Aramark (ARMK) Earnings Call Transcript & Summary

And great. Thank you all, and thank you all for joining us today. We are thrilled to host Tom Ondrof, the CFO of Aramark, to start the second day of our Industrials Conference. I am Kevin McVeigh, the business services analyst here at Crédit Suisse. Tom recently joined Aramark after having spent time as CFO of Performance Foods and North American Controller of Compass Foods. I think he brings a wealth of experience to Aramark in, really, as part of a meaningful reset of the senior management and really has done a really, really nice job through this pandemic. I'd like to keep this as interactive as possible. To the extent anyone want to ask questions, please feel free to do so. If people are more comfortable emailing me, please e-mail me at [email protected], K-E-V-I-N dot M-C-V-E-I-G-H at C-R-E-D-I-T dash S-U-I-S-S-E dot com.

But I wanted to start, Tom, again, thank you for taking your time out today, but also recognize the efforts you folks have made through COVID-19 because I think it really underscores the flexibility of the model. And what I wanted to do is really talk about initially kind of some of the liquidity measures you've taken and really how that's evolved over the course of the pandemic. Because I think what it's allowed you folks to do is really stabilize the business. And really, kind of within trends, would seem like they're starting to stabilize, maybe improve, albeit really stabilize the business and position it as we start to come out of kind of the events we've seen over the last 6 months or so.

Sure. And thanks for having me this morning, Kevin. I appreciate it. Yes, I think there were really 2 approaches: the initial approach with liquidity, and then right there in March, early April when the pandemic really hit and then the subsequent months thereafter. Initially, in late March, we drew down the balance of our revolver as things were first coming in this view as to what this may mean and how long it may last. It felt like a prudent action and, of course, it was. As we spoke internally about the impact that we were seeing in the business, we then undertook the bond issue, which we executed in late April for $1.5 billion. It's well oversubscribed. We're quite pleased with that. And that really shored up the balance sheet at that point. Thereafter, we really started focusing on the operational cash flows and really getting into managing those, making sure our working capital became -- rebalanced our inventories, payables, receivables. There was a -- early days, I think, a view that the receivables may start to lag, but our field and our unit operations did a fantastic job of continuing to stay current with those billings and collections. So in the end, since the bond issue in April through the end of the fiscal year, we ended up actually generating slightly positive cash flow. So it was a heroic and really well-focused effort by our team to do that and really didn't end up using any of the balance sheet over the balance of fiscal year. So it was a great result. And then subsequent to year-end, as you know, we paid down a good chunk of the revolver and feel like we're in really good shape going forward, both operational cash flow and our balance sheet position.

And one thing I'd highlight, too, is -- again, applaud you for being able to frame a cash flow range for 2021, particularly given some of the uncertainty that continues to be out there. So just, again, I think it underscores what you folks have done operationally. I think the other thing it's allowed you to do is maybe make some investments in the business. So maybe talk a little bit about some of the investments you made, both the foodservice and it sounds like on the uniform sales force, which sounds like that's going to position you well as we start to come out of this as well.

Sure. Well, I'm going to start with the uniforms because it's a little chunkier and maybe more publicized since it's been going on prepandemic as well. But we've added 150-or-so net sales execs in the last probably year, maybe 15 months. We continue to add probably another 100 or so. It still leaves us proportionately well behind our competition in terms of sales resources. So we are really recovering from being under-resourced over the last few years. Those folks are getting into place. They're a little quicker to be productive given the nature of the sale, although the contract is a little shorter. So we're quite pleased with how that's going. Our sales leader in the uniform business, Ryan Flaherty, is top-notch. He has a great process and a great team and continue to push that forward. So we're excited about the results there. On the food side, a little bit more nuanced. It's not so much about headcount there, though we are under-resourced, I think, versus where we should be and actually where the company was about 4 years ago in terms of sales execs. So we'll continue to look at those. A little different skill set with the foodservice sales. So a little bit longer recruiting process there, but we continue to punch away at it. A new sales leader in our health care division. Everybody is, including health care and the other lines of business are evaluating the talent and really getting everybody into -- back into the growth mindset. But we're also investing on the foodservice side in territory management, which is really key to being successful there, making sure territories aren't too big, aren't too small, have the proper pipeline within each and trying to stabilize those territories because that's really key to success in this selling process. And then also in training. Just hired or brought back Denise O'Brien, who had been with the company up until about 1.5 years ago. She had been within the sales enablement line part of the business. And she brought back in to reestablish training and onboarding programs, which I think will help accelerate the productivity of the foodservice sales folks.

That makes a lot of sense. Tom, one thing I wanted to talk a little bit about, too, is given the scale and the execution, as we come out of the pandemic, I think you folks have multiple opportunities, one of which is to kind of help set some of the industry standards. But I also wanted to talk not only about the impact of COVID on the uniform business, but also on the facility side because it feels like there's going to be structural, incremental demand. And maybe talk about -- the uniform side is one side, but I think kind of the facilities is maybe a little bit underappreciated. And maybe talk about how that ties in, too. It almost feels like it makes more strategic sense to have the facilities within foodservice now than, oddly enough, even before the pandemic, just given the increased focus on sanitation and so on and so forth.

Yes. No, we're excited about the facilities side of the business. It's got good leadership and good management team. It's been a separate business, separate line of business for us for a number of years. So I think that, that's going to work to our advantage. It's got -- even prepandemic, I think it had great opportunity. And probably, again, going back to your earlier question on sales, was under-resourced on the sales side because of the opportunity. So I think both being able to grow into new accounts given the current environment as well as being able to increase the base business in facilities is an opportunity for us. But you're right. Facilities really operates primarily off a cost-plus environment sort of contract. And if you were cleaning an office 3 days a week prepandemic, it could be 5 days -- or it could be 10 times a week now. And you're just building in that additional revenue, build in that extra fee and really -- so it helps drive the profitability. We're going to become more efficient with our offer, coming up with new technologies, given that we can't just rely on additional labor for the increased demand. So we're going to have to become, and we are becoming, more effective in the way we handle these accounts so that we can step up to the demand.

Tom, one, I think, intriguing part, too, is you and John bring a wealth of experience. And 2 of the bigger opportunities I see at Aramark are obviously the potential to reaccelerate the organic growth and then try to boost the margin. And maybe share with us a little bit -- because, again, between Compass and Performance Foods, you've got a wealth of industry in the industry. Maybe some best practices around that. And maybe if you could maybe comment a little bit as to the potential improvements in retention and sales force, things like that in terms of win rates, just anything. Because again, I think that's one of the more intriguing parts of the story, too, is the wealth you and John -- wealth of experience that you and John bring to the story.

Yes. I mean in terms of -- John will probably say the same thing. I think it's a little bit more intangible what we bring. This is a great company. It's got great people. John, before I arrived, had brought in some really, really quality operators: Gary Crompton in B&I; Jack Donovan came in a little bit after I did in higher ed; we got, as I mentioned before, Jim Rathburn's come in to run health care sales; Denise O'Brien. There's just a wealth of knowledge in the business that is changing, I think, the demeanor. I think Aramark had become -- it's well-known, too bottom-line focused. We've got to get back to balance. And that's what I grew up with. I mean I grew up with a balanced mentality. Growth mattered, but profitable growth mattered more. And so you have to grow, but you have to grow profitably. And I think the mindset had become unbalanced here in the last few years under the prior leadership. And John and I, I think, we understand with 50 years combined experience in the industry that it's balance. We've got to be customer-centric and hospitality-led. It's got to be -- it's as important as the clients -- that the clients are happy as to what happens to our bottom line in the short term. Because eventually, a happy client is a profitable client, is a long-term client, and that gets your retention rate up. It helps you become less cookie-cutter and more customized, which drives your top line. And then all that growth helps your supply chain negotiate. And then if you can layer on top of that some really prudent SG&A management, the whole model works. So it's really not any more complicated than that, but the hard part is executing.

And it's interesting. I think it shouldn't get lost on anyone that historically, Aramark was the industry leader in terms of revenue growth and things like that. And when we get the question whether or not you can kind of return to that, it's kind of interesting because I think if you just -- and again, it's difficult to do, but you've got the right team in place to do that. And there's best practices that -- there was a reason that was the case. So we look forward to seeing that happen. I wanted to maybe do a little bit more of a deeper dive by the segments. And just for the audience, as a reminder, Aramark is: foodservice, 55% of the revenue is North American, 25% is International; and then the balance is the uniform business. So what I wanted to do is maybe, Tom, just talk a little bit higher level on kind of -- whether it's recent trends or just any trends across, again, within the North America, which is 55% of the revenue. You've got Education at 25%; sports, leisure at about 22%; Business & Industry, 18%; health care at 12%; and then the facilities, which is almost 25%. But maybe talk to how kind of -- whether it's recent trends or just any thoughts as to how the different sectors have been impacted. And how you see maybe some of the progression as we're moving across the more recent COVID events?

Yes. I mean I guess talked about this for quite some time. And it's a big question. I keep it as succinct as I can. The trend overall, as everybody is seeing on the revenues, over the last 2 quarters it's been trending positive. We talked about going from 45% down to 36%. And then looking at a first quarter being very similar to the fourth quarter, so a bit of a pause in the recovery. I think taking them one by one, Education, abrupt stop and restart. I think we were operating at about 90% of our higher ed accounts throughout the quarter in the fourth quarter and then here, a bit into the first quarter, though by no means 100% within those -- within that 90%. It was a different offer with less students. So higher ed was obviously impacted but continue to see good activity. And I think the underlying sentiment in higher ed is everybody is desperate to sort of get back to normality. The universities are being pressured tremendously by both students and parents for a learning experience, an overall experience that's as normal as possible. And so we've worked very hard with our clients to help provide that and get things back to the extent that we can and safely can. So I continue to see the underlying pressure in Education to be a positive one and moving in the right direction as soon as possible. Sports and leisure, a different story. While there's underlying demand and desire to get back into the stadiums, I think people are fairly reluctant to that. Of course, as most people know, during the quarter, the NFL was allowing people back in small percentages back into NFL stadiums. So that helped a bit. But I think we still have a long way to go there. Certainly, a vaccine will help in this environment, the sports and leisure environment. The parks did have a solid summer selectively with the environment being outdoors. So we'll see how that transpires. B&I, we've said since the beginning I think it's going to be a long journey. It's going to be a linear bounce back. We saw a little bit of progress throughout the third and the fourth quarter since April and again, into the new year, new fiscal year. But it will continue to move forward at, I think, a pace that's probably a bit slower than the others. I'll note, because we get asked all the time, obviously, do we see permanent damage to the B&I industry. John and I don't, nor does our B&I leadership. We saw it in 9/11 and the economic downturn in '08,'09 the predicted death of B&I. And it bounced back plus some in both those cases. We feel it'll do that here as well. There's a lot of offsets in B&I. Participation rates historically are below 50%. In essence, the number of people we capture any given day is below half. So there's an opportunity with people coming to work in the new post-pandemic era, certainly initially wanting to stay on-site, and so participation rates could easily pick up a bit there. Delivery on to site could be blocked, to not have other people coming on to the premises, so that could help. So I think there's some short-term tailwinds that could help B&I as it recovers fully long term. Facilities, we talked about. Health care, again, has been pretty stable, was hurt in a short period of time by the hospital beds being freed up for COVID patients and elective surgeries being temporarily suspended. That's bounced back, and we continue to see solid improvement in health care. We feel really good about the opportunity. It's such an underpenetrated market. Again, new sales team, new sales leader, and we feel good about the opportunities that we've got in front of us on health care. And I think that industry will continue to strengthen.

I also think within B&I, Tom, there's probably incremental share as maybe some of your less-capitalized players struggle to kind of ride out the liquidity and invariably, what will be probably some upgrades from a CapEx perspective. So I share the sentiment. I'm going to ask a couple of questions that people have e-mailed me, if that's all right. One starts around the competitive landscape in terms of how you're thinking about pricing in both kind of the current environment. And then any kind of potential changes post-COVID? And how are you balancing kind of being back on the offensive versus retention, I guess, from a pricing perspective?

Well, more of our contracts are built off indices. And so pricing is built in, in the ordinary course of a given a given contract year. So we see that continuing to stay in place. One -- a little bit of difference right now in this environment is that we are working off negotiated contracts, addendums, amendments in this environment. So as we've said many times, a lot of the normal P&L contracts have been renegotiated cost plus. And they will -- we feel very good about the idea that they'll work their way back to their pre-COVID state as time goes on and volumes come back, populations on site come back. So under a cost-plus environment that we're sort of working in now, pricing is sort of a no-brainer. It's built into the contracts. As we get back into a P&L environment, that becomes more of the conversation. And I think at that point, we'll be clear of the pandemic. A lot of pricing is built around product cost inputs, labor inputs and the overall cost infrastructure. And I think it really just relies on your communication and conversation with your client and your ability to prove both the underlying cost pressures as well as being able to show your efforts at driving efficiencies to be able to negotiate those. But again, short term, don't see any issues with pricing. Longer term, as we move back into normal contracts, we feel we can handle that as we have in the past.

And Tom, just along those lines, someone also asked -- and I don't think it's necessarily an issue for you folks. But to the extent there was an increase in the minimum wage at the federal level, any thoughts as to that, particularly, I guess, as it relates to the pricing?

No, we don't. We don't pay minimum wage. Really, we're above that. Of course, there's always a little bit of a domino effect. As minimum wage rises, the higher-level wages can tend to rise as well. It's been -- wage inflation has been the one constant in my 25 years in the business. It's always there. So we're not fazed by what may come. And matter of fact, we've been dealing with a $15 minimum wage and its ripple effect for a number of years now in selected areas.

Great. And then another question was, did COVID actually accelerate some of the internal changes out of necessity? Or did that kind of push it out a little bit?

No, it actually accelerated it. It's a good question and a good point. If there's a silver lining in something like this, maybe that was it. It really did give us the added -- the ability to look at everything. You always theoretically hear about zero-based budgeting, but nobody ever does it. We were able to. And so we looked at everything. And really, I think if you look at the business's in-unit cost and above-unit cost in its most simple form, we were able to look at the above-unit costs very hard and very deep and on an accelerated way than when I came in -- than I would have thought we could have when I came in, in January.

That's helpful. Any thoughts -- and this -- another question that just came in. Obviously, there's been a lot of questions around how just the overall asset allocation within Aramark, particularly. And again, whether it's uniform or any other parts to the business, just from a strategic perspective, has that evolved at all the thinking around it?

The capital allocation, do you mean, Kevin? Or...

Yes. That and just the, I guess, the assets overall.

Well, I guess if I understand the question, I mean, our investments into each of those business lines and how we see that going forward?

Yes, yes.

Yes. No, again, John and I think the uniform, foodservice, both U.S. and international, all are performing well in the environment, have all been very deserving of continued investment, as you've seen in the uniform side on the sales as well as other investments needed to continue to drive that business, the ABS rollout in uniforms. So we continue to invest and feel good about driving opportunities and continuing to create value and additional growth and profitability in uniforms. And then on the foodservice side, certainly, core business and one that's near and dear to our hearts. We don't feel that we need to necessarily expand our footprint that much either in our lines of business within U.S. or internationally. M&A is always out there, but I don't think it's anything transformative. We continue to look at some tuck-ins that may bring a new line of customers or a particularly strong management team into the fold. So we'll continue to continue to invest and look at those opportunities.

Hey, Tom, one part of the business, I think -- or not even just overall, I think the market underappreciates is the flexibility of the cost structure. And I always say at one point, upwards of 280,000 associates, I think 100,000 are seasonal. Maybe talk to that flexibility because, again, I think that was one of the initial -- when you saw the initial reaction to COVID, I think it was a concern around just a much more rich cost structure that maybe is not there. And again, I think you folks have a lot of flex on that. So maybe just talk to that a little bit. I think it's another underappreciated part to the Aramark story.

Yes. It's another one. With all the time in the business, there was always the theory that the model was very flexible, and that if you needed to, you could move things out in fairly short order. This really tested the theory, certainly, April, May and June being able to take, again, in those 2 simple buckets, the in-unit and the above-unit costs and being able to very quickly flex the in-unit costs to match the activities levels. So if you worked down the P&L, the food was quite quick, obviously, to flex out. Labor was right behind it at the unit level, based -- if units went dark, you're able to make the move. And then other unit, other personnel direct costs in the unit follow the activity. So the in-unit costs were able to -- were flexed very, very quickly by our lines of business. The above-unit costs, they're a little bit longer when you get into district and regional management line of business, support, culinary, marketing, HR, that kind of thing. And then, of course, the corporate staff. So that took a little bit longer. But as we look through it -- and to your earlier question, really, really went down to the roots and looked at what we need, what we needed to support the business, what we felt was appropriate. We've used the term getting the business fit for purpose, deciding what needed to be either reallocated or taken out all together. It happened very quickly. So I think within 90 to 120 days, we were in a pretty good position, and as we opened up with, the results showed both in profitability and in cash flow.

Great. Hey, I've got a couple more from the field that I just want to run through, if that's okay. Could you discuss the opportunity to convert self-op to contract? And has that been accelerated by COVID? If so, why?

It will be. Again, as I mentioned before, the [ helota ] contract process or time line is different across the different lines of business. So if I take the, for example, the longer or the bigger self-op lines of business, healthcare and Education, [ helota ] contract can be years. As we've demonstrated or talked about a couple of quarters ago with Purdue, converting from self-op to outsource with Aramark, that was an 8-year journey. So the activity, the conversations are absolutely there. We just won Sacramento State, which we announced this past quarter, which was a self-op conversion. That conversation was a little quicker than 8 years, but we have been in that conversation. So the activity will begin. I don't want people to get too excited about it happening in a quarter or 2. But I think it will certainly be accelerated more than it would have been without the pandemic. Again, going back to 9/11 and the economic downturn, every time there's a bit of a crisis, there tends to be a boost to outsourcing. It's not massive, but it's a boost. And we'll see the same thing here. And I think the big point to make is that the underlying core pipeline prepandemic, post-pandemic has stayed very healthy. So you sort of have this pipeline that continues along, this healthy, robust pipeline that continues along. Decision-making has been slowed a little bit during this process, which has helped the retention rates. But that will reaccelerate. And then on top of that, you'll get this new layer of people who haven't even entertained outsourcing in the past and now will.

And I'm going to end on this. I also think the subtle point is the way folks have been able to execute with your clients is going to help that and maintain that retention and really just underscore the organization's capability. And I think that's going to go a long way.

It's a great point, Kevin. People who've stepped up for their clients through all this, I think, are going to be rewarded in the long term through retention rates. And those who didn't are -- that's going to be to our benefit.

Yes. Agree. Well, we can't thank you enough. We know you're busy, and I really appreciate the time here today, Tom.

Thank you.

Thanks. Thanks again. Take care now.