Aramark ($ARMK)

Great. Good morning, everyone. I'm Curtis Nagle. I'm the Senior business and information services analyst here at BofA. Session right now is Aramark. Very pleased to have Chief Executive Officer, John Zillmer. We'll structure this as a fireside. And then if there's time at the end, we'll field any questions. Welcome, John. Thank you very much for joining.

Great to be here.

So -- yes, I think maybe starting from the top. So exit last year in a record gross new business, record wins going into '26, right, some very large contracts, Penn and then RWJBarnabas. In terms of perhaps any structural changes in your go-to-market or anything else, what's been the driving this really impressive increase in win rate? Is it more on the client end? What's driving, I guess, them to choose Aramark over whoever?

Yes. First of all, I would say, strategically, it's really a result of a focus on the growth of the enterprise over the last several years. We've invested significant resources and leadership, in sales management and we've created a new growth culture in the organization that is just hyper-focused on results. We've aligned compensation structures in a way that really incent the entire team to focus on growth, not only new accounts, but the net new retention of the business. So culturally, we've really shifted the organization dramatically over the last several years, and that's led to these multiple years of record results that we're so excited about and that we continue to be very focused on. From a client perspective, I think there is a recognition that we have some unique capabilities in certain verticals that really align well with the needs of organizations today, in particular the 2 you mentioned, as health care institutions need to find a way to effectively managing today's health care environment with lower reimbursements, higher cost containment requirements, they look to organizations like ours to go ahead and bring value. And we have a unique set of capabilities that we can bring to bear to systemize large operations and that -- that we've demonstrated that in large client institutions. And that led Penn and RWJBarnabas to go ahead and make the decision to select Aramark as well. That unique capability in that particular vertical was very important.

Could we maybe dig a little bit more into that? Specifically, I mean, scale would be one, operational prowess would be another. But whether you want to use examples within health and I understand that you're taking over very large systems, and that's very complex. But maybe more specific competitive assets that you have that are really driving that?

Yes, I think it's different by vertical and different -- both domestically and internationally. We've spent a lot of time building some unique capabilities from both leadership perspective as well as a technical perspective that we can bring to bear against a range of different opportunities. And those are AI-based tools like Culinary Co-Pilot and others that give us unique operating capabilities and focused capabilities that the clients recognize can really bring value to them. And that cuts across verticals. Those kinds of opportunities exist in literally every industry, and we're uniquely positioned to be able to take advantage of them.

Okay. We've touched about on this just a little bit, but just digging a little bit more into Health and Penn. Again, largest -- I think the largest win in your history. I guess how does that maybe change, again, the go-to-market, the blueprint, right, or maybe the opportunity set within health care?

Yes. It's -- more and more systems are going to be faced with this decision of trying to find a way to systemize their operations. And many have already outsourced components of their business. Some have multiple providers, but there is a unique value that's created by having one provider, by having one organization provide patient transport, food retail, food dietary, integrated call systems or call center operations. And having one organization to work with helps to drive cost out of the system, drives consistency throughout the system so that a system like Penn that had -- was being served by multiple providers and was self-operating was doing it 5 different ways throughout the system. And they recognize that by consolidating systemizing and taking one approach that it could significantly change their operating structure. So -- more and more health care institutions are considering that. RWJ followed on very quickly. They made the same decision. But I think you'll see that applied across the country as more and more systems decide to take that approach.

Was there a specific catalyst because I think perhaps it's just the burden of cost is getting bigger and bigger, right? But I think, I don't -- most of these issues are relatively long-standing and consolidation and multiple operators. So...

Yes. I think there's -- I think the catalyst is the ever-changing higher level of pressure in terms of cost containment, the increasing need to reduce cost in the health care arena, if you will. So government reimbursement is continuing to contract and making it more and more difficult for companies -- for health care institutions to survive. And frankly, just -- I think part of it is leadership as well. So institutions are modifying their approaches to leadership. You have much more progressive leadership. CEOs of these health care systems are looking at this as a business opportunity in a cost containment opportunity where before it was more a philosophical decision. This is more of a business oriented, we need to get this done kind of a decision.

Understood. Okay. And then maybe this is sort of staying on the subject of health, but just maybe more broadly talking about I guess, contract uptake, not so much -- no capacity issues at this point more. It's just the sequencing of when deals come on and...

Right, right.

Right. Okay. Okay. That's good. And then I guess, just thinking about -- we've seen some of this in the numbers this year and to some degree last year. What is that -- from like a profitability standpoint, the arc right of, I guess, scaling? And from -- I don't know if you want to give the example of from 1 year to -- year 1 to 3, right? But just how does the sequencing of the margins from these larger contracts evolve or over...

Definitely. When you sell a new complex contract, there is a learning curve associated with taking on that new business, opening it and operating it. It's different by the line of business, sort of the vertical. Health care tends to be cost reimbursable contracts or management fee, if you will. So the ramp-up is shorter to full profitability. So you're going to be earning your normal margin much more quickly than, say, in a complex P&L environment in sports or the national parks or something like that, that might take a little bit longer to scale up on the learning curve. I will say, I believe our learning curve is actually accelerating because of the tools we've been able to provide the field organization. When you think about the management tools that we put in people's hands like Culinary Co-Pilot, like LaborIQ and like a number of the other tools, we've been able to accelerate that learning curve activity and ramp up to full profitability more rapidly because managers have the tools to go ahead and get the job done more quickly. Jobs that used to take multiple iterations of menu cycles, for example, to determine what their optimal cost structure should look like, they can now do with AI in a matter of hours and sometimes in a matter of minutes. And so there's really a broad application to those tools, and it helps accelerate that learning curve.

Yes. Good for the client, good for you.

Absolutely.

Fair enough. Okay. So I guess just going back to the -- thinking about the revenue mark for this year, right, you're outpacing your run rate to hit the 4% to 5% full year target. In terms of -- again, just somewhat going back to the question, we've talked about kind of where are these wins coming from? To some degree, it sounds like it's just -- it's move to self-serve. How much of it is it coming away from competitors? And then maybe just talk about, again, this theme of outsourcing more broadly across your verticals? And then a follow-up on that.

Yes, certainly. So this year, historically, we would sell about 1/3 of new outsourcing, 1/3 from the major competitors and 1/3 from the smaller regional competitors. For the last several years since COVID, the amount of first-time outsourcing has been accelerated. And so this year, we're somewhere north of 40% of our new business is coming from self-operated first-time outsourcing. Now some of its combination because, for instance, Penn, was served by our competitors before as well as had significant components that were self-operated. So it's really kind of a combination win. It was a competitive win as well as a self-op conversion. That's the same for RWJBarnabas. So we are seeing first-time outsourcing at an accelerated level or an elevated level, I guess I would characterize it as north of 40% this year. And we think that that's likely to continue for a period of time. There's still a lot of first-time outsourcing runway available to us.

Okay. And then again, just thinking about how you outlay the guidance, you're running ahead of it. I guess confidence level at kind of staying at that rate and what are the puts and takes in terms of either staying above or what could -- at the margin are probably not below, but just how to think about, again, the puts and takes.

Yes, we have a very strong pipeline of opportunity that we are working on. And I would say, the -- we got off to a very strong start from both a new account sales as well as retention perspective. We see very strong indications in the second quarter continuing good results. I'd say it's a little early to make the call on the full year, but we're very confident in the trajectory that we've outlined the guidance we've provided, and I would say the indications are very positive.

Okay. Very good. Right. So we talked about new wins a bit on retention. Again, terrific numbers, above 95%, which is a fantastic number. In terms of that stickiness, maybe we could just aggregate a little bit just how much of that is due to, again, the enhanced execution, right, the company has had over the past 5 years and incentivization versus, I guess, what you would call stickiness and kind of complexity of integration with you and your clients?

Right. I would say, first of all, the predominant reason for the lift in retention is execution and focus. It's discipline. It's a combination of both the incentives that we've put in place on net new, which is a measurement of both new sales and retention, which is 40% of the comp of not only the executive team, but the leadership team throughout the organization is focused on those two elements. So that's a very important part of it. It's also this consistent relentless focus that we, as an organization, have placed on it. Last year, almost 97% retention trending very high this year, just extraordinary numbers. And we have a review process. We call them operating reviews, sexy name. Every month, we get together with the leadership teams of all the businesses and talk about the financial results, not only for that month, but their pipeline of opportunities that are available to them, new account sales that they're focused on and the retention opportunities that they're working on as well. So we spend about 10 minutes on the financials and we spent about 1.5 hours on new sales and retention. So it's literally deliberate relentless focus on the execution of those two areas that have kind of led us to this place. And culturally, that's who Aramark has always been. We kind of lost our way in the, call it, '12 to '19. But we've refocused the organization, and reenergized the culture and really recommitted to the growth of the enterprise as the way to grow earnings for the company, which ultimately, that's what shareholders get rewarded by.

We are a business, too, right?

Absolutely.

Which is, I think, very important and a theme, right, sort of across the sector. I want to go back to the point you made about the operating reviews. It's kind of an interesting point. I guess -- could you give examples of, let's just say, best practice, right? So information sharing, right, best practices, where one -- they've been picked up in a particular segment and then spread through the organization and just I guess that flywheel...

Yes. The great thing is these operating reviews are not done in a vacuum, they're done with the entire team. So everybody participates in these processes. So the entire U.S. domestic leadership team is in the room hearing about the results from the individual businesses. So the presence of each of those businesses there, the sales executives are there. They're all describing those results. They're all describing the circumstances. And so everybody is learning from each other in that operating review environment. So it's not just me and the group President or the COO listening to that single business. It's everybody as a leadership team together in the room, both functional leadership as well as the operating leadership. And it does facilitate the exchange of great ideas and best practices throughout the organization, and it's just part of the way we operate.

Okay. Any specific examples of where best practice was -- well, in one segment and was deployed elsewhere?

Sure. Some of the AI initiatives, for example, are -- were initially focused on the individual businesses. Culinary Co-Pilot, for example, was originally focused on the corrections business where you have a very high level of predictability with respect to the number of customers, you have a very specific menu demand that led to very significant operating improvement results. We then applied that discipline and learning to the K-12 business, which has regulatory requirements that are different by school district, by state and the USDA. So applying that model to that enterprise quickly had an impact on their results as well. So that's a very specific example. It's very timely. It's obviously AI-oriented. And it's a way that we've been able to take advantage of that cross learning, if you will.

Okay. Good example. I guess the next thing I want to discuss is think about wallet share with our existing customers. Cross-selling, I think, has been pretty important driver. I think, particularly education is like a good example in campus and sports, vice versa. But in terms of, I guess, the -- one, like how much growth that -- is that driving now to in terms of maybe in innings, right? And then maybe more specifically across the organization, I don't want to call it like a new muscle, but maybe stronger muscle and how is that contributing?

Yes. Interestingly, it's something that we've always done, but I think the discipline and the focus on it as we've built an enterprise leadership team and enterprise sales team focused on looking for those kinds of opportunities has really brought it to a new level. And there is a lot of runway in terms of the opportunity, particularly, you think about the normal ones between business and industry and let's say, refreshment services, those businesses have been linked together for many, many years, and there is good synergistic growth between the two, particularly as customers evolve their needs. So those two organizations have always had a high level of cross-selling between them. And another opportunity is the facilities business and health care. Because the unique needs of facilities in the health care environment can draw upon the resources of our highly skilled engineering team in our facilities organization. When they need a solution, they can draw on that team to go ahead and help them learn how to solve the problem and begin to operate it. And so there is a significant amount of cross-selling there. And then frankly, there is significant cross-selling opportunity between our existing clients and supplier partners and the various business units. So we -- many of our suppliers are also large customers of Aramark in multiple ways. And so there is the cross-selling opportunity that comes out of supply chain as well. So really, the opportunity is significant, and it's one we're definitely hyper focused on.

Okay. Good. Sticking on education, Collegiate sports, I think, very topical and one where you're executing well. So I think some high-level themes, right? So professionalization, right, new sources of income for institutions for a variety of reasons. Maybe, John, sizing this opportunity again, I'll just ask a question in terms of early innings, bid process. And the importance of that, if I'm thinking about the whole sort of pie for Aramark?

Sure. It is a significant opportunity. And you're right. It is a change in the industry as NIL has created a significant need for funding in higher education, particularly in NCAA football and other programs. And so we have a unique set of capabilities that we can bring to bear to help them both accelerate their -- the revenue generation and profit through improved concessions operations, but also by applying the discipline around alcohol sales. Many universities didn't allow alcohol in their football stadiums for many, many years, and they're adopting very rapidly the opportunity to sell alcohol, and you need professional systems and processes in place. You need to understand the -- not only the economics, but you need to understand the legality and the functional requirements that are necessary for that. And so we're -- we have a very strong position and a very unique position in that regard. This last year, we've been successful selling several major new universities. Arizona state is a great example. We had served them for years as a dietary or a food service customer, they put that business out to bid after 20 years because it was necessary, they were required by the state to do it. We retained the food service program. We also picked up the athletics, which was operated by one of our competitors. We also picked up some B&I operations that were operated outside of that contract in a conference center in addition to it as well as some other additional foodservice operations. So having the opportunity -- having the ability to do both is extraordinarily important. And we're seeing successes we sell. We are the largest operator in college football in the country, and we believe we have significant runway to grow it as more and more stadiums consider outsourcing.

Sure. So a clean multiyear opportunities?

Yes. No doubt about it.

Very good. Okay. Turning quickly to international. So -- sorry, FSS International, 19 quarters, hopefully 20 DD growth. In terms of maybe just a basic question of which regions or maybe specific segments are leading this. And then the margin opportunity there, right? I don't want to maybe call it a catch-up, but just in terms of increased leverage ability, right, on a very strong momentum, I would imagine stronger execution. What is the margin opportunity set look like as a secondary question?

Yes. First of all, we are very excited by the performance of the international group, and they've had extraordinary results for, as you said, 19 quarters going on 20. It's been very broad-based. It cuts across geographies. Literally, every country is contributing to that growth. They've had extraordinary results and great success, cutting across multiple verticals in each of those individual countries. And we continue to see a long-term growth opportunity in that segment. Not only as a result of growing in the core businesses, but also expanding into other verticals in those markets where we have significant runway. Consider Germany, for example, we're the #1 B&I operator in Germany. Yet we had -- and the #1 sports operator in the Bundesliga, but we had very little business in health care, which is a market that was ripe. And we've just in the last couple of years, sold health care in that country. So we've got both vertical expansion opportunity, and we're very excited about the geographies we operate in. I don't need to go plant new flags. I just -- bigger in the individual countries where I already operate, and they've been able to do that very successfully. And with respect to margins, that business as it continues to grow scale, we'll naturally have margin accretion. The SG&A, we continue to grow at a very -- at a much slower pace than the revenue growth, less than half of our revenue growth. So you'll see natural margin accretion and the profitability will continue to ramp up in that business.

Okay. Maybe I'll turn to the U.S. for margins. [ I've been covering you ] guys for a few weeks now, but a common question I got is what prevents you getting back to '19? I understand very clearly different organization, different leadership, reinvestment was needed, right? But just given all the things we've talked about in terms of business momentum, operating prowess, AI, whatever it might be, why couldn't you get to 2019 levels?

We certainly, certainly can. Our expectation is that we'll get to those levels and beyond them over the course of the next couple of years. And we won't specify the actual timing yet. But we see continued margin expansion. We've been able to consistently deliver, call it, 40 basis points a year, we continue to see a runway or a pathway to improve upon that. We have multiple levers, multiple tools in order to help us achieve that. One of them is that SG&A leverage that we also have in international. The other is continuing growth in the supply chain and continued growth in the national volume discounts that we earn as a result of the growth in that spend. So growth is the catalyst. That's why we're so hyper-focused on it. We believe that the best way to grow earnings in the organization is by disciplined management, by growing the business steadily and by taking advantage of those levers, supply chain, SG&A. And then we manage the middle of the P&L by using those tools so effectively that we've talked about.

Okay. So we're still 30% to 40%, maybe closer to 40%, maybe better, but probably not changing the framework for conservatism, but -- I think a little more optimistic?

I think we've been consistent in terms of the messaging around margins. I think we believe that, that expansion opportunity will consist, but that's part of the algorithm that -- we have this growth rate that we've talked about. We believe we're going to be traded at the higher end of that growth rate. That should lead to trading at the higher end of the margin improvement scale as well over time.

Okay. Fair enough. And consistent?

Yes, that's right.

Okay. The GPO business, I want to spend -- Avendra, I want to spend a couple of minutes there. It's growing, I think, double digits at the moment.

That's right.

$20 billion in terms of procurement. I guess just a basic question, why is this an attractive market? Why focus for investment? I think historically, it's pretty competitive, but you're obviously doing well. So in terms of, again, just the attractiveness and I guess, maybe the value you bring to your consumers by scaling that network?

Yes, absolutely. It is very attractive for us. It is a source of significant earnings accretion and opportunity. It is growing double digits. We continue to be focused on both domestically as well as internationally. We continue to look for bolt-on acquisitions as well in that space. They come at high value, and they're generally accretive immediately as long as you're disciplined in the purchase price, and we feel very strongly that we can maintain that discipline. So the value proposition for the GPO customer is that they get the opportunity to take advantage of the supply chain of a much larger organization and get advantaged pricing and significant services. Our GPO Avendra is not only known for delivering great value in terms of pricing, but it's also known for delivering extraordinary service to our customer, to our end users. So that hotel owner or that supply partner looks at Avendra as a great service organization, which is different than some of the other GPOs that are just cost focused. So we've always had that service differential that's been recognized by many organizations over time. And -- so we'll continue to deliver a combination of great value and great pricing. And every time we do market baskets against our competitors, we end up having the best market basket of pricing for the customer, and we provide a range of services and a level of service that's unmatched by anybody in the industry.

I imagine scale but get scale there?

Absolutely.

Yes. I know more recently, you talked about, I think, theme parks, cruise ships as maybe near-term attractive. Anywhere else that looks -- would be attractive either for entry or scaling, I suppose?

Yes. I think there are other verticals that we can look at that we believe represents significant opportunity for us. Remote camps, in particular, when you think about the construction of the data centers in the United States and the opportunity to serve those potential needs, supply chain is an important component of that, particularly since you're building generally in locations that don't have significant infrastructure. And so the GPO can be a significant component of that. We also have other parts of our business that are uniquely positioned and capable in that space as well. So there are a number of verticals that I think we can expand in that way. And so the growth opportunity is dramatic. We believe we're well positioned to take advantage of it.

Okay. Maybe specific on the data center point, I would imagine, in terms of your expertise and presence in data extra -- or not data, material extraction, resources, that's probably...

Yes. When you think about remote camps, mines, [indiscernible], oil derricks in the middle of the Gulf of Mexico or in the North Sea, mining operations in Chile. We have some very unique capabilities that you can bring to bear. And I think that, that will serve us well.

So yes, data centers should be a walk in the park, fair enough. A couple of ones on AI. One, just kind of very high level one. And again, I get somewhat frequently white collar exposure within B&I?

Yes, it's really de minimis. If you really think about it, I think we've -- when you apply the math, it gets down to about a 3% potential impact in terms of the white collar workforce that would be potentially susceptible to what the AI trade is focused on.

That's just the pool, not the -- if we were to go away...

Yes, that's the pool. And my belief is that jobs will evolve. And today, there are very few AI engineers inside of organizations. And 10 years from now, there'll be a lot. And so the jobs will evolve. I don't believe that the jobs will go away, that entry-level jobs will be modified and changed. People will be refocused. And frankly, jobs may become more revenue-producing and orientation as opposed to back office, fundamental, administrative. So I would always make the trade-off. I'd take another salesperson over in an administrative position any time. So having the ability by reducing costs through the application of AI, having the ability to focus resources on growth, I think that's a great trade-off, and would do that every day.

Okay. And then maybe sticking on AI and sort of cost benefits. So we've talked about a little bit, hospitality and Culinary IQ, seem like pretty important initiatives. In terms of, I guess, adoption in terms of how it's impacting the cost structure for your clients, menu profitability, stuff like that. Could you touch on that a little bit, John?

Sure. Absolutely. It is -- they are very important tools, and we are constantly looking at ways to expand the application of them across the businesses. Culinary IQ, LaborIQ, Culinary Co-Pilot, a number of these tools are -- had the opportunity to help us manage the business much more effectively, not only for our own operations, but in particular, for our clients as well. And keep in mind that a number of our operations are management fee, client cost focused. And so anytime you can apply these tools and help to reduce the cost of the end user, whether it be B&I customer or a health care customer or enhance your operations in literally any business. It's a great application. And -- so the terrific thing is we've been able to build these tools internally using existing resources and our existing IT budget. So we don't have some significant technology stack cost requirement that we're trying to overcome. We have a normal operating budget, and we have the ability to develop these tools within it. So we're not making any extraordinary investment. We're just applying the resources that we have a little bit differently, and the results so far have been very dramatic.

So kind of an interesting point, quick deployment, cost efficient, leading to better outcomes. I guess, maybe two questions. One, maybe benchmarking those capabilities versus competitors. And then does that theoretically kind of open the moat a little bit in terms of their ability to scale up sort of similar tools or no?

Yes. I'm certain that they're all working on the same kinds of tools. I would expect that they -- yes, I would expect that they will. Our business is very stable, consistent. You've got large competitors that are well capitalized and understand the business. And I'm sure that they have tools that they're bringing to bear as well. I can only tell you that we're getting much more efficient day in and day out by the application of these tools and we're able to demonstrate to our clients. When they hire us, they get the opportunity to take advantage of that. And we're winning at an elevated rate because we're demonstrating things that our competitors haven't been able to demonstrate so far.

Okay. So a leading edge?

Yes.

Okay. Capital allocation. So leverage getting in a much more -- that's not the right way to put it, getting into a comfortable spot below 3% or close to it by the end of the year. Cash flow conversion is getting better, all good things. So maybe just the balance in terms of bolt-on M&A. And then maybe more near term, you started to buy back a little bit of stock. And how to think about the potential for shareholder returns through buybacks?

Yes. I think certainly below 3x by the end of the year. We'll get to that level and probably keep it in that range, that's a very comfortable range for us to be operating in. We have the capital to deploy to do bolt-on M&A that's -- we'll continue to be able to do that. Will accelerate share repurchases when we're below 3x. And we'll continue to maintain a focus on raising the dividend as well because we have a large shareholder base that's -- that are dividend-oriented funds that love the company. They're long-term holders, and we'll continue to be able to serve the needs of both sets of shareholders. Ultimately, we're very comfortable operating at this level of indebtedness. We'll continue to pay down debt slowly. But through the operating leverage, we'll continue to get the ratio down below 3, and it's our intent to keep it there.

Okay. Waiting round, word association to end it, if that's okay with you.

Sure.

AI.

I would -- the first word that comes to mind is awesome.

Awesome. I like it. Health care?

Challenged.

Challenged, which is good for you.

Yes.

Unfortunately. Margins?

Going up.

Up. Buybacks?

Yes.

Yes. I love it. M&A?

Some.

Some. And Big Ten football?

I'm a fan of all football and...

I think you're Northwestern...

I am the Northwestern grad. My daughter went to Wisconsin, and actually, she went to Colombia as well. So I don't have a college football favorite because I serve too many customers. I need to be loyal to all of them.

Very fair. All right, John, thanks so much. Really appreciate it. And thank you for the time. Informative.

Thank you. Appreciate it.

Thank you.