Aramark (ARMK) Earnings Call Transcript & Summary

Good morning. This is Andrew Steinerman, your Business and Information Services Analyst at JPMorgan, and welcome to the first session of the Ultimate Services Investor Conference. Obviously, this is the annual date where all of our business information services companies come together for you, the business information services investors. And before we get started with the Aramark session, yes, I just wanted to tell you good news. We have our date for next year. So this is save-the-date. It's Thursday, November 18, 2021, in-person here at 383 Madison. So already please mark your dates. So anyhow, this is the first session of the conference. This is the Aramark session. It's very timely to speak to both John and Tom, CEO and CFO; John Zillmer, Tom Ondrof. They've been with the company about a year. John came back to the company, was a long-time veteran in the company, then was CEO of other companies like in Waste, was successful there. Then really came back a year ago to revitalize the Aramark that he grew up with. Tom Ondrof actually comes over to Aramark shortly after John. He spent a long career at Compass and at Performance Foods after that, that has joined Aramark. So we're really talking to them exactly at the right time. Obviously COVID has been a big question for the whole industry of food services. But the thing I want to do is really kind of start out by saying what's changed. So John, Tom, welcome.

My first question is, you've been in place for about a year. Could you tell us, in this past year, kind of the details of what has changed and how far long are you towards enhanced financial performance?

Sure. And we'll both take a shot at this, I think. First of all, the very first thing we did was really evaluate the organizational structure and approach. We've been very focused on creating and reigniting the hospitality culture and the growth culture inside of Aramark. And the very first step in doing that was evaluating the leadership. We brought new leadership in the organization [Technical Difficulty] on the business units, downstream, what had been a highly centralized organizational approach back to supporting the field organization, and then began to really restructure the resources that were aligned to running the business. For us, the DNA in this organization was very, very good. People really knew how to execute. What we needed to do is to get the corporate headquarters out of the way and let people really serve their customers the way customers wanted to be served. Okay. And so all of our initial steps were designed to go ahead and facilitate that transformation to really empower people, put them back in charge of running the day-to-day business, and really to creating the everybody-sells mantra, getting really refocused on growth and total enterprise performance. Tom, do you have any comments you want to add to that?

Yes, just a few to build on. I mean, both John and I, as we talked about what we wanted to bring to the table in joining Aramark, it was to be a sales-led organization. I think that had drifted over the years, as John mentioned, and to make it everybody's business. Incentive plans have been changed accordingly throughout the business and with the sales folks to make it more customer centric. John started that the first day and re-empowered the lines of business. Take a more selective consolidation approach as opposed to just everything done from Philadelphia, again along the lines of empowering the lines of business. And then finally, just getting alignment and accountability back into the business so that there's a sense of ownership rather than, again, everything being managed from the center; make it local, get ownership back in and then celebrate success. I think some of the fun had drifted from the business and certainly this is a business that has a lot of passionate people in it, and we have to celebrate success.

Sounds good. Could you just give us a sense of how far along you are in the sales hiring? How much sales hiring has already been accomplished? Are you tracking sales productivity? How long is it going to take to see the benefits of this new initiative?

Sure, absolutely. First of all, with respect to the hiring process, we have -- we've largely completed the hiring process in the foodservice sector. We continue to add additional salespeople to the Uniform services business. We just announced that we're adding an additional 100 to AUS over the next several months. That nearly reflects a 25% increase in our sales staffing levels at AUS. But on the core foodservice business, we've added people. We've kind of refocused the organization. We've downstreamed from the center resources back into the sales and marketing function. So we're largely staffed there. We may add a few more people here and there as we finalize and align territories and the like. But we feel very confident that we're in very good position. We've got the organization the way we want it. Now that we've taken follow-up actions, as Tom just mentioned, we've changed the compensation systems. We've changed the incentive compensation systems in a way to really focus the entire organization on growth. Just approved by the board and announced is a shift in compensation, all the way from senior leadership down throughout the organization, to focus on the growth of the company. And from me on down, the annual incentive plan that's now got a 40% component focused on net new business, 40% on profit and 20% on cash flow or some other objectives. So a significant shift in the way we compensate people and the way we incent people to really shift the mantra and the focus of the organization.

Right. So John, I hear you. I know you previously said that the last management team overly emphasized margins, didn't emphasize revenue growth enough. I surely heard you use the word growth here. But I just want to make sure that when I hear growth, you mean organic revenue growth coupled with margin expansion, right?

That is correct. That's exactly the way I would describe it. It's organic revenue growth. It's new account sales acquisition or new account acquisition through sales efforts, not acquisition efforts. It's building the base business by selling more to existing customers. It's providing value-added services to our existing customer base and extending the product lines that we offer. It's organic growth. And coupled with that is a margin expansion expectation as we continue to add volume, as we continue to make continued efficiency efforts throughout the organization. And so you enhance the supply chain process. All of those are accretive to margins for the organization.

Okay. Yes, that sounds great. What about other areas of investment, like does branding hit an area of investment? B2B branding, is this important at Aramark? Just I hear most of your investments are in sales, most of your resources are getting decentralized. But where does branding and other investments, that I might have missed asking about, stand?

Yes. Branding is part of the culinary organization. We have product development, marketing program development people inside of the group, inside of the Food and Support Services group. So we've taken that resource from corporate as well and repositioned that into the lines of business to effect the change for their customers. And we have embarked on a branding strategy that includes a number of different sub-brands like Harvest Table in our Higher Education segment. And so we have continued to invest in branding initiatives in what I would characterize as program offering investments. So we continue to expand the range of offerings that we can bring to the customer literally every day. So we continue to make those investments as we move forward.

Okay. Great. One of the proposals of the incoming Biden administration is a national $15-hour minimum wage. We're not asking will it happen or not. My question is if it happens, how will Aramark respond? Does that lead to a lot of wage inflation? Maybe, maybe not. I'm asking you the question, not stating it. And if there's wage inflation, how does Aramark's ability to raise your prices at the end customer level affect or offset wage inflation?

Tom, would you like to go ahead and address that?

Sure. Well, I know John will say the same. In my 25 years in the industry, we've dealt with the wage inflation the entire time through -- I started back in the Clinton administration and there was -- pushed that on minimum wage on through today. So -- and we've been dealing with the $15 minimum wage proposal for quite a while now. So that's a constant in the business. We can flex through it. Most of our contracts have [ index ] escalators, both for product cost and labor cost so that we're able to work those into the contract as we go forward. Virtually, we really don't have any minimum wage paid people throughout the organization. So I know there's ultimately a domino effect as the minimum wage increases. But we feel comfortable that we've navigated wage inflation for many decades in this industry, and that we'll continue to be able to handle that as we move along.

Yes, absolutely. I would only add that we were very proactive as a result of the Tax Reform Act of a few years ago. We proactively went through and addressed wage disparities in the organization and made sure that we were positioned well. We wanted to be able to make sure that we can fully staff and operate our businesses effectively to keep our employees retained. And so -- and we don't feel like we're in a position where this would have significant impact on either the way we operate the business or on the financial structure of the business.

Okay. Great. I would say so far the recovery in food services and Aramark's food services was showing some good improvement spring to summer. And then since July, the year-over-year revenue declines have really been pretty steady. When you offered insight into the current atmosphere for the current quarter, you said that the current quarter year-over-year decline should be similar to the just-reported quarter. In other words, there's been a pause in the recovery. It's a plateau. It's not backwards, but it is not showing narrowing declines. And I just was hoping you could give some insight, maybe it has to do with verticals, maybe it has to do with geographies, of why for a few months now there's really been a pause, meaning that year-over-year declines have not narrowed.

Yes, we can both take a shot at this as well. I think in large part, it is somewhat different by vertical as we continue to see improvement in several of the businesses and more of a static environment in others. Business dining is one that I would characterize as somewhat static, very consistent month-over-month and quarter-over-quarter. That's primarily driven by company's decisions to either defer bringing people back into their operations until later in the year. And so we continue to react and be ready to manage when that phenomenon begins to dissipate and people start to return to work on a more active basis in the B&I sector, particularly in the white-collar segment. Obviously, we had anticipated and we even hoped for a larger recovery in the fourth quarter with respect to sports and entertainment. That continues to be dragging out as various sports still have not had fans in their stadiums or arenas. The NFL has had very limited participation in some markets and much of that is driven by either political and/or health decisions. So it has somewhat -- it has been somewhat flat. So we see the pace as just continuing. We're positioned, we are controlling what we can control, and we are ready and able as the pace of change and the pace of recovery begins to accelerate. But we're confident in our ability to manage in this plateaued environment over the next short period of time.

Okay. I'm going to ask about business and industry. I know it's about 10% of global revenues. It's about 8% of U.S. revenues. John, you've already called out multiple times, you think this is one of the verticals that will take longer to recover fully back to 2019 levels. Maybe you could articulate why you think this will take longer to recover than other verticals.

Yes. I think, primarily, we're seeing a much faster return to work in the blue-collar environment. Obviously, the high-tech white-collar environments on the coast and the financial services industry is a little bit slower to respond in terms of bringing employees back and may take slightly longer to do that. I think we believe that employees will return to work that customers or that companies do want to have a re-engagement process that begins. JPMorgan is a great example of an organization that's committed to bringing people back into the office and back into the work environment. We see more and more companies beginning to make that decision. But we're still at a time of fairly high volatility with respect to infection rates. So I think people are somewhat deferring decisions and delaying decisions until they have a greater degree of clarity. And that's really what's impacting B&I more than anything else.

Right.

Other verticals have taken a much more proactive approach. Higher education, for example, their economic business model is threatened if they don't have students back on campus and they need to continue to improve that level of campus enrollment. So other organizations, other institutions are just much more focused on finding a way to get things done and to operate in the current environment than say the business community is more ready to stand back and wait for the evolution to occur.

Okay. And then how about post vaccine? How do you see the recovery in B&I? And how long might it take to get back to fiscal 2019 levels?

In B&I, first of all, if there's wide adoption and wide availability of a vaccine, I think there will be a significant improvement in the -- or acceleration in the rate of return to work. I know the CEOs I talk to, the Board Members I talk to on the boards I serve and the associations that I participate in, people are very much focused on getting people back. So I think if there's wide adoption, I think that there will be an acceleration. And it's hard to predict exactly what will unfold, but I do believe that ultimately the vast majority of American workers in the business sector will be back in their buildings and back working. There's been such a loss of productivity, such a loss of innovation, a real loss of engagement and empowerment that people are feeling. Even our own employees can't wait to get back into the building in order to facilitate that culture. Thank you.