work to do, but we're very pleased with the leadership team we have in place doing the work.

Yes, excellent. Okay. And Tom, just kind of interested to hear your perspectives, contrasting Aramark with Compass, a business that a lot of us folks in Europe know well. When I'm asked about Compass, I often talk about an aggregation of marginal gains, be it the GPO, the segmented approach, the focus on food and somehow created a flywheel effect. Is that fair? And what else does sort of Compass do you right that Aramark can learn from?

Yes. I let him comment on this since he spent so many years there. And I'll add some comments at the end. Tom, go ahead.

Sure. James, it's ironic because when I -- I was acquired, I was with the company that Compass acquired in the U.S. back many years ago. And at the time, and in those first few years, we aspired to be Aramark. We modeled ourselves, that's when John was there and the business was run as he just described. And I think Compass had, had a couple of false starts way back in sort of the late '80s, early '90s with a couple of acquisitions, and one that they brought in and sort of change the name and tried to merge it in and the people left and the clients were lost. And I think there was an early lesson learned by Compass all those many years ago that benefited them well to get to this model that John just described, which is you've got to empower your operators, you've got to be customer-oriented and you've got to have balance. It's not just about the top line, it's not just about the bottom line. It's -- or just about cash flow. It's about all 3. And so to your point, the flywheel effect, it's a balanced approach to it. It's not just procurement, it's not just sales led. So you've got to bring all those pieces together to create this [ virtual ] effect. And that's what we're trying to bring here. And that's what Aramark was, it's in the DNA. And I think we can achieve that.

Yes, I think that's exactly right, Tom. It is the, as I said, it's kind of back to the future. It's the culture that existed in Aramark for decades and we're very growth focused, adding new accounts, adding new business, accelerate supply chain purchases. It all creates that flywheel effect that you've discussed. And so growth begets additional growth, improved profitability, gives you the resources to go ahead and reinvest in the business and allows you to do the things in terms of customizing operations for individual clients. So it is absolutely imperative that we grow the organization and create that dynamic. We think we can do that. We think we're well on our way to making that happen. And it's not magic, it's not rocket science. It is really basic hospitality, client relationship kind of driven business. And the capabilities of the organizations are very similar. If you walked into a Compass facility and an Aramark facility and if there were no signage, you wouldn't be able to tell the difference in most cases. And so it's really about in terms of the offering itself and the product and the menus and the like. It really is all about the understanding that you have with that customer and that client and how that drives the program that you've designed for them in the selling process and how you continue to evolve in that operation over time so that you're always meeting those unique consumer preferences and the customer needs as they change.

Yes. And I guess I'm struck by -- in the number of years I've been covering the sector, we've seen others try and emulate Compass and turn their businesses around. Why do you think it's been hard for others to do it? And why do you think, by contrast, you can do it at Aramark?

Yes, I would tell you I think it's because there's -- I think what really demonstrates the success at Compass has is their long-term commitment to the strategy. The fact that they have been consistently led by the same people. They've been consistently growing the organization. And I think any time you have a company that tries to engage in fits and starts, it's hard for people to follow the strategy and it's hard for people to really engage in the cultural change. And in this case, this was part of our DNA. What they are doing is exactly what we were doing. And so for us, it's easy to kind of pick up the mantle and say, "Listen, we need to reinvigorate this culture. We need to regrow it." Because the people in the organization, the front line managers, the district managers, the RVPs, people who really run the business on a day-to-day basis, they know what to do, they know how to do it, and they're committed to making that happen. So I think it is a long-term commitment to the strategy. It's the willingness to really invest in that approach and to continue and not to get whipsawed by decisions, by changes in leadership. And that's why one of the things that we've really focused on is bringing people back into the organization who have long-term industry understanding and relationships so that people like Jack Donovan, who we recently brought back into higher ed in the United States. They had run that business before. He's been in the industry for decades, he knows the customers, he knows the marketplace, his vision for the business is the same as mine. And so that commitment over the long term, I think, is what has benefited Compass, and it's what will benefit us going forward.

Yes. James, I'd just add, having lived through it, and if you've covered Compass long enough to remember the dark days back in the early 2000s, it's exactly what John said. It's resolve, and people who don't have the resolve to stay with it because it's a messy strategy. When you empower your field folks, your operators, you provide customer service. It's not a cookie-cutter approach. This need to try to standardize everything and fall to the pressures of efficiency, which is where Aramark sort of fell in the last 5, 7 years. The resolve to stay with that sort of messiness is, it takes a lot of guts. And when Compass was struggling, Gary Green, in particular, stayed with the strategy and wouldn't let it fall. And that's the resolve that John's brought back to Aramark. And I think that's why people have failed when they tried to emulate it in the past.

Yes. Yes. No, very clear. And John, I think it was interesting to see the new incentive program that's been put in place. It was published last week. And when we think about the art of what's possible here and look at the sort of 5-year timeframe and exercise prices up to $85, kind of -- what do you need to achieve? What's possible here as we think about the future?

Yes. Interestingly, and yet -- those strike prices, frankly, we worked very carefully with the compensation consultants and with our investor in Mantle Ridge and with the Board in crafting that approach and that program. And that laddered approach is what management believes can be achieved over that timeframe. And it is it the result of delivering mid-single-digit growth, accelerating earnings as a result of accelerating the growth. It does not require heroic efforts, frankly. It is a good, solid basic, strategic approach and implementation and a commitment over that time period. So -- and we have a very firm belief that we can achieve those targets. And that's why they were set out the way they were. That program was put in place in recognition of the fact that a lot of the equity that was in place for existing leadership was underwater, and that's put into place an opportunity for significant value creation and significant retentive value that we think was extraordinarily important given today's environment. And so we set the targets along with the Board. And we're committed to delivering on them, and we believe in them.

Excellent. So I wanted to pick up maybe on something more recent. The last week, I think you said you were talking at another conference about Q4 organic down around 35%. And I guess a bit fascinated to get a bit more color around kind of what the trends you've been seeing in the business. And I guess, particularly, as we think about some of the noise in higher ed and some colleges going back and then reversing those decisions. And what kind -- of what are you seeing on the ground?

Yes. I would tell you the -- 2 things. First of all, it's -- our teams have done a really extraordinary job over the last several months in managing the business and the cost structure and the cash flows. And they have been very accurate in terms of the way they predicted the return and the impacts on the business. So I've been very pleased with their -- with the transparency in the business and their ability to predict behavior. And so the models that we developed early on are basically what we're working towards and what's been achieved, and we're very gratified by that. Not where we want to be ultimately obviously, but we're glad that we've been able to predict well what's happening so we can adjust structure along the way. You're right, there is messiness in higher education. Today, we have around 90% of our schools have opened in one form or another, about 50% with on-site students full time, about 40% in hybrid model, where there are students on-site part-time and in classes virtually as well as in real classes. And then 10% that have essentially said they're going to be totally virtual for the first semester at least. So those openings, reopenings, fits and starts, are exactly what we're working through over the last 4 weeks, and there's -- we'll have a higher degree of clarity here as we close out the month of September, and schools are fully operating. But there is -- there are a lot of, what I would characterize, as kind of puts and takes in terms of the way the business is reopened. On the other businesses, it's more predictable. The B&I, we think will be a much more steady ramp-up over time, although there seems to be some impetus in the United States to start to return to work. You saw JPMorgan's decision to bring its traders back and others. And that's beginning to give organizations the stimulus, if you will, to start to really think about the return to work. And we're seeing that in multiple cities. The other business that is somewhat affected by the fits and starts is the K-12 sector, the primary and secondary education programs in the U.S., where you still have some school districts kind of in a state of flux in terms of their decisions. As you know, the USDA just extended the waiver for meals for students for free or reduced meals, which has -- will have a significant impact over the course of at least the first quarter for us. And so there are some fits and starts to the business, but we're working through all those. Our people are well-prepared to do it. And Tom, do you have some additional color commentary you want to add to that?

No, I think that's appropriate. I mean, we -- James, we talked about that July was down 36% at the earnings call. I think that the month, August, September, roughly, give or take, in that range because as John said, the fits and starts have created a bit of a plateau right now on the road to recovery as people are taking a little bit of a wait and see and dealing with the restart. So I think that's it for the quarter. But I think we're positioned and the underlying momentum is there as we get into the new fiscal year. One thing that John didn't mention is sports which a few of the NFL teams, including last night, have had fans. I think there were 6,000 fans at the NFL game that was played yesterday. So the attempts are trying, the underlying momentum from the owners, from the players, certainly from the fans, are to return. So we think it's obviously -- to state the obvious, it's a matter of when, not if.

Yes, yes, I'm sure. And then I guess I'm also struck by the complexity of operating in the current environment, whether it's different service styles or higher cleaning costs and PPE costs. And how are you finding your negotiations with clients in terms of getting -- passing those costs on to clients? And where does that leave the industry's margin structure longer term, do you think?

Yes. I think the company has done an extraordinary job of renegotiating terms with our clients in business dining. In particular, all of our contracts have been renegotiated to cost plus management fee agreements. So those costs are being passed on to the client as we reengage and restart operations at lower employment levels or lower population levels and then ramp up over a period of time. And we expect that, ultimately, those contracts will transition back to our normal relationship, whether they were P&L or management fee, that they will transition back to the older terms. But we've had great success in cooperation with our clients in developing an approach that really serves their needs first in terms of what they want to have performed for them on the ground, but also protects us from any downside operating cost risk. We've also done the same thing in higher education. During the COVID months, we had memos of understanding with each of our customers in terms of how we would move forward from a contractual perspective. Those MOUs are in place as we reopen the business, and then those accounts will also transition back to normal terms when the populations or student levels are back to appropriate levels. The guiding principle in all of this is making sure that we can operate safely and effectively in these environments and serve the customers in a hygienic way. And that's the overriding principle. We know we can work -- these relationships are long-term annuities for us. And so we can work through all of these issues with our customers. And it's been very cooperative. And I think it's been similar for our competitors as well as they've worked through this time. The whole industry has responded pretty effectively to this, I think, in terms of contract structure. I don't think in the long term, it puts any significant pressure on margins. As businesses return to work, we will have absorbed the service change, the service style changes. The additional equipment is de minimis. You transition from self-serve salad bars to served product or pre-plated product or customized with somebody serving it for them. So the service styles will change. But even in those particular cases, we're able to do it with the same kind of labor pool that we had in the past. So we're confident that there's no long-term margin impact to the business as a result of this. And frankly, it has allowed us to become more effective operators. We've learned how to do more with less, both in the units as well as a company. And we think, ultimately, when we return, we'll actually see margin improvement over a period of time as the business comes back to full operation.

Yes, yes, okay. Excellent. I wonder if I can sort of switch gears now and think about some of the sort of longer-term threats, challenges to the business. I guess there's a lot of debate about food delivery as a competing force. How is Aramark adapting its offer to that environment? And -- yes.

Yes, well first of all, we think that food delivery is not only a potential threat, but it's also a potential opportunity. And we have the production facilities and the capabilities and we have proximity to the customers, right? So we can deliver the food to the customer in a way that's even much more efficient than our competitors, whether it be Grubhub or somebody else. And when you think of a large urban environment, if you're in New York City and you're at the headquarters of Goldman or Citi or JP, do you really want 100 Grubhub drivers walking in the door with bags of food that you have no predictability over where it was produced, how it was produced, how the sanitation requirements are met? And all that kind of thing. So I think in a large urban environment, you'll actually see it -- it will represent an opportunity for us that we have to capture. And for that, we've -- over the course of the last several months, we've developed applications for our customers so that they can order from their desk or their iPhone and that product can be delivered to them at their desk or in a central delivery location. So we've put in place the ability to go ahead and respond to those needs and to take advantage of that consumer preference for that kind of convenience. We're also looking -- we've looked at alternative delivery models like Good Uncle, the acquisition that we made last year, is a centralized commissary food production approach to food delivery. It's very high end. From a culinary perspective, it's really fantastic product, very great packaging and also has extraordinary convenience for customers in locations where it's been installed. And so we see that as an opportunity as well to have our own customized delivery service, if you will, available to students in universities or health care institutions or even B&I locations. Where the customer has the Good Uncle app on their phone and they literally select the menu and that product is delivered within minutes to their locations from the trucks that are on the street. So very, very unique service profile and very -- and terrific product. So we see it as a threat, but we also see it as a significant opportunity.