Aramark (ARMK) Earnings Call Transcript & Summary

Great. Thanks, everyone, for joining us for the next session. I'm Andrew Wittmann. I'm the senior research analyst that covers facility services at Baird and we're really glad that you chose to spend your time for the next half hour in this session with Aramark. Not just Aramark today, we've got a little bit different twist. We're talking to the Uniform side of Aramark, which has been publicly announced as being spun off, likely coming later this week. Kim Scott is the company's -- is the Uniform CEO; and Rick Dillon is the Uniform CFO. We're going to do this one as a fireside chat format, and I do have lots of questions, far more than we could do in 0.5 hour. But if you want to chime in, you can e-mail me at -- don't know what session number this is, I'm sorry, [email protected]. Thank you, Brian.

I think the best way to start out probably, Kim, is just for you just take a couple of minutes and do maybe a high-level overview of Aramark's Uniform Services, and then we'll just kind of go from there.

Fantastic. Well, thanks for having us. We're thrilled to be here, and thank you all for joining us. We're excited to talk about this fantastic business. So Aramark Uniform Services is this wonderful hidden jewel tucked inside Aramark, and we're really thrilled to be talking about the future of this business. It is a roughly $2.6 billion top line business, serving roughly 300,000 customers through a recurring revenue model that is renting things like uniforms, mats, shop towels, bar towels, all kinds of wonderful services and offerings at the back end of the house of our customers. And so it is a really, really wonderful business with this fantastic recurring revenue. And what's so amazing about this business is the opportunity to expand with our existing customers. So creating this fantastic beachhead with revenue generated from renting uniforms and then this opportunity to bolt on fantastic adjacencies across the base of the business. So we are 20,000 teammates strong, serving roughly 300,000 customers across roughly 3,500 routes every week, and we're really incredibly proud to have the opportunity to serve some amazing customers. We've been all preparing this business to spin. I joined the company about 18 months ago with the intention of preparing the company to spin. And I'm really proud of the outstanding management team that we've been able to put in place to prepare the company to do this. We're also very grateful that Aramark has placed their confidence in us and they believe that we're ready to launch out as a separate public entity on our own. We know there is massive opportunity for value creation just through really putting our head down and getting really focused on delivering results across this business. And there are great watermarks out there in the industry that demonstrate that great things can be done in this business. And when we look at our historical performance, while we're very proud of the team and all the work that they have done, it's been very clear over the last 18 months that with a new strategic plan, which we have now put in place and with the establishment of some new functional capabilities, we can take this business to a new level. And so we're very excited about the prospects of driving higher top line growth in this model, really generating higher top line growth allows you to leverage your fixed assets and take advantage of an outstanding footprint and network that we have. So we're delighted about the prospects of growth, and we also see tremendous opportunity for margin expansion. So we're very delighted about what we see for the future for the company.

Okay. That sounds like a good overview. Let's dig right in. So like you said, Kim, 18 months, Rick, 12 months or so?

Correct.

A little -- maybe a little bit more than that, so kind of new. Help set the table here about what is changing or maybe what's the strategy? How is it different from maybe what you inherited when you got here?

So I'll begin by saying we have amazing teammates. So what's not changing is that we have 20,000 highly engaged teammates who love our customers and are doing an amazing job serving them. So we want to build on the great things that we found when we arrived here, and we do an amazing job serving our customers with excellence and we have outstanding customer relationships. We have a highly tenured route services team, and they do a great job every day serving the customer. But what we found as we evaluate that amazing relationship and that great customer interface is that we weren't taking full advantage of the opportunity to cross-sell our base. So we're going to leverage those amazing relationships that our frontline teammates have built to drive the capture of share of wallet with our existing customers. And we offer, as I mentioned earlier, a variety of products and services, and we haven't even begun to scratch the surface on penetrating existing customers and cross-selling the base. And so we're incredibly excited about helping our amazing frontline teammates and equipping them with the right tools so that they can cross-sell the base. And so as we look at our strategic plan, high-quality revenue growth is the #1 component in our strategic plan. That starts with retaining the amazing customers that you already have. But the second component of that is cross-selling the base and getting outstanding flow-through and margin expansion off of every dollar of new business. Because as you think about the investments we've already made in our infrastructure, we're sitting on an amazing plant network that is outstanding across North America and an amazing set of teammates and assets that are ready to drive density and penetration with customers with very little investment. So just leveraging those fixed assets and getting flow-through on the base through higher top line growth is a huge opportunity. And we have amazing teammates that are ready to go, and we haven't really leveraged that opportunity so we're thrilled about that.

I think there's an obvious follow-up question in here that talks -- that addresses what gives you the confidence in the cross-sell? Like how do you know that it's there? Can you look at your revenue mix compared to competitors or other companies that gives you that confidence? And anything you can do about putting boundaries around what you think that can do for the revenue opportunity that's there over a period of time would be helpful.

Yes, there's no question that the opportunity is there and we validated that with math. So that's the good news. As we look at our existing customer base, even before we target attractive new verticals, which we'll also be doing, when we look at our existing customer base, we have quantified the number of products and services that they're using. And by vertical, we have quantified the number of products and services that they could be using. So there is a very clear opportunity to expand to multiple offerings with existing customers. And we've done that math and we understand where those opportunities exist, and we are surgically feeding our frontline teammates leads by customer so that they understand which products they should be cross-selling to which customers. The other reason that we have to believe is because we have demonstrated it over the last 18 months. So when I arrived to the company 18 months ago for a variety of reasons, the strategy was not to leverage our frontline teammates to cross-sell our customers. So our route drivers were not cross-selling. And as I spent time in the field riding along with them and meeting our customers, it was very clear how powerful the relationship is and how powerful the trust is between our route representatives and our customers. So we turned that back on. And we began cross-selling through our frontline teammates, and we see evidence of that cross-sell in our existing -- our current financial results. We have been measuring the number of route teammates that are selling and that aren't selling, and that number is rising, and we've been measuring penetration with customers and that number is rising.

That is -- this is a great asset to have those drivers.

It is. They're wonderful.

That is sometimes where the strongest relationship rests is with that driver, not even with the salesperson. It's really kind of not easy way because it's not easy when you're changing the culture. How do you change the culture? Is there incentive now for the drivers to do this? How do you get that to change?

There is incentive for our teammates to do this, so we compensate them. They're paid for a commission-based pay structure when they sell new business. And they're also compensated if they're not comfortable closing the deal. They're also able to refer it to a sales teammate who can go in and help them do that. And in both cases, they're compensated for the work they do. But I will also tell you that our teammates like to win. And so they're also very excited about the notion of competing to win. And we're keeping score now. And when you ask how do you change things culturally, culturally, our team has always worked really hard, and they've always done a great job taking good care of our customers. But we haven't done a great job of putting financial metrics in front of them and helping them understand how actions have consequences and can deliver financial results. And so we're committed to win here and the whole team has rallied around that. So you can go in a break room in any market center, and you can see a board where there are sales contests taking place. And we have every 1 of our route teammate's names listed on a board, some of them with really clever nicknames but on a board and they're all competing against one another, and they come in each day and they measure who's winning and who's driving the most sales across the team. So there's a lot of fun and there's a lot of energy in the...

And that's new, this board with the drivers' name -- before the sales names were always there because that was the job but now the drivers are on that, too.

That's right, that's right.

And added to it. That's interesting. So what is the -- obviously, as you -- is there a virtuous circle that happens as customers take more stuff from you? I guess I'd like to hear your thoughts on retention, in other words. Where do you stand today? Is there a retention opportunity? And how does the cross-selling of more products and services into your customers enable that?

So retention is one of the most important levers in this model. So as I mentioned in the beginning, recurring revenue, the best thing you can do is protect it, so it keeps giving week-over-week and month-over-month and quarter-over-quarter. So we are very focused on customer retention. And we will never be satisfied, quite frankly, with our performance on customer retention, and so we hold on to every customer that we worked so hard to acquire. So we'll always be looking for new opportunities to improve retention. And cross-selling and providing multiple products and services absolutely makes you stickier with the customer. So the more value that you are creating for them and the more embedded that you are in their operation, the less likely you are to be put out to bid, the less likely your customer is to shop for a new provider. So it's all about creating this outstanding set of services to the customer. And we're in a great position where people don't wake up thinking every day about uniforms and mats and restroom services and first aid kits. They only think about them when they're not being provided effectively. So it's a wonderful opportunity to very seamlessly serve your customers and create limited friction in the relationship and they rarely think about moving on.

We've seen in the past when companies -- service companies, probably not just uniform companies, when they undertake big changes, that service companies can oftentimes benefit from what I call addition by subtraction. Customers that maybe aren't valuing your service the appropriate way where you just look at it and say this, we could be spending our time. [indiscernible] your business takes capital. There's -- you need plants, you need trucks, you need people's times. And if you're not compensated fairly, sometimes it's better to do business with someone else. Has there been or do you intend to do an account review to say, to look at which customers are the right customers for you? And maybe if this requires shrinking for a little bit to improve the profit margin, that's what you have to do. I just like to hear philosophically 18 months into the job, if you think there's an opportunity there.

So there is always an opportunity to evaluate the portfolio, but I'll say a couple of things about that. That's very rare in an instance where you look at your customer portfolio and you decide to exit a relationship. I'm not saying that, that couldn't happen and that, that won't happen with us, and we will absolutely evaluate every customer that we have and we will understand their contribution. But it's very important to note in this model, density matters the most. And so the more that you can leverage fixed assets with volume, the better flow-through you get and the better margin that you get. And so there could be moments where you very surgically address profitability with a specific customer, but we have established a very robust portfolio of cost-out initiatives. And so with those cost-out initiatives across our system, all of our customers become more valuable. So we think there's more opportunity to make the entire system more profitable through these structural and systematic cost-out initiatives versus shedding customers or exiting customers. So there could be a moment, I'll never say never, but it would be rare for us.

I see. Okay. Well, you opened a can of worms there by saying -- talking about cost-out initiatives. Investors always love to hear about opportunities to improve the margins. So why don't you give us a little bit more detail to the extent that you can on some of those initiatives?

Absolutely. So when we think about our strategy, I spoke about high-quality growth being the first pillar, so really thinking about that growth. The second piece of our strategy is driving efficient operations. So we have built a very detailed 5-year plan that has a set of strategic initiatives related to cost-out strategies. And those are not onetime cost-cutting efforts and let's go take some headcount out and save the day. These are material opportunities to operate our business more efficiently. So we have a portfolio of logistics initiatives that will allow us to really manage our flows. And by flows, I mean, the movement of product between customer locations and plant locations and how we serve those customers. There has been very little effort put in our business in the past around flow optimization and routing and scheduling and logistics efficiencies. So we have a great portfolio of initiatives around better scheduling our routes and also understanding where we have empty miles and how we will sell along the route so that we can fill in those empty miles and leverage those assets. And it's exciting because the team has been doing some of that work, but they've been doing it without sophisticated tools and modernized practices. And so it's been done from within without using really known and proven external resources. I come from a route-based business previously so I'm familiar with these tools, and we're very excited to bring the team some of these tools to help them.

Interesting now. So I guess my question on this would be, you've recently implemented a new customer relationship management system on your routes, information that gives more power, more information to your drivers. Is that the enabler or is this purely just a fresh look from management of doing something different?

It's both. So the system that we launched is really useful. So we have moved all of our locations across Canada and the United States onto 1 common operating system. And that's extremely helpful. As you drive these initiatives and you drive change inside the team, to have everyone on a common platform allows us to do things more rapidly. So we consider that platform a great enabler that needs to be fed with strategic initiatives in order to be useful. And so I'll give you a great example. As we have reinvigorated cross-selling with our route drivers at our customer level, their ability to do that very efficiently is enabled by this platform. So they have handhelds that they're all using out at the field level. And when they like to add a product for a customer, they're all pressing a button on the handheld and very seamlessly, they're able to cross-sell and add that product. Without that tool, we had fragmented systems and there would be multiple solutions regarding how you could cross-sell.

Yes, okay. So that's interesting and helpful. So then, I guess earlier, you mentioned that you were going to start to kind of address new customers that you thought would be attractive customers that maybe haven't been customer types that Aramark's catered to in the past. Could you expand on that maybe a little bit who those are, what they are and maybe how much opportunity there is there?

There's a lot of opportunity. So as I mentioned, in our high-quality growth strategy, part of that does include bringing on new customers. And we've done a significant amount of market sizing and segmentation work by vertical. So we have a very clear understanding of the market. I will tell you that our sizing work demonstrates a $48 billion market, so it's a very exciting opportunity when you think about the space that is available for us to compete within. And the top 3 players together represent roughly, what, $11 billion of that $48 billion, so there's plenty of room for everyone. And so we've actually broken down the market by verticals, and we have scored the vertical based on profitability, based on the opportunity for those verticals to utilize multiple products and services. We're in many and most of those verticals but we haven't doubled down on them the way that we should. So now we have a very targeted focus around all of the verticals, but there are 8 sub-verticals that we're particularly interested in. I'm not going to reveal that today because I think that's a competitive advantage that we possess with a very targeted go-to-market strategy, but we have a very clear path for where we'll grow.

And do you have to -- does Aramark have the ability or do you have plans to segment the market and specialize your sales or service teams directly to any of these 8 new verticals or other ones to be -- like do you have the scale and the wherewithal to be able to invest that way? Or how are you going to approach that?

We do, and we should and we will. So we -- I'm really excited to share we recruited in a new sales leader who joined us just a few months ago. And if any of you have followed the industry over time, you would be familiar with a company called G&K. And he was at G&K when G&K ramped up their business and did an amazing job growing and building that business, and it was ultimately sold to one of our competitors in a very successful transaction. And we're very pleased that we have recruited him to lead our sales team. And it's really interesting that you asked the question because it's the first observation that he made, which is we need to specialize and have some of our teammates on our sales team very focused on specific verticals, subject matter experts that are able to really solution-sell into those verticals, we have very few of those today but we have a very large sales force. So we've already made the investment in the team, which is great. And now it's just about organizing the team correctly to go to market and capture that share.

Got it. Where do I want to go next? I guess I wanted to learn a little bit more about your revenue mix. I fully expect that this will be coming in your SEC document when you -- when that is published. Maybe, Rick, this one is for you. Can you just maybe compare or contrast, is Aramark heavier on things like linen or healthcare? Are you maybe lower in your mix on formats, which is actually, I think, a hell of a business, by the way? Can you just maybe talk about how your revenue mix might compare? I don't know who this is for -- some of the -- and if that's an opportunity? Like are there categories in the revenue mix? You heard my bias towards liking formats. But like, are there opportunities that you see to increase things like that or shrink things if you don't like businesses in terms of how you strategically want to grow the company?

Sure. When you look at the business and Kim's been talking about cross-selling the base, when you look at those products like mats, managed restroom services, towels, all of those things lend themselves well to route sales, getting route sales, adding them on the handheld. And so that's a pretty -- that category is a pretty significant part of our business. We do have a heavier concentration, if you will, of linen. Obviously, the Canadian linen business we acquired from an acquisition has a linen element of it that may be a little bit higher than our competitors. And so linen may come with a slightly lower margin. But there is an opportunity still there to keep that business, retain, grow that business, as Kim mentioned, could drive density, could be attractive and obviously a significant competitive position in Canada. So when you look at our business, large chunk this workplace kind of supplies, mats, mops, things like that lend themselves well to cross-selling. And then we have our Uniform business, which also creates a customer relationship that we can then advance to growing the base.

Okay. There was 1 other question, I guess, kind of going back on margins. And I think when I look at the industry, the largest competitor, I think their supply chain and their sourcing is a really big source of their margin differential. And I don't know how much Aramark has done over the years to improve the supply chain. A lot of the things you talked about on the costs were kind of route-centric, selling more along the route. And certainly, that's a huge cost center. But on the supply chain, merchandise costs, all of that, how much opportunity is there? And maybe can you detail some of the things that you're looking at there?

Absolutely, and there is tremendous opportunity there as well. I will start with the management team. So about a year ago, we recruited in an outstanding supply chain leader with extensive global procurement experience, he is a very proven executive. And so he has been in, for the last year, building a global purchasing strategy. So step 1, let's buy it right. And he's doing an outstanding job even in this inflationary period with the supply chain headwinds that the entire world has been facing, he has done an outstanding job mitigating those headwinds and really battling those out. He has a portfolio of initiatives over the course of our 5-year plan as well around sourcing strategies. We have 2,000 teammates in Mexico that are cutting and sewing and preparing uniforms for us today. And our buy versus make mix is different than some of our competitors, and we think there's tremendous opportunity to leverage our awesome teammates in Mexico. I have visited that facility. We have 2 facilities, and it is -- they are world-class, our leader, our general manager down there is world-class, and we can believe -- we believe that we can shift more to make versus buy and drive some cost out. The second part of the opportunity is around garment utilization and asset utilization. So as many of you who have modeled our business would know that there is amortization cost that comes in the system. So as you grow your business, you issue new garments and amortization begins driving cost into your system. And we have a very modest today or we had a very modest focus on being militant around garment reutilization, and we have stock rooms full of idle assets that are either being amortized or they were previously amortized and they are no longer amortized. And so we -- the team has done a nice job of understanding the importance, but we have suboptimized because we have isolated those stock rooms and they are only being reutilized in their existing market center where those garments sit. And we know there is tremendous opportunity to pull those assets together so that we can better reutilize them. And so our logistics leader who I mentioned who is running all of these logistics initiatives is also very experienced in inventory management and asset utilization. So he's building a team to attack that. And we'll see costs come out of the system around amortization as well.

So you need digital tools to get at the stock room? Is it just blocking and tackling with your human assets? How do you get at that?

So we have the inventory now all assessed, which is great. So in ABS...

Which you didn't before?

The operating system -- correct. So the operating system you mentioned was a key component in giving us visibility to those assets. And so the good news is we have that visibility. And the opportunity now is to prove to the team that it makes sense to move them to common locations and to create mother stockrooms, if you want to think about it that way and distribute reused garments out of those stock rooms. And the team had not really done the math and the analysis around that. They operated under the assumption that it would just be expensive to move garments on a less than truckload to another location. But the math will prove to you that it's better to consolidate them and reuse them than to not suboptimize by leaving them in a single location. So a lot of it is just around analysis, Andy, more than it is the need for new systems and tools.

Got it, okay. We have spent 0 time talking about the current macro because I think the company-specific stuff is really, to me, is the story at Aramark Uniforms. But let's take the time that we have and just talk a little bit about some of the operating environment. And I thought maybe I'd first ask about the labor market and demand for people wearing uniforms today. We actually had a surprisingly, I guess, you'd call it negative unemployment claims today, but we have a very low unemployment rate overall. So kind of pushing and pulling forces, but what are you seeing in the wearer base? Are your customers still adding wears or is it more neutral? Or is it going the other way?

So we absolutely have customers that are still adding wearers, and we have customers that are still challenged with turnover. So they're adding new wearers, so there's still a lot of movement in the workforce for our customers and it really varies by segment. And that's what's so attractive about this business is the diversification of verticals. So you have some verticals that are challenged in this current environment. We've seen some customers who may be reducing workforce and utilizing less, but we're actually seeing some customers who are adding more and it depends on the vertical. So when you're spanning across industrial services and healthcare, you're in pharma, you're in all kinds of different industries that allows you to really be insulated from these types of environments. So overall, we're still seeing growth in our business, which is more than many industries can say.

Great. This one is from the audience, and I'm going to add on to it and kind of supplement it a little bit. But the question is, when you are closer to formally going through the spin process, do you anticipate that you'll be giving multiyear financial targets for things like revenue or margin percentage? We'd love to hear them today, but I think that might be a little bit presumptuous. Should we just -- should we -- is that something you think we should be expecting to hear from you guys?

Well, we're in the process. As Kim mentioned, we definitely have a long-term strategic plan. We'll be working with our Board on that strategic plan on how far out we provide targets and the nature of "guidance." Obviously, we feel like coming out, we'll have to kind of help the market through 2024. We're excited about the targets that we have and we want to just be very thoughtful about when we set those targets and what that looks like from a market perspective. We obviously want to show the trajectory to show some of this in action and then set the watermark for where we want to go.

Okay. Then maybe my last question, another 1 for you, Rick, is just thinking about the capital structure here. Aramark Corporate has done a really nice job taking advantage of what I'd say, some hidden assets and deleveraging the balance sheet faster certainly than we thought. For those of you who don't know, they had a small stake in the San Antonio Spurs that they sold everything. What? But they sold a joint venture in Japan, monetized, just closed this quarter. So the balance sheet at Aramark is a lot healthier than we thought but still fairly highly levered. When you think about the right way to capitalize this business, how should investors be thinking about that here today?

Well, I think we've talked about the very active work that Aramark is doing, and they specifically said they anticipate coming out of the year with a leverage of less than 4. And the intent is to kind of keep both businesses on equal footing as we emerge. So we definitely expect to be levered. As Aramark continues to work through and take advantage and be opportunistic about delevering, that will obviously have an impact on the level of debt we emerge with.

Yes. And then -- sorry, did you want to chime in?

Yes, just to maybe add some color to that. We have contemplated all of that in our 5-year strategic plan. And it is -- we have tremendous opportunity to delever as we move through the 5-year plan while we continue to make investments in the business. So we have plenty of ability to invest in the things that we need to invest in to drive our strategic initiatives and to continue to pay down debt. And we land quite delevered at the end of the 5-year plan, quite impact to delever. So we'll have the opportunity to start making some very strategic investments in this business. But I feel very comfortable with the modeling that we've done, that there will be plenty of opportunity for us to do all of the things that we desire and to continue to create value while we're delevering.

Okay. I have more on that one but we're out of time. So we're going to save that for the breakout session. Please join me in thanking the Aramark team here for the presentation.

Thank you.