Aramark (ARMK) Earnings Call Transcript & Summary

Welcome, everyone, to the next session of Baird's Consumer, Technology & Services Conference. I'm Andy Wittmann. I'm the senior research analyst that covers facility services at Baird. This next session is with Aramark. And what's unique about this session with Aramark today is we have the Uniform leadership team. This is -- recently, the company announced that they plan to spin off this unit. It's going to take a little bit of time for that to happen. But this is the management team that is going to be -- to running that new entity when it comes to its own company in 1 year and a half or so, depending on how it feels. I guess John is now saying maybe we can do it a little bit faster. I heard him say that last week. So we'll see. But this is Kim Scott, she's going to be the CEO. This is Rick Dillon. He was recently hired to be the Chief Financial Officer of the company. And so today, we're going to take a pretty high level because I think the future of Aramark's Uniform business is going to take on kind of the life of its own. But it would -- I think the best place to start, Kim, would be just talk about -- and really, this is probably for both of you, first, Kim, then Rick, talk about what brought you [ into ] the opportunity at Aramark Uniforms and kind of what you see as the key attributes that you plan to build on.

Absolutely. Well, first, thanks for having us. We're delighted to be here and really pleased to talk about Aramark Uniform Services today. It's an amazing great business, which is one of the reasons that I was attracted here. But a couple of things I'd like to share about why I did choose to come on and go on this journey, which I think is going to be a very exciting and accretive journey for our shareholders. So I thought I'd talk about that and then introduce you to Rick and let Rick tell you a little bit about his background because I'm really pleased that we were able to recruit him as our Chief Financial Officer, and he's recently joined us. So we're really building out a great management team and, hopefully, I'll have the chance to talk about that at some point during our time together today. But this is an amazing model. So recurring revenue models as many of you know, because you're following services or investing in B2B services, is a brilliant, brilliant model when operated properly. So I love the recurring revenue concept of the business model. I have a ton of experience working in this space. So coming from, first, CHEP, which is equipment pooling and rental. And then moving over to Rubicon in waste, Terminix in pest control and now here at Aramark Uniform Services. So I really have an affinity for the recurring revenue model and understanding how important protecting that basis and really building customer loyalty, so that you can then drive retention, which, as you all know, is a great way to grow your business in a recurring revenue model, but also this huge opportunity to cross-sell the base. And so I'm coming from a background that has a tremendous amount of experience really running these recurring revenue models and running them very well. But the other thing that really attracts me is the very large frontline team that we have. So I have a heart for our frontline team members. Any of you who participated in our Analyst Day session in December would have heard that passion that I have for our frontline team. And I'm always attracted to models where we have a very large frontline workforce and it really motivates me and inspires me. That's where I get my purpose to really help our thousands of frontline team members live their dreams, enable them to do their job really well and to help them build purpose and to be fulfilled. And so this model presents a great opportunity to do that. So that was very attractive to me. But of course, logistics is where my heart is, I grew up at CHEP, as some of you may be familiar with Brambles, but it is a very sophisticated logistics company. And so the intellectual challenge that comes with complex logistics and really, really managing logistics effectively, whether that's in a route-based business or complex inventory models that require you to move assets. I really enjoy the challenge that comes with that. And so when you put all that together, it's just really a great fit from my background and for the things that I enjoy. But lastly, of course, I looked at the actual opportunity. So beyond the business model and the fact that I love that my experiences correlated and I love the frontline team and the intellectual challenges of logistics, really comes the opportunity. And so when we look at this market, we estimate this opportunity to be a $40 billion market. And for those of you who follow our financials, you'll know we're sitting on about $2.5 billion of that. So when you think about the opportunity to capture market share and to really take advantage of that market that is available to us, it is tremendous. And so as I've come into the company now since October, it's just incredibly clear that there's so much opportunity to harvest that and to grow this business and to really drive a step change in organic growth but also improvement in how we operate the business to expand margins. And that opportunity just becomes more and more clear to me each day that I'm here. So I could not be more excited to be on this journey. I'm pleased that we've made the decision to spin out the business and to give us really that freedom to unleash us, to go capture that value which is clearly in front of us. And so I'm also pleased to introduce you to Rick Dillon because I need a great partner, many great partners on this journey with me, and so I'm really honored that we were able to recruit someone of Rick's background and caliber to come on the journey with us. And So as I mentioned in my intro, Rick will be our Chief Financial Officer. He is now just joined us about a month ago. And so I'd love to give Rick the opportunity to share the story and more about your background as well.

Thanks, Kim. And thanks, Andy, for having us again. I am incredibly excited to be here. As Kim outlined, I think it's an incredible opportunity where the company is. I joined about a month ago with the announcement of the spin. When I heard about the opportunity, the things that attracted me was the growth opportunity out there. Here's a business that you can see from the results is responding to investments. It's a $40 billion approximate market. And we have $2.5 billion. So there's clear runway there for us to grow. Being able to leverage my background, it's very broad, larger public companies. I've done everything from baby products to mining equipment. So being able to leverage all of those collective experiences in a carve-out at my most recent company, we completed a separation of 2 businesses, so that's very relevant to what we're doing. And I've seen the benefit of leveraging kind of this customer experience. We refer to it as life cycle management or smart services and the value creation there and the intimacy you create. So when I looked at this business, those are the things that excited me. And now that I'm here, I look at the team that we've put together, that Kim's put together, and I'm even more excited now. So definitely happy to be here.

Great. It's interesting. So now both of you relatively newer to the company. I guess one of the things I would like to know, Kim, is after a few months on the job, what have been the 1 or 2 really positive surprises? And what are the 1 or 2 opportunities that you think became clear to you as you've taken a look around the business?

Yes. I would say, generally, it's what I expected. So the good thing is my homework panned out for me. But I was incredibly pleased to see the tenure of our frontline route services team. So this heartbeat of this business is around how you touch and interface with the customer and our route drivers, our teammates who are delivering uniforms and cross-selling to our base, are highly tenured. And I was extremely pleased to see that because you're coming on to a base with a great culture, high employee engagement, teammates who have been here for a very long time, who are passionate about their routes and about their customers on those routes. That was the pleasant surprise. You don't always find that. And so I was delighted to see the tenure. I spent some time doing ride alongs, obviously, with our route team so that I could see what we do and how we do it and get really close to our customers, and the intimacy and the relationships that already exist between our route drivers and our customers was just really, really apparent and compelling. So this opportunity to move into adjacencies and to really grow the base through cross-selling is very apparent. And there's -- again, when you say the opportunities, there's an opportunity to do better at that. So we have this amazing group of teammates who have already built this great relationship with the customers and we haven't built the right tools and given them the right resources so that they can really excel at cross-selling adjacencies to the base. But they've done the hard part, which is build the trust and build the relationship. And so I'm incredibly excited to leverage these relationships that our route drivers have with our customers by bringing them some good tools and some more sophisticated resources.

Got it. So the company has been implementing and it's actually mostly done implementing a new software handheld system that's on the route. Is that the tool that you think is going to help unlock the cross-selling? Or are there other things as well?

Yes. I would say that it's one of many tools in the toolkit, and it is wonderful. So you all have heard us talk about the CRM and we are almost fully transitioned now. I think we had 5 facilities literally left to move on to this in our core business. And so we are already taking advantage of that tool by doing things like adding the ability for an RSR, which is what we refer to our teammates in the field, our route drivers [ as ] to add a product. So when they're on the ground with a customer, now they can press a button, they can add a mat, if they're not already selling mats to that customer. We've made it very easy for them. So that's step one, just make it really easy so they can sell what's available. But step 2, which is the part that we'll be building out as part of our strategic growth plan is now let's really work on our product marketing and really think about how we're managing our products, how we're bundling our products, how we're going to market and what tools we're giving them to more easily cross sell and to make it a really simple ease of doing business experience for the customer. So in the coming years, we're going to be building out more go-to-market strategies and more sophisticated product management strategies. But for now, let's sell what we have. And that tool, that CRM, is allowing them to press a button and to add that mat and to move that the customer. But I think we can do more beyond that with more sophisticated marketing.

Cross-selling is a great way to grow the top line. I was like a fundamental principle that we believe as important is the -- we always say growth starts with retention, the customer you don't lose. And so I was just wondering what initiatives you have in place to look at your retention rate and if you think there's an opportunity there. I think, honestly, from what I've heard from the company, the retention rate in the kind of low 90s, 91, 92 is pretty, I'd say, standard for it -- the most of the industry. But I was wondering that what you -- I mean, you can always do better. So I'm wondering what you think is the opportunity there, if any.

Yes. Well, I love how much you understand our model because you're right on. I know you've been following our industry for a very long time. But what I like to tell our teammates is the single smartest and best way to grow is through retention. So you've already paid to acquire these customers. You've already spent a ton of energy and resources, quite frankly to ramp them up and to move them into your portfolio. And so it's almost free growth, if you want to think about it that way. So it makes sense to invest in retention strategies. And our team has been very focused on retention in terms of building great relationships and in terms of visiting the customer and making sure that you're spending time with them and delivering on the promise. But there are also more sophisticated tools that we can bring around customer touch point strategies and being very thoughtful about every touch along the way, not just closing the deal and the implementation of the customer, that, that entire life time that, that customer is with us, thinking about when you touch them and how you touch them. How you articulate value, when you articulate value, segmenting them very, very surgically so that you understand who to cross sell what to and win and being really purposeful about that. Also, those touch points allow you to continue to articulate the value that you bring. And on those days when you need to take price on those days do come, you've established that trust, you've established that relationship and that customer knows the value that you bring and it actually helps you pass pricing through when needed as well. So we're going to be very focused on continuing just to do the great things from a relationship perspective, but to bring in real sophisticated customer touch point strategies. And that's part of our long-term growth strategy as well.

It feels like a lot of the investments to position Aramark Uniforms for growth have been made. The last couple of years, John Zillmer has come in. I think he said last week at a different conference that the sales force was increased by like 30% or so.

That's right.

Are there other investments? Or do you just kind of need to -- you've got the CRM, you've got more people. Like is it now just time to kind of harvest this? Or are there more things to come?

It's a great question. Well, first of all, I came in after the decision to make those investments have been made and we were largely ramped. And I can tell you, I'm very pleased that those investments were made. So I look at those decisions that were made to increase that sales force by more than 30%, to move to that ABS routing systems, the CRM that we talk about. I think those were really sound and good choices and good investments. So there is time now to harvest those as we talked about using that CRM platform to add a product and to help route drivers cross sell. So there's definitely an opportunity to do that. We've also seeing that sales force really hit their stride in terms of productivity. So the key part of that investment thesis was they've got to hit a certain productivity level to pay for themselves and to make this thing worthwhile. I'm very pleased to see that we are hitting those targets and we are delivering the productivity with that sales force that we planned on. So we feel great about all of the things that are happening around those investments and the benefits and the business cases that we assemble when we made those investments. So we're going to harness that, but we also to give now these frontline sales team members more sophisticated ways to sell. So when we talk about this go-to-market strategy and bundling products and being a one-stop shop, in fact, and just finding ways to more easily sell our products to our customers, we're going to arm that sales team now with more sophisticated tools. So in terms of massive investments, we have no massive major step-change investments on the horizon. We're going to harness what we've already done. And we're going to make some investment in marketing in due course because I think that we've underinvested in marketing, digital marketing, product management. So there'll be a time where we make some investments in marketing, but they will not be to the magnitude of the types of investment that you saw with the CRM platform or with the 30% increase in the sales force, if that makes sense.

Yes. Okay. So I'm starting to get -- my next question is going to be, so what do you think you do differently as a stand-alone company than you do as part of the larger organization? It sounds like a little bit of marketing is one thing. Is there anything else operationally or other things that you think maybe now you've got control of your own capital budget?

Yes, that's a great question. So the first thing that we've done around operations, candidly, is to install a proper logistics function. And so there is a massive opportunity in this model, of course, to leverage logistics know-how to drive efficiencies. So efficient routes, really driving density across those routes so that you can leverage your footprint and lower your cost to serve. And so we're very, very focused on logistics. And I think that's been an area that we have not been as focused as we should have been in the past. And so that's really not related to what you do when you spin out, it's just really related to what do you do to really run this business really well. Whether we're inside Aramark or outside of Aramark, we should be really, really expert at logistics because we're running a route-based business. And going back to your question of kind of what surprised you. I mean, candidly, I love our team and I think they're doing amazing work, but I was surprised that we weren't doing more sophisticated things around routing and scheduling and logistics.

Is that using software tool? Is that cloud? Is this really basic stuff? What kind of stuff about?

It's a great question. I'd say it's a little bit of both. I mean, I've been really pleased to recruit a great logistics leader. In fact, he was my logistics leader at CHEP for more than a decade in a really sophisticated, complicated logistics environment. And so we brought him in to start building out metrics to start with, very hyper focused on route efficiency, route density. But then taking it to the next level and thinking about how do you fill in those holes and those empty miles. So using the metrics to say how dense is a route, how efficient is it, how many empty miles are sitting in it or whatever metric you want to use for inefficiency, and then how do you your prospect on those routes to fill in those routes. And so you're making every route more efficient and you're also cross-selling the route. So understanding how penetrated you are and what can you do to gain more share of wallet, making every stop more valuable. So this is just the concept of understanding efficiencies. So not huge investments. This is more around rigor and really getting disciplined around logistics, KPIs and route efficiency KPIs, and then bringing in some sophisticated tools around things like geo prospecting. So when you've got this large sales force now out in the field, selling, helping them be really smart about how they're selling. So today, they have territories. Tomorrow, I'd like for them to be laser-focused on routes. So I talked about this in December, think about driving behind the route driver and looking for every stop he's not making, that as a prospective customer, winning that customer and making that route more efficient so we can leverage those assets that we already have and drive cost efficiencies.

Okay. That makes sense. I'm just curious, it's -- this is a business that historically, it's differentiated on service quality in the competitive environment. I think product breadth is another area where some people kind of compete. Where is Aramark Uniform competing today? And does it need to change after your view here a few months in?

Great question. Yes, so largely our base business, as I'm sure you know, is uniform rental. And inside that, it also includes renting mats and it includes [ bar towels ] and things of that nature and some linens in there as well. But we also do have adjacent and we refer to them as adjacent services. And for us, that means managed restaurant services, and that means first aid. So when we talk about adjacencies, we're largely referring to those 2 service lines that we have inside the business. We've shared previously with the market that we have less than 5% adjacencies in our top line revenue mix. And we've been hyper focused on growing that adjacency mix and getting a greater mix of restroom services and first aid. We're over 5% now, but we have a very long way to go. They're very accretive. It will drive margin expansion for us to grow into these adjacencies. So we have tremendous opportunity there, and we're going to be very focused, as part of our long-term growth strategy, on shifting the mix and having a very granular focus around the mix of our top line revenue and shifting, not as much as we can, but more towards adjacencies and growing in that space.

Got it. Okay. That's interesting. I think I wanted to talk a little bit more about kind of what the financial plan can be. The margin at Aramark Uniform Services this year, at least for the segment, is going to be probably in the 9.5% range we're guessing at Baird, at least. And that's almost back to pre-COVID levels, but there's obviously some inflationary factors in there. Before we talk about the specific inflationary factors that everybody in the industry is experiencing, I was just wondering if you have a view or any targets that you feel are realistic for the margin profile as the business continues to scale?

So we're absolutely focused on expanding margins. So we believe that margin expansion is a must for us. We're very pleased that we're broadly back at pre-COVID levels. So you would have seen that we have now gotten back above our pre-COVID revenue levels and we're broadly back to the pre-COVID margin levels. We're not satisfied with that and we will always be striving for more. We're going to make commitments in due course, obviously, when the time is right around our forecast and our entity being separate from Aramark. But absolutely part of our story will be and our plan will be margin expansion and consecutive margin expansion year-over-year. And I see a lot of opportunity to do that, not just in the mix around adjacencies but also around operational efficiencies in this discussion that we just had about logistics and route efficiency and really leveraging our assets and being more dense and leveraging that footprint are all ways that we're going to expand margin in due course.

Got it. And just maybe specifically, and I don't know if there's an answer to this question, but the company, Aramark, the company laid out some margin targets for, what was it, 2025 at least?

Yes.

Okay. For 2025. And I just wonder, is there an implicit number or range inside of the corporate average margin that is applicable to the Uniform business that we should be thinking about?

So in due course, we are going to bifurcate those numbers. And so Aramark, as we've said many times, we remain committed to those targets that were given by Tom back in December and John. And so we're working now to prepare to communicate that to the market. So we will bifurcate that. One plus 1 will still equal 2. And we're all committed that Aramark as a whole, including our portion and our contribution, we will still stay behind that guidance and those numbers. So in due course, we'll tell you what portion Aramark Uniforms is going to take with us and what that leads the targets for Aramark to be.

I know you're just starting your meetings today. I have a sense that...

Everyone's going to ask that.

You're going to be getting a lot of questions about everything that's 18 months away or 12 months away today because we all want to just zoom there and there's a lot of wood to chuck.

So we will communicate that in due quarter, not today, obviously, but absolutely, we will, and we remain committed to those targets that we put out together.

That makes sense. All right. Well, there's -- we're on day 3 of this conference, we've all been talking about supply chain labor. We've been talking about fuel costs and everything else in between. It's pervasive, obviously. So I wanted to just check your temperature a little bit about where Aramark Uniform Services stands and its ability to find people and be staffed to avoid overtime and other things that are not financially helpful. But also the experience that you're having in terms of what you're paying the labor that you currently have and your ability to price for that.

So yes, it is a challenge that everyone is facing, and I'm sure you're going to talk about this repeatedly throughout this conference. But we've been very surgical in our approach. So rather than taking a macro view and a blanket number that says, "Hey, we're seeing labor inflation of X," because we have the distributed model, and we're operating in many different geographies in many different cities with various labor pressures, we're taking a very surgical view of that. So as we go into facilities, we are evaluating by location, by plant, by market center our staffing rates, our overtime numbers, what are our challenges and how are we managing labor cost. And so it is not for us a one-size-fits-all at all. And I think we've done a very good job of absorbing any inflation that we needed to, any wage increases that we needed to absorb. And we're offsetting those in other places, candidly. So while we are seeing some higher labor costs in certain markets and we're also seeing difficulty staffing in certain markets, that drops over time, we're finding ways to manage that very carefully and offset it. So we aren't taking a blanket approach to wage -- raising wages, if that makes sense.

Yes. It's interesting. So the Uniform business at Aramark is fairly heavily unionized in the plant labor and I believe your route drivers are as well. Is that a benefiting factor right now that you've got contractual wage rates? Or are there markets in fact where the contract wage rate is insufficient to fill the labor needs that you have?

Yes, I would say that it's not an advantage or disadvantage, just it is our environment that we have to manage within. And so when you have, as you know, a unionized and a CBA in place unionized workforce and CBA in place, when you do something for one, you do something for all. And so we do have to be very mindful about that. So as you're bringing in new employees in your staffing, new teammates, if you have to raise wages, you obviously have to address the existing workforce as well. And we want to take great care of our people and do the right thing, I want to be clear about that as well. But it's more of a systematic situation when you've got those CBAs in place and you have to -- you have to normalize things for the whole team. But I would say that it's not an advantage either. I think we're just very mindful about the fact that when we make a change, we may have to make a change for all across the system that is related to those particular union organizations.

Got it. So energy costs, about 4% of revenue the last time I checked at Aramark. Obviously, fuel price. So there's natural gas, there's electricity, there's motor fuels, all in then all up a lot. What -- have you been putting fuel surcharges? Have you been just trying to get kind of raw price increases? And what's your experience been with the customer talking them through these recoveries that presumably you're trying to get?

Yes. So we've also been very, I would say, rigorous about understanding the cost of fuel on our network, whether that's energy inside our plants and facilities or whether that's fuel that's being consumed by our fleet. And so we have been very thoughtful about how we deal with that. And so in some cases, we have some costs that are being passed through to our customer very transparently. In fact, it explains very clearly how we're approaching that and how we're quantifying that. And we've created, in fact, even a micro site for our customers so they can go and look at it and understand it. So we've been very transparent about what we're doing, with every intention in some of those cases where we have passed on fuel cost that we have every intention of reducing those fuel costs in fact when costs mitigate. So we've been incredibly transparent about how we're managing that. And we feel we're really doing the right thing by our customer and being very open about that situation and how we're managing that situation.

Great. Okay. The -- are there any other questions from the audience here? We've got like 3 minutes left and I only have like one more question. So to the extent that anybody has anything of the question in the audience? Okay. I guess my final question is when you think about organic growth rates, I mean, today, there's an inflation. We talked about how you're trying to be transparent with the price increase that you're getting. What's the right level of volume growth for Aramark as a standalone company? Like historically, the company grew 3% or 4% organically. I'd say it's probably 1 or 2 price or 1 or 2 volume. Is 1 or 2 volume still the right kind of way of thinking about what's going to underlie the growth rate? Or do you think that there's more there?

So while I'm not going to give you my growth targets today. I will tell you we can do better and we intend to do better. So I absolutely, and we've talked about this before when we described our Uniforms business, we have to drive a step change in organic growth. So I feel very strongly our growth rates are too low and meager to be really candid. And so these areas that we're talking about around enabling our route drivers using digital marketing, having better product management strategies and better go-to-market strategies are all intended to increase that organic growth rate. So what I can tell you is we intend for it to be much better than it was historically and much better than it was pre-COVID, when you look at pre-COVID numbers, and we're already starting to see evidence of that now that we've lapped our pre-COVID revenue number and we've gotten back above that line. We are starting to see stronger growth in our business than we have historically and we intend to continue that. And of course, in due course, we'll share some numbers with you and talk about what that's going to look like.

We will look forward to that. Thank you very much for your time today, Kim and Rick.

Thanks.

And thank you to the team from Aramark.